The flight to safety following last week’s quarter-end window dressing is accelerating, with constant news and flashing red headlines of record low yields across DM government bonds once the norm, and as of moments ago Denmark’s 10Y bonds joined the exclusive club of sub-zero yields; gold has soared to fresh multi-year highs above $1,370, the risk-off currency, the Yen, soaring and sending the USDJPY just above 100, while sterling crashed overnight once again below 1.27, levels not seen since 1985.

European banks continue to struggle and while Monte Paschi was halted up 10% earlier following the previously halted shorting ban, both Deutsche Bank and Credit Suisse have plunged to new all time lows, this time on concerns that the two trouble banks could be forced out of the Stoxx 50 Europe index according to an LBBW analysis while BlackRock cutting the region’s shares to underweight, with a negative view on the euro area’s banking sector, did not help. To be sure, all eyes remain on both Italian banks as well as UK property funds, where the announcement of more gating is widely perceived as imminent.

Indeed, as Bloomberg summarizes, it’s safety first for investors around the world as Brexit, no longer a risk on catalyst as it was a week ago, has instead become a reason to offload risk.  Demand for haven assets sent bond yields to record lows after Federal Reserve Bank of New York President William Dudley said Brexit’s significance could escalate if it triggers turmoil in markets beyond the U.K.

Based on overnight analyst quotes, the euphoria is certainly gone by now: “Everyone is trying to react to a situation we’ve never been in before,” said Stewart Richardson, chief investment officer at RMG Wealth Management in London. “We’ve had shocks to the system before, but we haven’t had one like this. And we won’t know the answers for a long time.”

Mitsuo Shimizu, deputy general manager with Japan Asia Securities, also opined saying that there are“fears the global economy will worsen due to Europe. The U.K.’s economic outlook is blurred with uncertainty and the pound’s recent weakness is likely to encourage speculative buying in the yen.”

After rallying last week on bets central banks will work to limit the fallout from Britain’s referendum, global equities are retreating again as the knock-on effects become evident and as central bank credibility and efficiency is once again questioned. Three asset managers froze withdrawals from U.K. real-estate funds on Tuesday following a flurry of redemptions and the Bank of England relaxed capital requirements for lenders. Societe Generale SA Chairman Lorenzo Bini Smaghi said a banking crisis in Italy, stoked by the referendum, could spread to the rest of Europe and rules limiting state aid to lenders should be reconsidered.

As noted earlier, yields continue to plunge: 10-year US Treasury yields fell as much as six basis points to 1.318% and was at 1.33% at 10:44 a.m. London time. Yields on 10-year government bonds in Australia, Japan, Germany, France and the U.K. also sank to records. The strength of the gains in government bonds is leaving investors to ponder how severe the fallout from Brexit is going to be. Securities in the Bloomberg Global Developed Sovereign Bond Index, with an average life of about 10 years, yield a record-low 0.40 percent. In Germany, the 10-year bund yield fell to minus 0.205 percent, while yields on similar-maturity French and British securities reached 0.101 percent and 0.729 percent, respectively.

Expect yields to continue plunging: declining prospects of a Fed rate hike have spurred a torrent of demand for Treasuries, with almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index yielding less than zero, up from about $9 trillion a week ago. In addition to experimenting with negative rates, some monetary authorities abroad are buying government debt, reducing the supply for investors who count on fixed-income assets.

“In the risk-off environment produced by international events, there is a global rush to buy super-long sovereign debt, and bonds that still offer some yield are going to be most in demand,” said Hideo Suzuki, the chief manager of foreign exchange and financial products trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo.

And while until recently bonds and stocks had disconnected, as of this moment, plunging yields finally means sliding stocks as well. The MSCI All-Country World Index dropped 0.7% and the Stoxx Europe 600 Index slid 1.4 percent, falling for a third day, with all its industry groups declining. Automakers and insurers were the biggest losers, while Tullow Oil Plc sank 14 percent after announcing a $300 million sale of convertible bonds. The Stoxx 600 trades at around 14 times estimated earnings, near its lowest valuation since 2012 relative to the global index.

Deutsche Bank AG led losses in a gauge of European lenders as BlackRock Inc. cut the region’s shares to underweight, with a negative view on the euro area’s banking sector, amid the Brexit fallout. The Italian market regulator banned short selling on Banca Monte dei Paschi di Siena for Wednesday’s session, prompting a rally of 9 percent — after it slumped 31 percent in the past two days. The MSCI Emerging Market Index dropped 1.4 percent, falling for a second day. Shares in South Korea slid 1.9 percent and Taiwan’s benchmark slid 1.6 percent. Many markets across Asia and the Middle East were closed for religious holidays.

