- Corporate-bond fear gauge jumps most since Lehman collapse
- ‘Fatigue and uncertainty’ with market seen closed for weeks
After pulling all-nighters and getting to their desks before dawn, U.K. traders groggily took in the new reality created by Britain’s choice to leave the European Union.
“The entire market is shell-shocked," said Umang Vithlani, head of credit at Fideuram Asset Management in Dublin, which overseas 3 billion euros ($3.3 billion) in credit. "Now there’s a feeling of fatigue and uncertainty.”
That uncertainty is reflected in the corporate-bond market fear gauge, where the cost of insuring against losses on European investment-grade bonds surged the most since Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008. Sterling plunged to the weakest level since 1985 and the euro suffered its biggest intraday drop since it was introduced in 1999. Global stocks tumbled.
It made for a hectic day. Traders globally bought $63 billion of default insurance through credit-derivatives indexes on Friday, more than double the daily average over the past year, data compiled by Bloomberg show.
Many traders stayed up all night ahead of the vote, with JPMorgan Chase & Co. booking hotel rooms near its Canary Wharf offices for employees working long hours. Barclays Plc brought in sleeping bags and sent some workers home on Thursday so they could be fresh later on. Other banks offered bunk beds, sushi and pizza.
So traders were already woozy when the results came in, surprising financial markets that had expected a vote to remain in the 28-nation bloc amid polls showing it was too close to call.
“Although we had intellectually prepared ourselves, it’s hard to mentally prepare when you’ve got an expectation that something’s not going to happen, and then it does,” said Gordon Shannon, a London-based money manager at TwentyFour Asset Management, which oversees 6.4 billion pounds ($8.7 billion) of assets. “We’ve gone from reasonably plain sailing to a bit of a recession. But it doesn’t usually happen in one day.”
The Bank of England said on Friday it will take all necessary steps to ensure stability, while central banks across the world pledged to take action as needed to avert any breakdown in financial-market liquidity.
The result sets the U.K. up for years of bitter divorce talks with the first round likely to come at an EU leaders’ summit next week. Britain must now count the economic and financial cost of an exit that Prime Minister David Cameron, who said he will resign, warned would spark a recession.
Europe’s corporate-bond market may be closed for weeks as investors and companies try to work out the implications of the U.K.’s decision. There’s unlikely to be any investment-grade sales until the middle of next month, according to both ABN Amro Group NV and UniCredit SpA.
For now, investors are heading home to take stock of the wild day in markets.
“We’ve all been here since 2 a.m. and we’re all a bit jaded,” said the ironically named Peter Sleep, a London-based senior money manager at Seven Investment Management LLP, which oversees about $10 billion. “We have a natural hedge in place and our positions will keep over the weekend. We don’t lose anything by waiting until Monday when the market might be more liquid, everyone has had time for reflection, and policy makers may clarify the situation.”