The FTSE 100 slumped by 8.3% upon opening following the UK’s vote to leave the European Union, with gilt yields falling to record low levels.
The FTSE dropped to 5,811 in early trading, while the yield on the benchmark 10-year UK government bonds fell by 0.31 percentage points to a record low of 1.07%. The pound also fell by around 10% against the dollar to the lowest level since 1985 overnight.
The results were followed hours later by Prime Minister David Cameron announcing his resignation. He said he hope a new leader will be in place by the time of the Conservative Party Conference in October.
The City reacted with shock to the news and a unanimous acceptance that the UK will face a tough future in the short term at least.
Hermes group chief economist Neil Williams said the vote was “a massive ‘curve ball’” for financial markets, which now need time to assess the policy path a new political line-up will eventually choose to go down.
“Equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with our main trading partner, FDI foregone, and a diluted relationship with the US and other third parties that use the UK to access the Single Market,” said Williams.
“The UK economy will of course ‘survive’, given its entrepreneurial flair, increasing focus on non-EU trade, and likely policy accommodation by the Bank of England and UK Treasury. However, getting to the next stage looks a long, drawn-out ‘can of worms’, leaving considerable uncertainty for UK assets and markets. The extent of this damage now rests on the manner of the exit.”
The Pensions Management Institute chief executive officer, Gareth Tancred said: “The vote in favour of leaving the EU creates a new era, the full implications of which will not be apparent for a long time. “However, it is clear that in the short term there will be considerable volatility in financial spheres, which will have to be ridden out. Pension schemes are long-term arrangements, and should therefore maintain that long-term focus, resisting any pressure to react to short-term events where the implications are unclear.
“For those who do have to think in the short term, such as those looking to retire in the near future, the decision is more difficult, and they will be more exposed to the short-term volatilities. However, where possible, the message should still be to base decisions on carefully-thought out positions, rather than knee-jerk responses.”