Finally, the US:

• S&P FUTURES NEAR SESSION LOW, -14PTS, AS EU STOCKS EXTEND DROP

At this rate the Fed’s biggest flip-flopper and stock market supporter, Jim Bullard, may want to wake up: the futures will need his jawboning support soon.

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Market Snapshot

• S&P 500 futures down 0.7% to 2069
• Stoxx 600 down 1.3% to 320
• FTSE 100 down 0.6% to 6507
• DAX down 1.8% to 9357
• German 10Yr yield down 2bps to -0.2%
• Italian 10Yr yield down 5bps to 1.22%
• Spanish 10Yr yield down 4bps to 1.15%
• S&P GSCI Index down 0.6% to 362.1
• MSCI Asia Pacific down 1.1% to 129
• Nikkei 225 down 1.9% to 15379
• Hang Seng down 1.2% to 20495
• Shanghai Composite up 0.4% to 3017
• S&P/ASX 200 down 0.6% to 5198
• US 10-yr yield down 6bps to 1.32%
• Dollar Index up 0.1% to 96.27
• WTI Crude futures down 1.2% to $46.03
• Brent Futures down 0.8% to $47.57
• Gold spot up 1.1% to $1,371
• Silver spot up 2% to $20.34

Global Headline News:

• Melrose to Buy Ventilation Fan-Maker Nortek for $2.8 Billion: Plans fully underwritten rights offering of 1.6 billion pounds. Shareholders offered a 38% premium over Nortek’s closing price
• RBS, Lloyds Most Exposed to Commercial Property, JPMorgan Says: Smaller lenders at more risk due to greater leverage on debt. Asset managers freeze real-estate fund withdrawals post-Brexit
• BlackRock Cuts European Equities to Underweight Citing Brexit: BlackRock downgrades European stocks to underweight, with a negative view on the euro-zone banking sector, and upgrades U.S. credit and EM debt to overweight, according to note
• It’s Dollar’s Time Now Post-Brexit, Top Currency Forecaster Says: Julius Baer says greenback’s fortunes to ‘change massively’. It was among the biggest pound bears in the run- up to EU vote
• Italy Could Spark Systemic Banking Crisis: SocGen Chairman: Italy’s banking crisis could spread to rest of Europe; rules limiting state aid to lenders should be reconsidered, says Lorenzo Bini Smaghi on Bloomberg TV
• Fed Minutes Could Still Hold Important Clues Post-Brexit Vote: Economists cite shift in FOMC tone even before U.K. vote. Record could reveal crucial discussions on jobs, neutral rate

Looking at regional markets, Asia conformed to the downbeat tone seen across global markets in which Wall Street snapped its 4-day advance as ongoing Brexit fears spilled-over and dampened sentiment. Nikkei 225 (-1.9%) underperformed amid a firmer JPY as USD/JPY traded with a 100.00 handle, while the ASX 200 (-0.6%) suffered from the downturn in energy. Chinese markets were also pressured with the Shanghai Comp (+0.4%) weighed following a weak liquidity injection for a second consecutive day. 10-year JGBs benefited from the risk-averse sentiment seen in Japan and traded higher alongside the 10yr and 20yr yields printing fresh lows, while the BoJ also entered the market to acquire JPY1.27tIn worth of government debt. S&P stated that China’s economic growth trajectory is worrisome over the mid-term.

Top Asian News

• Yuan in Longest Losing Streak Since February as Forecasts Cut: China is using opportunity to engineer currency decline, RBC says
• Japan Pension Whale’s Stock Losses Force More Buying, Bond Sales: Fund could buy $41b in Japanese shares, analyst says
• Japan 20-Year Yield Goes Negative as Treasuries Rally to Record: Japanese, Aussie 10-year yields drop to unprecedented levels
• Hong Kong Hedge Fund Adds to Baidu, Samsonite After Brexit: Manas also added to Delfi shares, which surged 38% on June 30
• China Resources Beer to Raise $1.2 Billion From Rights Offer: Proceeds to finance buyout of Chinese venture with SABMiller

European equities slipped this morning with weakness yet again stemming from financial names, as such the Swiss banking giant Credit Suisse (-2.2%) has now fallen to its lowest level since 1989 with Deutsche Bank (-5.4%) also feeling the squeeze amid the continued uncertainty sparked by the fallout from Brexit. While property names have also been pressured with more fund managers announcing yesterday that they were halting there UK real estate funds. Additionally, Italian banks remain in focus in particular Banca Monte dei Paschi which has fallen around 20% since the beginning of the week, in turn the Italian regulator Consob has placed a temporary ban on Banca Monte dei Paschi, which has seen shares higher by over 10%. In credit markets, the fall in global bond yields persists with yields in the German 10-yr benchmark declining to a record low -0.19%, in turn prices have briefly moved above 168.00 . Alongside this the German yield curve has seen some notable curve flattening.

