With global asset correlations once again approaching 1, overnight stocks have been trading in broadly “risk off” mode, following every twist of pound sterling and the rapidly deteriorating British financial situation as “chaos infects” virtually all markets, from China, to European banks, to US equity futures.  As a result of ongoing aftershocks from the Brexit vote, coupled with the sudden political chaos in UK politics, where both parties now seem in disarray, with the pound has extended its selloff to a fresh 31-year low dropping below the Friday lows while European equities are dropping to levels last seen in February. Asian shares rebound, as oil, gold advance and steel prices surge in Shanghai.

“It’s going to continue to be a fairly choppy ride,” Michael Hewson, a market analyst at CMC Markets in London told Bloomberg. “Banking stocks will continue to struggle.”

U.S. stock-index futures indicated equities will deepen declines, after the S&P 500’s worst selloff in ten months following Friday’s U.K. referendum. Contracts on the S&P 500 slid 0.5% to 2,009 in early trading. It earlier erased a drop as Asian equities rallied. Dow Jones Industrial Average futures fell 96 points to 17,150.

“We are in for a volatile period but I don’t think it’s one way down,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd., which oversees about $116 billion. “The dust will settle and investors will realize there’s a long way to go for all of this and markets will eventually start to grind higher again.”

The only silver lining overnight was in Spain, where despite initial exit polls suggesting a victory for the left-wing alliance, the final result confirmed a repeat of the December result in which not only alliance will have a majority in parliament, and in fact Rajoy’s PP gained some votes, leading to a rebound in the IBEX, while yields on Spanish 10Y dipped below those of comparable Italian bonds.

Market Snapshot

• S&P 500 futures down 0.3% to 2012
• Stoxx 600 down 2% to 316
• MSCI Asia Pacific up 0.6% to 126
• Nikkei 225 up 2.4% to 15309
• Hang Seng down 0.2% to 20227
• Shanghai Composite up 1.5% to 2896
• S&P/ASX 200 up 0.5% to 5137
• US 10-yr yield down 9bps to 1.47%
• Dollar Index up 0.83% to 96.24
• WTI Crude futures down less than 0.1% to $47.60
• Brent Futures up 0.2% to $48.49
• Gold spot up 0.8% to $1,327
• Silver spot up 0.3% to $17.78

Top Global News

• Battered British Government Seeks Unity to Soothe Brexit Nerves: Osborne says Britain has resolve to cope with hit to economy
• U.K. 10-Year Gilt Yield Drops Below 1% for First Time on Record: yield -9bps to 0.993
• Brexit Adds $380b to Global Negative-Yielding Bond Pile: investors seek haven debt after U.K. votes to quit EU
• Bloomberg View: Markets Were Rational, But U.K. Voters Weren’t, Matthew Winkler writes
• Rajoy Wins as Spain Cleaves to Establishment After Brexit: traditional parties consolidate position as Podemos stumbles
• Spanish Bonds Surge After Rajoy Wins Election With Bigger Margin: Rajoy’s People’s Party consolidates power as Podemos stalls
• Italy Weighs $44b Capital Injection in Banks, Fatto Says: Il Fatto Quotidiano cites government, financial sources it doesn’t identify
• Sanofi, Boehringer Ingelheim Agree to $25b Asset Swap: Boehringer to get animal-health unit, pay EU4.7b

Looking at regional markets, there was some optimism in Asia where some local bourses saw a mild rebound led by the Nikkei 225 (+2.4%) outperforms amid bargain buying following last Friday’s near 8% decline with reports PM Abe instructed Finance Minister Aso to intervene aggressively in response to the market if needed and also instructed the BoJ to ensure liquidity. Furthermore, Japan was also said to consider a JPY 10 trillion fiscal stimulus package in case of excessive JPY strength. Elsewhere, Chinese markets are mixed with the Hang Seng (-0.2%) resuming last Friday’s declines, while the Shanghai Comp (+1.5%) recovered following a firm PBoC liquidity injection and strength in Chinese commodities. Elsewhere, 10yr JGBs trade in positive territory despite the advances in Japanese stocks, as hopes of BoJ easing increased demand for the paper, while the central bank was also in the market for JPY 475b1n in government debt and inflation-linked bonds.

