How a UK stock market crash could hit UK’s economy
Stock markets in the United Kingdom have plunged in the aftermath of Britain’s shock vote to leave the European Union, which has plunged the economy into chaos and plunged the value of sterling.
The pound fell as much as 2.5 percent to $1.1799.
However, Britain’s biggest stock exchange tumbled more than 10 percent in the early hours of Thursday morning, plunging the value by almost a third after it reported its biggest drop in market values since October 2016.
The drop has sent investors fleeing the market, with some people trading their own shares, while others are selling.
Many traders are holding their money in euros, which are being backed by the British government’s quantitative easing program, which is a way of boosting the country’s finances.
Analysts said investors could lose a significant chunk of their money if the UK votes to leave.
“It’s going to be very difficult to get the market back,” said Alex McLean, head of research at investment bank FTSE Capital Markets.
“People are going to have to find other ways to make money.”
In London, the London Stock Exchange fell 1.3 percent and the Standard Chartered index fell 1 percent.
Traders are also leaving the market in New York, where the Dow Jones Industrial Average dropped 10.8 percent, and in Tokyo, where its Nikkei 225 index dropped 3.5%.
The British economy has shrunk for six years in the wake of the Brexit vote, which sent shockwaves through the markets, plungings in the value and plummeting confidence in the British banking system.
Britain’s financial sector was hit hardest, as banks and other companies lost billions in client deposits and loans as a result of the vote.
More than a quarter of Britain is still without bank loans, and many are still waiting for new information on the cost of buying a home or a car.
Bankers have warned that a collapse in the market would leave many Britons without income and force them to sell assets, as well as leaving many businesses without cash flow.
British Prime Minister Boris Johnson is due to meet with European Commission President Jean-Claude Juncker in Brussels on Friday.
On Thursday, the British pound fell 0.5 of a penny against the euro, to $0.5356.
In Frankfurt, the Frankfurt Stock Exchange dropped 0.4 percent to 1,974.52 euros, while the Frankfurt-based DAX index dropped 0 .3 percent to 2,085.52.
European stock markets also took a hit, with the FTSEurofirst 300 index down 3.4 points, or 2.2 percent, to 1.4669.44, the FASB euro zone index down 1.5 points, 1.9 percent to 9,731.52 and the DAX in the Netherlands down 1 point, 1 percent to 3,719.04.
But investors are not holding their breath waiting for the UK to return to normalcy.
People have been fleeing the stock market for a long time.
It is hard to predict the market’s reaction.
We will see what happens,” said Michael Tindall, chief market strategist at the London-based exchange, where clients hold a combined 1.8 million shares.
A fall in the pound means the value in euros is also losing ground.
That has sent a sharp shock to sterling, which had gained more than 2 percent against the dollar since early March.
Investors are selling their holdings in euros.
With markets still in a freefall, investors are likely to sell their euros in euros because of the weaker pound, according to Tindold.
This will make it harder for sterling to recover, which could have a negative effect on the economy, he said.
Brexit has led to a huge drop in confidence in British financial institutions.
The government has said the UK should be able to rejoin the EU in 2019, but it has faced resistance from business leaders, unions and politicians.
There is also a risk that the UK may no longer be able make loans to other countries and could be forced to use a different currency, Tindaly said.