Top European News

• Swedish Central Bank Delays Rate Increase Plans After Brexit: Bank says rate increase now seen in second half of 2017. Riksbank keeps QE program unchanged for second half of 2016
• Italy Could Spark Systemic Banking Crisis, SocGen Chairman Says: Italy’s banking crisis could spread to the rest of Europe and rules limiting state aid to lenders should be reconsidered
• Morgan Stanley Sees Further Potential U.K. Property Fund Stress: U.K. property funds could come under further stress after a surge in redemptions following the country’s vote to leave the European Union caused three asset managers freeze their holdings
• From Paris With Love: France Woos U.K. Business Post Brexit: Paris Region lays out case for moving jobs to French capital. Former Sarkozy minister seeks tax advantages for foreigners
• Carney’s Crisis Management Gives U.K. Only Plan to Work With: In post-vote tumult, governor emerges as anchor of stability. Global officials blindsided by British decision to leave EU

In FX, the pound sank to a fresh 31-year low of $1.2798 before climbing back toward $1.30. The yen jumped 1.2 percent to 100.54 per dollar, taking its advance since Britain’s referendum to more than 5 percent. “The yen is taking the brunt of the pound selling,” said Takuya Kawabata, an analyst at Gaitame.com in Tokyo. “It’s a risk-off market triggered by the pound. We need to continue to remain wary of risk aversion prompted by the U.K.” The currencies of New Zealand. Russia and South Africa — commodity-exporting nations — all dropped by at least 0.5 percent. South Korea’s won led declines in Asia, sinking 0.9 percent versus the greenback. The yuan dropped as much as 0.2 percent to a five-year low of 6.6980 per dollar after ABN Amro Bank NV, Credit Agricole CIB and Goldman Sachs Group Inc. cut forecasts for the currency on Tuesday. An index tracking the yuan versus 13 peers fell for eight of the nine days since Britain’s referendum, spurring speculation China is seeking to weaken it amid the risk of a slowdown in the EU.

In Commodities, precious metals surged as investors piled into haven assets. Gold advanced as much as 1.1 percent to $1,371.39 an ounce in London, the highest level since March 2014. Silver gained as much as 2.9 percent. Most industrial metals declined, with copper falling 1.5 percent to $4,744 a metric ton and lead dropping 1.6 percent. Nickel gained 0.4 percent on concern that supply could be disrupted in the Philippines, the world’s biggest producer of nickel ore. West Texas Intermediate crude slipped 0.4 percent in London to $46.40 a barrel after closing Tuesday at a one-week low.

On today’s US calendar, the highlight is the ISM non-manufacturing print which is expected to come in at 53.3 after printing at 52.9 in May. Also due out is the May trade balance reading and the final June PMI revisions (services and composite). Later this afternoon we get the FOMC minutes from the June meeting which we expect to strike a relatively cautious tone. Remember that this meeting was pre-Brexit. Away from the data the ECB’s Draghi is due to speak this morning in Frankfurt while the Fed’s Tarullo is due to speak (at 2.00pm BST) on regulation and monetary policy.