Top Asian News

• Line Delays Setting IPO Price Range Amid Brexit Turmoil: Japan messaging service plans largest tech IPO of the year
• China Weakens Yuan Fixing by Most Since August as Dollar Surges: Reference rate weakened by most since aftermath of devaluation
• Yen Brexit Surge Seen Testing 95 in Threat to BOJ Stimulus Goals: HSBC changes year-end dollar-yen target to 95 from 115
• HSBC, Nomura Fall in Asia as Brexit May Force Costly London Move: Nomura shares complete biggest two-day drop since March 2011
• Pimco, JPMorgan See Asian Bond Stability Appealing After Brexit: Reduced supply gives support as dollar bond offerings drop 18%

In Europe the picture has been decidedly uglier. The leader of the EU parliament Martin Schulz said that David Cameron needs to formally begin proceedings to depart the EU, adding he wants the British PM to trigger Article 50 on Tuesday.  German Chancellor Angela Merkel has stated that the EU has “no need to be particularly nasty in any way” in the discussions with Britain about its exit from the bloc. However, German Government Spokesman Siebert states that there can be no informal negotiations will take place with the UK prior to Article 50 being triggered.Spain’s election results saw conservatives Partido Popular (PP) secure 136 of 350 seats, which although short of a majority, saw the party’s leader and acting Spanish PM Rajoy demand the right to govern after election win. In the UK, Moody’s downgraded UK’s Aa1 outlook to negative and stated that UK’s creditworthiness is at a larger risk after the Brexit vote as it faced substantial difficulties on exit negotiations.

Top European News

• HeidelbergCement Said to Choose Bidders for $1b of Assets: Cimsa Cimento, Cementir among bidders for Belgian business
• London Broker Foxtons Says Brexit to Prolong Housing Woes: sees lower 2016 rev., profit as decision to quit the EU prolongs uncertainty in London’s residential property market
• EasyJet Joins IAG in Paring Profit Goal After Brexit Vote: demand for flights set to slide for rest of summer period
• Nordea CEO Pledges Dividend Growth Amid Capital Shortfall Fears: CEO Casper von Koskull speaks to Bloomberg
• Wirecard Rises Most in Two Weeks on Report of Alipay Interest: Bild report says Alipay discussing buying 25% stake

In FX, the pound was the worst performing among major currencies, falling to $1.3235 as of 10:27 a.m. London time after Friday’s 8.1 percent plunge. The euro weakened 0.9 percent versus the greenback, after sliding 2.4 percent in the last session, and the Norwegian krone fell 2 percent against the dollar. While protesters angry at the result took to the U.K. streets at the weekend and circulating petitions calling for a fresh vote, the EU’s founding members bolstered pressure on the U.K. to leave the group as soon as possible. Cameron has said he is in no hurry to make the move, indicating he will wait as long as three months before making way for a new leader who will be responsible for negotiating the exit. “People are finding it difficult to comprehend what Brexit implies for the future — we don’t know yet what the magnitude of the shock will be,” said Steven Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. “So far, in terms of sterling-dollar, we’ve seen half the decline we’re likely to see this year.”

In Asia, the yen strengthened 0.3 percent to 101.96 per dollar. It jumped 3.9 percent in the last session and reached 99.02, the strongest since 2013. Finance Minister Taro Aso told reporters Monday that Prime Minister Shinzo Abe has asked for various measures to stabilize Japanese markets. The comments came after a meeting between officials including Aso, Abe and Bank of Japan Deputy Governor Hiroshi Nakaso. The yuan fell 0.2 percent after China’s central bank weakened the currency’s reference rate by 0.9 percent, the most since the aftermath of August’s devaluation. The move came after the Bloomberg Dollar Spot Index surged on Friday by the most since 2011 following the U.K.’s referendum.

In Commodities,  gold gained 0.8 percent on demand for a haven, set for its highest close since July 2014. West Texas Intermediate crude was little changed, erasing earlier losses. It plunged 4.9 percent on Friday, its biggest drop since February. Copper added 0.3 percent in London, while nickel gained 0.2 percent. “Everything is caught up in Brexit,” said Evan Lucas, a market strategist at IG Ltd. in Melbourne. “The oil fundamentals for the moment will be put to one side as markets try to figure out exactly how this will all work.”

