In the years after the 2008 credit seizure, traders spent their days worrying about the next crisis.
They were filled with dread even as central bankers pumped trillions of dollars into markets in the form of huge asset purchases and implausibly low interest rates. They worried about bond-market liquidity, or a lack thereof. They wondered whether policy makers had the tools to cushion the next crash.
Now, global markets are undergoing possibly the biggest stress test since the financial crisis. And they’re not doing too well.
After Britain voted on Thursday to exit the European Union, global markets went haywire. The pound plunged the most on record.
Shares of Deutsche Bank and European stocks generally tumbled the most since 2008.
Yields on U.S. Treasuries plummeted the most for a day since 2009, nearing the lowest on record, and U.S. stocks sank.
Everyone braced for a rocky, tumultuous night. Banks and exchanges planned for it by having extra staff on hand and warning clients about possible trading slowdowns. Investors knew that the polls were incredibly close.
And yet asset prices fell into complete disarray as news of the vote trickled in. Yes, it was a hugely important and somewhat unexpected verdict. But it doesn’t necessarily portend another recession, bank failure or credit seizure.
Instead, this highlights how a single event can summon chaos because of the interconnection of global markets. The Brexit vote became a systemic event, one that possibly prevented the Federal Reserve from raising rates this month, one that sent supposedly safe assets soaring and riskier ones tumbling, even though the broader long-term ramifications remain unclear.
The severe moves have probably put enormous pressure on some firms. The European Central Bank, Bank of England and Swiss National Bank have all started deploying plans to mitigate the damage from the fallout.
The fact that markets are so beholden to this vote and its uncertain aftermath shows how systemic risk looks different than it did leading up to the financial crisis. Back then, it stemmed from an extraordinary buildup of leverage and unshakable faith in the value of residential properties, even as lending terms became looser and looser.
Today, the risk stems from currency moves and traders all betting around the same central bankers and the same national votes. One nation’s problems can quickly infect the rest of the global economy, bringing everyone down with it.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Updates sixth paragraph with U.S. stock market reaction.)
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Lisa Abramowicz in New York at firstname.lastname@example.org
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