WASHINGTON (BLOOMBERG) - The aftershocks of the UK's vote to leave the European Union (EU) reverberated across financial markets after a weekend of political turmoil, with the pound extending its record selloff and European equities dropping to levels last seen in February.
Sterling fell below Friday's lows with a 3.8 per cent slide to the weakest since 1985 and the FTSE 100 Index retreated alongside European shares, weighed down by upheaval within Britain's two major political parties even before Brexit negotiations begin. Declines for British banks put a measure of European lenders on course for the biggest two-day drop on record. Demand for haven assets boosted gold and government bonds.
The victory for Brexit tore through world markets on Friday, pummeling the pound and high-yielding assets as more than US$2.5 trillion (S$3.3 trillion) was wiped from global equity values. Prime Minister David Cameron resigned without spelling out when the UK intends to leave the EU and at least 17 members of Labour Party leader Jeremy Corbyn's team quit amid calls for his ouster, exacerbating the sense of instability.
"The range of outcomes for the UK economy is very wide, but clearly skewed to the downside at this point," said Ned Rumpeltin, European head of currency strategy at Toronto Dominion Bank in London. "It is very hard to find a good scenario if things continue to progress toward a EU withdrawal."
The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank is hosting a three-day meeting in Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen. German Chancellor Angela Merkel will host EU President Donald Tusk in Berlin on Monday to talk about the UK's plan to exit the bloc. Cameron is due to address British lawmakers.
The pound was the worst performing among major currencies, falling to US$1.3164 as of 7.57 am New York time after Friday's 8.1 per cent plunge. The euro weakened 1.1 per cent versus the greenback, after sliding 2.4 per cent in the last session, and the Norwegian krone fell 2.5 per cent against the dollar.
While UK protesters angry at the result took to the streets during the weekend and circulated petitions calling for a fresh vote, the EU's founding members bolstered pressure on the UK to leave the group as soon as possible. Cameron has said he is in no hurry to make the move, indicating he will wait as long as three months before making way for a new leader who will be responsible for negotiating the exit.