British vote causes wild swings in credit, currencies

(Refiles to reach additional subscribers)

By Daniel Stanton, Takahiro Okamoto, Adam Parry and Helene Durand

LONDON/TOKYO/SINGAPORE, June 24 (IFR) - UK bank names came under pressure in credit markets in early trading after the UK voted to leave the European Union, but there were signs that broader financial markets were stabilizing as the session continued on Friday morning.

The pound plunged nearly 12% to hit its lowest level against the dollar since 1985, but has since bounced 4.5% off the lows. Sterling at one stage had shed over 8% against the euro, while the euro fell 4.5% against the Greenback, its biggest drop since the advent of the single currency.

In credit markets a knee-jerk reaction saw synthetic indices gap out on the open before retracing a portion of those moves, leaving the iTraxx Main investment grade index 18bp wider, the Crossover out 75bp and the Senior Financials wider by 30bp.

UK names were hardest hit. Barclays (LSE: BARC.L - news) five-year senior bonds in euros have settled around 30bp wider versus mid-swaps at plus 170bp, but five-year CDS is still up 35% at 135bp. It is a similar story for other UK names with RBS (LSE: RBS.L - news) some 30bp wider in cash terms, compared to European giants Deutsche Bank (LSE: 0H7D.L - news) and BNP (Paris: FR0000131104 - news) Paribas, for instance, which are only 5-10bp wider.

Tier 2 paper widened up to 100bp before rallying back. HSBC's 3.125% June 2028s hit 310bp over mid-swaps but had come in to 260bp over by mid-morning. That deal closed Thursday around swaps plus 230bp.

The rout spread to other bank capital bonds, hitting the Additional Tier 1 market particularly hard. A BBVA (LSE: 931474.L - news) 8.875% deal lost almost seven points before bouncing back above 97.00, still five points lower on the day.

DRAMATIC TRADING IN ASIA

As the session progressed in Asia, the odds of a victory for the Leave camp increased steadily, exacerbating market movements, until the final result showed 51.9% had voted to leave the EU.

FTSE futures were down 3% at 2am, but that had extended to a fall of 8.6% by the time the final result was declared.

The FTSE is 4.7% lower mid-morning on Friday, although that is more than 4% off the session lows. Ten-year US Treasury yields similarly touched a low of 1.405% as the risk-off sentiment grew but are now back at 1.54%.

Markets endured dramatic moves in Asia as the count continued, with USD/JPY at one point in free-fall to 99.00. When British broadcasters ITV (LSE: ITV.L - news) and BBC called the referendum result for Leave, JGB futures soared to a record high while the 10-year benchmark yield tumbled to a record low of -0.215%.

Japan's stock index slumped to the lowest level since October 2014, losing 7.9% and causing circuit breakers to kick in for index futures.

A trader at a big Japanese bank said the outcome of the vote itself was not important, but the chief concern was whether a Brexit would cause the European economy to slow and hold back the Chinese economy, which would then affect emerging economies.

The overnight indexed swaps market is currently pricing in a 50% chance the Bank of England will cut rates in July and close to a 100% probability of a rate cut by year-end. (Reporting by Takahiro Okamoto, Daniel Stanton, Helene Durand, Adam Parry, editing by Vincent Baby, Alex Chambers, Julian Baker)