* * *

Bulletin Headline Summary from Bloomberg and RanSquawk

• Brexit continues to dictate price action with GBP plummeting below 1.3300, UK financials underperforming and Gilt yields falling below 1%.
• IBEX outperforms in reaction to the Spanish election with leftist Podemos party less likely to gain power.
• As well as the fallout of the Brexit vote, other highlights include US Advanced Goods Trade Balance, Composite & Services PMIs alongside speeches from ECB’s Draghi and PBoC’s Governor Zhou.
• Treasuries higher in overnight trading while Asian equities rally, European stocks drop as GBP drops below $1.32 for the first time since 1985 and the USD index strengthens.
  ECB removed Fed Chair Yellen from scheduled list of speakers for Sintra Forum on Wednesday, according to ECB comments
• The aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets after a weekend of political turmoil, with the pound extending its selloff and European equities dropping to levels last seen in February
• U.K. sovereign 10-year yields fell below 1% for the first time amid speculation the nation’s exit from the European Union will push the Bank of England to cut interest rates to a record low as soon as next month
• Leaders of Britain’s splintered government sought to reassure investors they’ll be able to navigate the fallout from the stunning vote to quit the European Union as the pound extended its drop and international policy makers scrambled to respond
• George Soros, the billionaire whose 1992 wager against the pound made hedge fund history, was “long” the currency before Britain’s vote to leave the European Union on Friday
• Spanish government bonds jumped, pushing the yield down by the most in eight months, after Acting PM Mariano Rajoy defied opinion polls to consolidate his position in the country’s general election
• Italy is considering injecting as much as 40 billion euros ($44 billion) into some lenders after the U.K.’s vote to leave the European Union sparked a selloff among banks already hurt by investor concerns tied to their bad loans
• China weakened its currency fixing by 0.9% to 6.6375/dollar, the most since last August as global market turmoil spurred by Britain’s vote to leave the European Union sent the dollar surging
• Asian stocks rebounded from the steepest slump since August as investors are watching for policy action by central banks globally to ease the market turmoil and pump liquidity into financial markets
• Japan’s 20- and 30-year bond yields dropped to record lows as the U.K.’s decision to leave the European Union reinforced demand for the haven of government debt

DB’s Jim Reid concludes the overnight wrap

As we glance over our screens, the focus in markets this morning is once again in FX where the Pound is down just a shade over 2% versus the US Dollar and hovering at 1.3398 as we type – its yet to have quite breached the early Friday lows however. Sterling is also down -1.14% versus the Euro although interestingly it’s not actually the Pound which is the worst performer, but the Norwegian Krone which has weakened over 3% with the falls in Oil seemingly compounding the pain there. Staying in FX, the PBoC this morning weakened the CNY fix by the most since August (0.9% weaker) in the wake of the surge for the Dollar on Friday.

Meanwhile, equity markets are a little bit more mixed this morning. Following that huge leg lower on Friday, the Nikkei is +1.39% currently while bourses in China (Shanghai Comp +0.65%) are also a touch firmer. The ASX (+0.52%) is also up however the Hang Seng (-0.95%) and Kospi (-0.31%) are both down. FTSE 100 futures are currently -3.60% while US equity index futures are down around half a percent. Elsewhere, credit markets are weaker this morning with iTraxx indices in Asia and Australia between 4bps and 5bps wider.

The moves this morning follow what was a huge sell-off for risk assets on Friday. That said moves were relatively orderly in the end with a number of assets rebounding from the late Asia and early European open lows. Unsurprisingly it was the moves for Sterling which were front and centre for most. The Pound ended the session down at 1.3679 which was a loss of just over 8% – the biggest daily fall since data starting from the Bretton Woods collapse. That somewhat masks the fact though that the currency traded in an incredible 13.52% range over 7 hours or so. To put that into some perspective the range (on an intraday basis) for the entire 2016 prior to this was 8.03%.

Looking at performance for equities, the end result for the Stoxx 600 was a -7.03% loss which is the fifth biggest fall of all time for the index (and the largest since 2008). Regionally it was the peripherals which were hardest hit. The IBEX closed -12.35% and the FTSE MIB was -12.48%. The DAX and CAC collapsed -6.82% and -8.04% respectively however the relative outperformer on the day was actually the FTSE 100 which closed -3.15%. It had opened initially over 8% lower but bounced back as the session progressed with a number of USD-sensitive earners benefiting (BP +1.73%, GlaxoSmithKline +3.71%, Shell +1.08%, Astra Zeneca +3.41%). It’s amazing to see that the index also had its first positive week (+1.95%) since May. Across the pond the S&P 500 closed -3.59%.

There was no hiding for banks however. Indeed the Euro Stoxx Banks index tumbled -18.02% and easily the most of all time (the next closest being a -10.26% drop in 2008). Peripheral Banks were down anywhere from 20-30% and even the best performing banks in the index were down high single digits.