Bulletin Headline Summary from RanSquawk and Bloomberg

• Risk sentiment guides action in Europe with financial names feeling the squeeze from continued downbeat investor sentiment
• GBP/USD printed a fresh low overnight to briefly break below 1.2800 before being granted some reprieve and meeting resistance at 1.3000
• Looking ahead, highlights include FOMC minutes, US Services PMI, Trade Balance and a host of central bank speakers
• Treasuries rally overnight on continued flight to quality flows, with 10Y yield reaching all-time lows, as global equities, commodities (except gold) all dropping; FOMC minutes released at 2pm ET.
• While U.K. Brexit vote spurred many forecasters to revise their Fed calls — with Morgan Stanley among those now saying nothing will happen before 2018 — BofAML, Citi, Deutsche Bank, Goldman Sachs and JPMorgan still think Fed will raise rates this year, in Dec., while Barclays maintains call for Sept. hike
• Italy’s banking crisis could spread to the rest of Europe and rules limiting state aid to lenders should be reconsidered, Societe Generale SA Chairman Lorenzo Bini Smaghi said
• As Italy considers options to recapitalize its banks, the Texas ratio, a measure of bad loans as a proportion of capital reserves, illustrates the scale of the problem
• Mark Carney has unveiled his four-point plan to cope with the Brexit crisis and it’s just about the only one Britain has to go on
• Royal Bank of Scotland and Lloyds Banking Group are the two major U.K. lenders most exposed to the commercial real estate market, which poses a risk for banks after asset managers froze withdrawals from property funds, JPMorgan said
• German factory orders unexpectedly failed to rise in May as uncertainty over the global outlook deterred demand for goods. Orders, adjusted for seasonal swings and inflation, were unchanged from April, when they fell a revised 1.9%
• In the background of another epic bounce for U.S. stocks was the bull market’s oldest friend: buybacks. American companies announced $52 billion of repurchases last week alone. That pushed total buybacks in June to more than $65 billion, the most since February
• Battered Tokyo stock investors may find savior in an old friend: the world’s biggest pension fund. Because shares held by Japan’s $1.4 trillion Government Pension Investment Fund have suffered such large losses, it will need to add to those holdings to meet targets for their weighting
• Japan’s 20-year government bond yield dropped past zero for the first time as ultra-low yields worldwide failed to deter investors from rushing to buy the safest assets
• Bank of America Corp. sees the $3 trillion U.S. corporate pension industry throwing its interest-rate assumptions out the window. And that means the retirement plans will probably throw more money into Treasuries

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DB’s Jim Reid concludes the overnight wrap:

At the start of this week we thought that the Brexit news flow would slow down a little, with Italian banks in the spotlight and focus gradually moving onto the data, especially Friday’s payroll report. However the news over the last 24 hours or so that three UK commercial property funds worth £9.1bn have suspended redemptions reminds us of the various ways Brexit can impact markets and has people fearful of more stress to come. Indeed the moves also hammer home the vulnerable position that commercial real estate in the UK now sits in following the vote outcome and it wouldn’t be a great surprise to see similar moves by other funds in the coming days and weeks. Funds, diversified financials and insurers were hit hard yesterday as a result. L&G (-7.11%), Hargreaves Lansdowne (-5.70%), Standard Life (-5.20%), Schroders (-5.07%), Prudential (-4.48%) and Aviva (-3.94%) all stood out on a day that the FTSE 100 actually closed up +0.35% despite markets elsewhere tumbling.

That relative outperformance had alot to do with the latest sharp leg lower for Sterling. Indeed the Pound tumbled -1.99% yesterday versus the USD and is down another -1.21% this morning at 1.2864 – the lowest post Brexit and the lowest since 1985. Along with the property redemption freeze news the latest moves also came following the comments from BoE Governor Carney yesterday who warned that ‘there is the prospect of a material slowing of the economy’ and that the financial risks of Brexit ‘have begun to crystallise’. Carney and the Financial Policy Committee also announced that they are reducing the countercyclical capital buffer to 0% from 0.5% of risk weighed assets which is said to raise lending capacity ‘by up to £150bn’.

All of this culminated in a much weaker day for risk overall. European stocks fell for a second consecutive session with the Stoxx 600 closing -1.70% and the DAX -1.82%. The FTSE 250 also fell -2.37%. Across the pond the S&P 500 returned from the long weekend holiday with a -0.68% loss although it did benefit from a slight bounce into the close. Oil markets didn’t help after WTI tumbled nearly 5% and back below $47/bbl for the first time since Monday last week. Meanwhile Gold (+0.42%) benefited from the flight to safety while core global bond yields hit fresh record lows across the board. 10y Gilt yields fell over 6bps and closed at 0.768% and 30y yields fell nearly 7bps to 1.583% – both the lowest on record. 10y Bunds moved deeper into record negative territory (4.4bps lower to -0.186%) with the curve now negative out to 15 years.

Danish 10y yields turned negative (-0.006%) while bonds in Netherlands (0.020%), Finland (0.072%) and Sweden (0.080%) moved one step closer. It was much the same in the Treasury market where 10y  Treasuries tumbled nearly 7bps and along with the move this morning (another 3.2bps lower) are now hovering at 1.343% and the lowest yield on record. This unchartered territory means the 10y is now down a fairly incredible 40bps from its pre referendum poll level on the 23rd.

