The damage from last week's surprising Brexit vote is continuing this week, with U.S. equities down again sharply on Monday.
Key technical support levels have already been violated or are under threat. The Dow Jones Industrial Average has traded below its 200-day moving average for the first time since March. The Nasdaq Composite has tested back to levels not seen since February. Yields on 10-year Treasury bonds, at 1.46 percent, have returned to lows not seen since 2012's scare over the European debt crisis.
Overseas, the damage is even worse. U.K. sovereign default risk has spiked to three-year highs, and Standard & Poor’s has downgraded the country’s credit rating two notches, from AAA to AA. Italian bank stocks are down 25 percent while trading in British banks was halted overnight after shares lost 23 percent over the last two days. Banks are scrambling for U.S. dollar liquidity, tightening inter-bank lending markets.
Losses look set to continue as the political fallout is deepening. In comments to Parliament, British Prime Minister David Cameron said that the vote of the people to leave the European Union must be respected — diminishing the hope of many globalists that the result would be ignored just as anti-Lisbon Treaty votes in 2008 and the anti-bailout vote by Greece in 2015 were. The president of the European Parliament raged that the British "violated the rules" and that it is not "the EU philosophy that the crowd can decide its fate."
Ignoring or invalidating the result in one of the world's largest democracies would unleash populist outrage, and rightfully so.
Cameron added that the timing of triggering Article 50, the EU's exit clause, was still to be decided. The process is likely to take years, during which the crisis will simmer.
Weaker members of the European Union will use the chaos to negotiate relaxed fiscal austerity and debt repayment requirements under the threat of following Britain's example. Creditor nations like Germany will want to hurry the process along to deny this opportunity.
The pre-positioning has already started.
There have been calls for EU membership referendums in countries like Portugal, France, the Netherlands, and Austria. German Finance Minister Wolfgang Schäuble said that the EU must resist the temptation to react to Brexit with additional sharing of financial risks within the Eurozone (a pet peeve of the Germans). Italian Prime Minister Matteo Renzi is reportedly asking for more flexibility from Germany on public spending and EU state aid regulations.
What's really bothering investors is that the deus ex machina of this business cycle — which would pop up whenever something threatened stocks — looks powerless here. I'm talking about the central banks, which have swooped in again and again to save investors from fiscal cliffs, debt crises, government shutdowns and anything else that endangered asset valuations. This time, there’s little they can do. The Bank of Japan and the European Central Bank have already cut interest rates into negative territory. Asset-purchase stimulus programs have reached their functional and statutory limits.
The problem is that the constituents from which Fed Chair Janet Yellen and ECB chief Mario Draghi derive their powers are raging against their elitist, globalist policy response to the financial crisis — a response that has, unarguably, grossly benefited wealthy asset holders over regular working families.
You can see this in the widening of wealth inequality. You can see this in the stagnation of incomes. You can see this in still-elevated unemployment rates throughout Europe. You can see this in the electoral rise of nationalists from Donald Trump to far-right presidential candidate Norbert Hofer in Austria.
Bank of America Merrill Lynch analysts call Brexit the "biggest electoral riposte to our Age of Inequality" and recommend clients prepare for a period of populist economic policies, higher levels of volatility, strength in precious metals and the outperformance of Main Street assets vs. Wall Street assets.
In other words: The worm has truly turned.