The underperformance for Banks was certainly the case for credit markets too. Indeed the iTraxx Main and Crossover indices were 19bps and 71bps wider respectively while the senior and sub financials indices were 32bps and 58bps wider respectively. Even though they rallied from the morning opening lows, these were the biggest moves wider since 2012 and 2014 respectively for those financial indices.
Unsurprisingly then the lone gains on Friday came from those flight-to-safety assets. Core sovereign bond markets were at the centre of that. 10y Bund yields reached a new record low of -0.051% after dropping over 14bps (intraday low was -0.183%), while 10y Gilt yields fell nearly 30bps and at 1.082% reached an all time record low. 10y Treasuries also struck a low of 1.561% after moving nearly 19bps lower. Meanwhile Gold rallied to the tune of +4.69% with other precious metals also up. That was as good as it got for the commodity complex though with Oil in particular down nearly 5% although in the context of some of the huge swings we’ve seen in the energy complex this year that didn’t seem all that eye-opening.

You’d be forgiven for missing the fact that there was actually some economic data released on Friday, although clearly that was very much second fiddle to events in the UK. In Germany we saw the IFO survey for June come in a little ahead of expectations at 108.7 (vs. 107.4 expected) after rising close to 1pt from May. The expectations component rose 1.4pts to 103.1 (vs. 101.2 expected) although you’d have to imagine that Friday’s result will dampen that next month. Meanwhile in the US the latest durable and capital goods orders data was disappointing. Headline durable goods printed at -2.2% mom in May, weaker than the -0.5% expected. Excluding transportation orders were down -0.3% mom although expectations had been for a +0.1% rise. Core capex orders (-0.7% mom vs. +0.4% expected) were also disappointing. The final release on Friday was the last June revision to the University of Michigan consumer sentiment reading which was taken down to 93.5 from 94.3 in the prior print.

Onto this week’s calendar now. It’s a quiet start to the week today (outside of the obvious EU debate) with the only data due out of the European session being the latest M3 money supply data for the Euro area. Across the pond this afternoon we’ll get the flash June services (expected to rise to 51.9 from 51.3) and composite PMI’s, as well as the advance goods trade balance for May and also the Dallas Fed manufacturing activity index. We start in Europe on Tuesday with the various confidence indicators out of France and Italy, as well as CBI sales data in the UK. The main focus in the US on Tuesday will be the third revision for Q1 GDP (expected to be revised up to +1.0% qoq from +0.8%), while we’ll also get consumer confidence data, the Richmond Fed manufacturing index and finally the S&P/Case-Shiller home price index for April. Turning to Wednesday, we’re kicking off in Asia with consumer sentiment data in China and also retail trade data in Japan. Over in Europe we’ll get the June confidence indicators for the Euro area, while German CPI data in June is also due out. The UK will also release the latest money and credit aggregates numbers. In the US on Wednesday we’ll get the PCE core and deflator prints for May (both expected to rise +0.2% mom), as well as personal income and spending data for the same month and finally the latest pending home sales data. We start in Japan again on Thursday where we’ll get the latest housing starts data along with industrial production data. It’s busy in Europe on Thursday. The Euro area CPI print for June will be released, along with French and Italian CPI, UK Q1 GDP (final revision) and also the June unemployment reading in Germany. We’ll also get the latest ECB minutes on Thursday. US data on Thursday consists of initial jobless claims and the Chicago PMI for June. It’s a busy end to the week in Asia on Friday. In China we’ll get the official manufacturing and non-manufacturing PMI’s for June, while in Japan we get CPI for May, manufacturing PMI and also the Q2 Tankan survey. In Europe on Friday we get the final manufacturing PMI numbers in June, while over in the US we’ll be keeping a close eye on the ISM manufacturing print (little change expected), while construction spending data, manufacturing PMI (final June revision) and vehicle sales data for June rounds things off.

Away from the data there will be plenty of focus on the aforementioned two-day EU leaders summit which kicks off tomorrow. Also worth keeping an eye on is the three-day ECB Forum in Portugal which starts today, with Yellen, Draghi and Zhou scheduled to speak. Elsewhere, over at the Fed we’ll hear from Powell on Wednesday and Bullard on Thursday. We’ll also hear from a number of ECB members at the event in Portugal over the next few days. It’s also worth keeping an eye on the release of the second part of the Fed’s stress test results on Wednesday.