Taking a look at the rest of markets this morning and with Sterling and bond yields extending their moves lower (20y JGB’s have now gone to below 0%), equities markets are following suit in Asia with almost all major bourses in the red. The Nikkei (-2.96%) has seen the heaviest fall followed by the Kospi (-2.03%) and Hang Seng (-1.92%) while the ASX and Shanghai Comp are -1.36% and -0.18% respectively. EM FX is under pressure while the risk off moves has helped the Yen to gain 1%. Credit markets are a couple of basis points wider while US and UK equity index futures are down half a percent.

Moving on. The latest news out of Italy and specifically the banking sector concentrated on a Bloomberg story suggesting that the Italian government is looking at potentially invoking an EU rule stipulating  the allowance of temporary state aid should regulatory stress tests uncover a shortfall. It’s hard to gauge the reliability of the story so we’re taking it with a pinch of salt for now.  So with political risk rife, yesterday Hungary announced that it is to hold a referendum on October 2nd concerning the plan to share the burden of refugees across the EU. Prime Minister Orban’s right wing government has previously opposed the plans of reallocation of large numbers of migrants across the EU. President Ader announced that the question asked will be “Do you want the EU to be entitled to prescribe the mandatory settlement of non-Hungarian citizens in Hungary without the consent of parliament?”. Interestingly the timing of the vote comes on the same day that Austria will be re-running the presidential election which itself carries its own level of uncertainty.

Moving onto credit, yesterday we published a ‘Credit Bites’ reviewing EUR and GBP corporate IG issuance YTD. After the slowest start of the year in over a decade, we have now seen very strong overall EUR IG issuance YTD. In the non-bank senior space (ECB CSPP universe), record run rates have been reached. Less than 4% (€241mn) out of €6.4bn of ECB CSPP purchases settled in June originated from the primary market. However, issuance with June settlement after the purchases started was relatively limited. We expect a notable pick-up in primary purchases by the Eurosystem over the coming months, particularly after the summer lull, with the CSPP eliciting a supply response. Given the rise in uncertainty following the Brexit vote, the notable drop in GBP issuance by non-UK corporations is likely to continue. The GBP market has been in relative supply decline for years but Brexit created an extra dent, at least for now. See the report out yesterday afternoon or email Michal.Jezek@db.com if you didn’t get a copy.

As has been the case recently the macro data came off second best yesterday to the focus on the Brexit-driven fallout in markets. The data that we did get in the US however was reasonably soft. The IBD/TIPP economic optimism reading for July fell 2.7pts from June to 45.5 (expectations were for no change) which is the lowest level since November last year and further evidence of the drop off in confidence post Brexit. Meanwhile factory orders declined a little more than expected in May (-1.0% mom vs. -0.8% expected) while the final headline durable goods orders reading for May was revised down another tenth to -2.3% mom.

Over in Europe we received the final PMI revisions for June. The Euro area services reading was nudged up 0.4pts to 52.8 which, when taken with the manufacturing reading, saw the composite print revised up to 53.1 from 52.8 and so making it unchanged from May. Regionally Germany saw a 0.3pt upward revision to the composite to 54.4 while France had a 0.2pt upward revision to 49.6. Italy’s composite printed at 52.6 (from 50.8 in May) after getting a boost from the services sector while the composite reading for the UK declined 0.6pts to 52.4, although that was a little better than expected. Importantly our European economists note that all of the responses in the manufacturing survey (data collected 13-23 June) and 90% of those for the services (13-27 June) were collected before the result of the UK EU referendum and so that leaves these PMI’s, as well as the May retail sales data for the Euro area (+0.4% mom) as less relevant than usual. The July flash PMI’s which get released on the 22nd of this month (and the day after the ECB policy meeting) will provide us with the earliest snapshot of the Brexit impact.

In one final mention of Brexit for today, we also heard from a couple of Fedspeakers yesterday on the subject and how that impacts their outlook for the US economy. San Francisco Fed President Williams (centrist to slightly dovish) said that he sees Brexit, as it has played out so far ‘as being a relatively modest risk to the US outlook’. He also reiterated that a Fed rate hike this year could still be warranted should the data come in consistent with his outlook. The NY Fed President Dudley (dovish) was a lot more cautious. He said that while it’s still early days to fully grasp the consequences of Brexit, ‘if there is broad contagion through financial markets’ and ‘if it leads to greater consequences about the stability of the EU, then it could have significant consequences.