The three major U.S. stock indexes shed some of last week’s big gains, the British pound dropped to a 31-year low and oil pulled further back from $50 a barrel as the recent British vote to leave the European Union continued to roil world markets Tuesday.
The Dow Jones industrial average and the Standard & Poor’s 500-stock index finished the trading day down more than 0.6 percent. The tech-heavy Nasdaq composite index was down 0.8 percent. Their slump followed a global tumble, with Japan’s Nikkei 225 index, the Hang Seng in Hong Kong, and markets in Australia and most European countries losing ground. The yield on the 10-year U.S. Treasury note also fell as investors sought shelter in gold, bonds and other havens.
Two weeks ago, a British majority voted to leave the E.U., creating uncertainty about how long the exit will take and what its long-term ramifications will be on international business and finance.
Mark Carney, the governor of the Bank of England, sought to calm financial markets, saying Tuesday that the central bank would do its best to make sure that financial institutions can keep lending.
Carney said the central bank would lower the amount of capital that British banks must keep in reserve, which would free up more money. He warned, however, that financial risks from the Brexit vote “have begun to crystallize” in people’s minds.
“There is still a negative reaction to the Brexit vote, which certainly surprised pundits, pollsters and the prediction markets,” said David I. Kass, a professor of finance at the University of Maryland. “Today, the markets are being more reflective that Brexit will have a negative impact on world markets, at least in the short run, especially in the U.K. and Europe.”
Tuesday’s pullback followed last week’s strong bounce in U.S. markets, when they took back steep losses that were suffered in the days following the Brexit vote. Both the Dow Jones and the S&P 500 climbed last week by more than 3 percent in their biggest gains of the year.
The latest market turmoil arrives as the first half of the year closes and businesses prepare to report second-quarter earnings. Many investors are looking for an earnings jolt from companies to keep the bull market alive.
U.S. banks’ stock prices continued to be hit hard because their profits are under stress from the Federal Reserve’s low interest rates, which are not expected be raised again anytime soon.
“Interest rates will stay low and stimulate the economy,” Kass said. “But by interest rates being constrained, large-bank profits are being held back. It reduces profit margins.”
JPMorgan Chase, State Street and Wells Fargo saw their stock prices down by at least 2 percent in intraday trading on Tuesday. Oil companies and mining stocks also dropped. Utilities were up.
The fall in the value of the British pound could have several effects. British companies that rely heavily on exports could do well overseas. Companies that sell into Britain could run into head winds as their products become more expensive because their currencies are stronger against the pound.
The U.S. Treasury note, whose yield moves opposite its price, was at a low because of high demand. Investors were keeping tabs on Italian banks on Tuesday because of an enormous number of bad loans on their books.
“This week so far, we are seeing a little instability in the trading of government debt in Europe,” said Keith Davis, a principal at Farr, Miller Investments in Washington. “People are worried about what’s the next shoe to drop. The concerns are amplified by the fact that European banks own a ton of that debt. So the banking sector is selling off and traders are trading out of the peripheral countries such as Italy and buying bonds in flight-to-safety countries such as Germany, the U.K and the U.S.”
The drop in world oil prices may have less to do with Brexit and more to do with oversupply. Brent crude, the global benchmark, was down nearly 5 percent at one point Tuesday, to $47.77.
Bloomberg News reported that U.S. refineries are running at full tilt and imports are flooding into the country, sating gasoline demand — and pushing down prices at the pump. Meanwhile, U.S. gasoline consumptionis not as high as expected in peak driving season. The result is weighing on crude prices.
The U.S. Energy Information Administration reported last week that gasoline consumption in April was 9.21 million barrels per day, lower than expected.