Yesterday we warned that the biggest threat to the UK political process in the aftermath of the Friday referendum is neither an arguably fake petition to hold another referendum (it won’t happen), nor the so-called buyer’s remorse on the side of “Leave” voters, especially with ComRes confirming a negligible 1% of those voters were “Unhappy” with the outcome…

…but rather a surprising discovery in a UK government Command Paper laying out “The Process of withdrawing from the European Union“, which goes through the process of invoking the infamous Article 50 of the Treaty on European Union, and notes that there may be a rather substantial hurdle to the actual Brexit process: a Scottish and/or Northern Irish veto to Britain’s separation from the EU. To wit:

The role of the devolved legislatures in implementing the withdrawal agreement:

We asked Sir David whether he thought the Scottish Parliament would have to give its consent to measures extinguishing the application of EU law in Scotland. He noted that such measures would entail amendment of section 29 of the Scotland Act 1998, which binds the Scottish Parliament to act in a manner compatible with EU law, and he therefore believed that the Scottish Parliament’s consent would be required. He could envisage certain political advantages being drawn from not giving consent.

We note that the European Communities Act is also entrenched in the devolution settlements of Wales and Northern Ireland. Though we have taken no evidence on this specific point, we have no reason to believe that the requirement for legislative consent for its repeal would not apply to all the devolved nations.

As it turns out, this warning was spot on, because earlier today Scotland’s First Minister Nicola Sturgeon told the BBC that the Scottish Parliament could try to block the UK’s exit from the EU. As a reminder, unlike England where the vote went 52% to 48% in Brexit’s favor, in Scotland the picture was vastly different with 62% backing Remain and 38% wanting to go. And as predicted, the Scottish National Party leader, who went through her own UK independence referendum  two years ago and is now considering yet another referendum, said that “of course” she would ask MSPs to refuse to give their “legislative consent”.

In other words, Scotland’s leader is threatening to break down the very concept of a “Great Britain”, which includes England, Wales and Scotland, and pledge allegiance to the EU, while turning her back on more than half of the English population.

In an interview with the BBC‘s Sunday Politics Scotland program Sturgeon was asked what the Scottish Parliament would do now. Ms Sturgeon, whose party has 63 of the 129 Holyrood seats, said: “The issue you are talking about is would there have to be a legislative consent motion or motions for the legislation that extricates the UK from the European Union?

“Looking at it from a logical perspective, I find it hard to believe that there wouldn’t be that requirement – I suspect that the UK government will take a very different view on that and we’ll have to see where that discussion ends up.” When Sturgeon was asked by presenter Gordon Brewer whether she would consider asking the parliament not to back such a motion of legislative consent she replied “of course”.

She added: “If the Scottish Parliament was judging this on the basis of what’s right for Scotland then the option of saying look we’re not to vote for something that’s against Scotland’s interest, of course that’s got to be on the table.”

* * *

Still, as we also cautioned yesterday, the veto threat may be merely Scotland clutching at straws. Scottish Secretary and Conservative MP David Mundell, who also spoke to the Sunday Politics Scotland program, said: “We have to respect the result on Thursday, even if we don’t like it – it was a UK wide vote – it was a vote by people across the UK.”  Asked about the possibility of Scotland stopping Brexit, he said: “What we need to see is the legal mechanism that we go through to get to a situation of the UK leaving” and then said clearly that “I personally don’t believe the Scottish Parliament is in position to block Brexit, but I haven’t seen the legal documentation that you refer to in your interview with Nicola [Sturgeon].”

* * *

It is unclear what the final legal determination will be on this subject, but if someone Scotland does succeed in scuttling a historic referendum decision by the majority of the UK population, we urge Edinburgh to build a very big and vary tall wall on its southern border (ideally without waiting for Mexico, or the UK, to pay for it).

Meanwhile, as all this takes place, the UK ruling class is in a state of crisis, with both PM Cameron and Chancellor Osborne having disappeared, while the opposition Labour party is undergoing a real time coup attempt, in which as we reported yesterday, party leader Jeremy Corbin has been firing random MPs from the shadow cabinet, in an attempt to foil an ouster. For those eager to follow the drama live, the Telegraph has a good live blog at the following link: “EU referendum Labour crisis: Hilary Benn says Jeremy Corbyn ‘is not a leader’, after he is sacked over post-Brexit coup plot, as six shadow cabinet members quit and more expected to follow”

For those still confused, the following tweet by the Telegraph’s Tim Stanley summarizes everything that has transpired in the past few days best: