(Bloomberg) -- 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 record selloff and European equities dropping to levels last seen in February.
The S&P 500 sank 1.7% to the lowest since mid-March, while Europe's equity benchmark slid 3.2% as bank shares tumbled, weighed down by upheaval within Britain's two major political parties even before exit negotiations begin. Sterling fell below Friday's lows with a 3.6% slide to the weakest since 1985. Demand for haven assets boosted gold, while Treasury 10-year yields approached an almost four-year low.
Risk assets have been under pressure since Britons voted to secede from the EU, raising concerns that an already-fragile global economic recovery will falter as trade snarls in one of the world's biggest consumer blocs. More than $4 trillion has been was wiped from global equity values as internecine squabbles flared in the U.K.'s main political parties, exacerbating the sense of instability.
"This is the new normal -- politics could add more volatility to all financial assets," said Barbara Reinhard, head of asset allocation for multi-asset strategies at Voya Investment Management, which manages $213 billion. "This is in part because central banks have done the lion's share of lifting for stimulus."
The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank is hosting a three-day meeting in Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen. German Chancellor Angela Merkel will host EU President Donald Tusk in Berlin on Monday to talk about the U.K.'s plan to exit the bloc. Cameron is due to address British lawmakers.
"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.
BANK STOCKS BATTERED
The S&P 500 fell 1.7% to 1,999.94 at 10:36 a.m. in New York, sliding below its average price for the past 200 days after Friday plunging the most in 10 months. Investors weighed the implications of Brexit for economic growth and U.S. monetary policy. The odds of a Fed interest rate increase by February plunged to about 10% from 52% on Thursday.
Commodities producers led losses with a rout of 2.9%, while financial shares continued their slid with a 2.6% drop. Utilities and phone stocks gained.
The Stoxx Europe 600 Index slid 3.8% and the FTSE 100 lost 2% even as Chancellor of the Exchequer George Osborne sought to reassure financial markets by saying that a contingency plan is in place to shore up the U.K. economy. The volume of European shares changing hands today was almost three times the 30-day average.
The Stoxx 600 Banks Index, which included European companies involved in banking, fell 7.6% after dropping 14% on Friday. U.K. banks were the worst performers, with Royal Bank of Scotland losing 23% and Barclays sliding 18%. Losses in Italian lenders were limited after people with knowledge of the discussions said Italy is considering injecting capital into some banks.
EasyJet dragged travel-and-leisure companies lower, tumbling 21% after warning that a drop-off in travel demand arising from a Brexit will pare earnings over the rest of summer.
Stock markets in Sweden and Finland, which were closed for the midsummer holiday on Friday, sank more than indexes elsewhere when trading resumed after the weekend. Sweden's OMX Stockholm 30 Index dropped 6.9%, while the OMX Helsinki 25 Index fell 7.7% at one point on Monday.
The MSCI Emerging Markets Index dropped 0.8%. The gauge slid 3.5% on Friday. Shares in emerging Europe and Africa were among the hardest hit, with benchmarks in Poland and South Africa falling at least 1%.
UNCERTAIN FUTURE
The pound was the worst performing among major currencies, falling to $1.3204 after Friday's 8.1% plunge. The euro weakened 1.2% versus the greenback, after sliding 2.4% in the last session, and the Norwegian krone fell 2.7% against the dollar.
"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 in London. "So far, in terms of sterling-dollar, we've seen half the decline we're likely to see this year."
The yen strengthened 0.5% to 101.68 per dollar. It jumped 3.9% 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 MSCI Emerging Market Currency Index fell 0.7% after dropping 1.3% on Friday. Currencies in eastern Europe led declines, with Poland's zloty falling 1.7% against the dollar, the Hungarian Forint 1.5% and the Czech Koruna retreating 1.6%.
Treasuries gained, with 10-year yields extending Friday's retreat by falling another seven basis points to 1.49%. The yield on similar-maturity German government bonds dropped six basis points to minus 0.11% and that on U.K. gilts declined below 1% for the first time on record.
"What we know is that there will be a lot of uncertainty, and uncertainty is not welcomed by the market," supporting haven assets such as Treasuries, said Tomohisa Fujiki, chief rate strategist at BNP Paribas SA in Tokyo. "Our call for no rate hike this year or next is looking more and more likely."
Spanish government bonds rallied on Monday after Acting Prime Minister Mariano Rajoy defied opinion polls to consolidate his position in a general election held Sunday. His People's Party nonetheless fell short of a majority, requiring Rajoy to seek talks with competing parties in order to form a government. The yield on the nation's 10-year debt dropped 17 basis points to 1.45%, after jumping 17 basis points on Friday.
Saudi Arabia appointed JPMorgan Chase, HSBC and Citigroup to arrange its first international bond sale, people with knowledge of the matter said.
Gold gained 1.1% on demand for a haven, set for its highest close since July 2014.
West Texas Intermediate crude fell 1.9%. It plunged 4.9% on Friday, its biggest drop since February. Aluminum fell 1.2% on the London Metal Exchange.
"Everything is caught up in Brexit," said Evan Lucas, a market strategist at IG 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."
