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Brexit: U.K. Property Funds May Come Under More Stress

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Three's a trend as U.K. property funds halt redemptions in the aftermath of the Brexit referendum, sterling has touched a 31-year low, and global bond yields continue to plumb the depths. Here are some of the things people in markets are talking about today.

Pull up the gates

Three - count 'em three - asset managers have frozen withdrawals from real-estate funds with almost 9.1 billion pounds ($12 billion) worth of assets following a flurry of redemptions post-Brexit. M&G Investments became the third property fund to pull up the gates, following similar moves by Aviva Investors and Standard Life Investment. The attempts to stem redemptions have brought back financial crisis memories for some, while analysts at CreditSights Inc. point out that no one knows how much further property prices need to fall in order to lure investors back into the market. Others have been worrying about U.K. bank exposure to commercial property with the Bank of England noting in its Financial Stability Report released yesterday that the country's lenders have "material exposure" to the sector. So far the consensus seems to be that well-capitalized banks can withstand a reasonable fall in property prices, but that doesn't mean that they won't be affected by recession as one of the great pillars of the British economy begins to crumble.

Not-so-sterling

The British pound sunk to a 31-year low as Brexit continued to play out in global markets. Sterling fell below $1.29 against the U.S. dollar and sank to its lowest against the euro since 2013 as evidence piled up that the Brexit vote is hurting confidence in the U.K. economy (see Exhibit A above). Here's what markets looked like the last time the pound dropped below these levels - back in 1984. For some offsetting levity, here's Conservative Energy Minister Andrea Leadsom discussing the potential impact of Brexit on the pound just a few weeks ago. Leadsom came in second place in yesterday's first round of voting to decide who will succeed U.K. Prime Minister David Cameron, pipped by Home Secretary Theresa May. Elsewhere in British politics, here's Ken Clarke talking and the Chilcot Inquiry is underway.

How low can bond yields go?

Very low, apparently. Global government bond yields are plunging to fresh depths with Japan’s 20-year yield dropping below zero for the first time to reach minus 0.005 percent, while the 10-year U.S. Treasury reached a(nother) record low yield of 1.3397 percent. While much of the rush into bonds has been pinned on Brexit jitters, others are looking at the longer-term trend of central bank actions that have herded investors into sovereign debt. Mohamed El-Erian reckons that record low U.S. Treasury yields say more about Europe and Japan than anything else. Stock markets, meanwhile, continued their sell-off with the MSCI All Country World Index down 0.97 percent as of 4:56 a.m. New York time. The Stoxx Europe 600 Index declined 1.14 percent as of 4:58 a.m. ET while futures on the S&P 500 Index also point to a down day.

Heavy metals

Gold bugs are perhaps one of the few investors enjoying themselves this week as the price of the precious metal has reached a two-year high on safe haven demand. Gold for immediate delivery rose as much as 1.1 percent to $1,371.39 an ounce in London, the highest level since March 2014, and traded at $1,367.39 by 4:03 a.m ET. UBS AG Strategist Joni Teves figures the metal has further to go. We're in the early stages of the "next bull run" she said in a note lifting the bank's short-term price target to $1,400 from $1,250. Also in precious metals, it seems China's Great Ball of Money has rolled into silver with day traders in the country said to be behind the shiny stuff's biggest two-day rally in five years. Silver was up as much as 2.4 percent to $20.4103 per ounce in early trading on Wednesday, and traded at $20.1995 as of 4:07 a.m. ET.

A little data deluge

German factory orders for May, released early on Wednesday, unexpectedly failed to rise as uncertainty over the global outlook deterred demand for goods. Economists had expected a 1 percent rise, but orders adjusted for seasonal swings and inflation were unchanged from April. In the U.S., trade deficit figures for May will be published at 8:30 a.m. ET and are forecast to show a decline from $37 billion to $40 billion. They'll be followed by the June Markit Services PMI figures at 9:45 a.m. and then the minutes of the Federal Open Market Committee (FOMC) June meeting will be released at 2 p.m. ET. While the meeting took place before Britain's historic Brexit decision, they'll be closely watched for clues as to how the U.S. central bank is monitoring economic data especially in the context of May's disappointing jobs report.

What we've been reading 

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