Risk Assets Under Pressure on Brexit and Global Growth Concerns

US stocks are opening the week lower while Treasurys are rallying across the curve as lingering uncertainty over the fallout from Brexit and tepid economic data fueled global growth concerns.  Bank of England Governor Mark Carney cautioned of “the prospect of a material slowing of the economy”, outlining five areas through which the Brexit vote could increase risks to financial stability.  Carney mentioned financing of the current account deficit, the commercial real estate market, the high level of household indebtedness, subdued global growth, and fragilities in financial market functioning as the key areas of concern.  The BoE also announced a cut to capital rules for UK banks, lowering the countercyclical-capital buffer from 0.5% to 0.0% of risk-weighted assets.  This should increase banks’ capacity for lending and is likely to remain in place until at least June 2017.  The Pound fell to its lowest level against the US dollar in 31 years.

In terms of new data, a report showed China’s service sector grew at the fastest pace in 11 months, but the more closely followed manufacturing composite sunk to its lowest level in four months.  China has been trying to rebalance its economy towards stronger consumption and away from manufacturing and exports.  The data appears to reflect that, but it remains to be seen if the expansion in services will be robust enough to spur growth if the manufacturing sector continues to struggle.  In the US, separate reports showed declines in both factory orders as well as durable goods orders in May. 

All three major US stock indexes are currently down close to 1%, while Treasury yields and swap rates are 3-8 bps lower across all major maturities.  Oil prices also got hit hard, with both WTI and Brent crude down close to 4%.