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Dow Plummets after U.K. Vote. Aired 9:30-10:00a ET
Aired June 24, 2016 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
[09:30:00] ALISON KOSIK, CNN BUSINESS CORRESPONDENT: All right, the opening bell has rung and in the first few minutes of the trading day we are seeing triple Dow triple digits lower in the first few seconds. It is ramping up, though, as we see, 112 points lower for the Dow. You know, this could just be one of those days where you just see a very reactionary move as far as traders and investors go.
You think about what's led up to today. Up until today, all of the thinking was the British people were going to vote to stay. So what we actually saw over the past week or so was investors really buying into the market. In fact, the Dow was up hundreds of points over the past week or so. So now you're seeing investors really unwind those buys by selling. We are seeing the Dow down now 243 points. Things happen very quickly here on Wall Street.
John.
JOHN BERMAN, CNN ANCHOR: Yes, 393 points down in one minute in the New York Stock Exchange this morning. That's the Dow we're looking at right now, now down 400.
Alison, stand by.
I want to bring in Diane Swonk, founder of DS Economics, and on the phone with us, chief economic adviser for Alliance, Mohamed El-Erian.
Mohamed, we're looking at it Dow down nearly 400 points in less than two minutes. How long do you think this is going to last?
MOHAMED EL-ERIAN, CHIEF ECONOMIC ADVISER, ALLIANCE (via telephone): It's going to last for a while. You now have major institutional uncertainty on top of global economic fadrilaty (ph), on top of financial fluidity. So there's a lot of uncertainty out there and it's going to take time for markets to settle down.
BERMAN: And one of the issues, Diane Swonk, is up until yesterday, most investors has actually thought the vote in Britain would go the other way. So this hasn't been priced in exactly just yet. We're seeing losses of 415 points early in the morning. But the market has absorbed this type of uncertainty before. It has absorbed problems before. Will the U.S. markets be resilient in this case, Diane?
DIANE SWONK, FOUNDER, DS ECONOMICS: Well, I think the U.S. economy will be resilient, although it will still suffer from this as well. I think what's important is the financial markets not only did not price in an actual Brexit vote, an exit from the European Union, they didn't price in the risk even if Britain had stayed in. They had gotten several concessions to stay in, and that meant a lot of collateral damage within the E.U. as well.
And so what I think the markets are adjusting to now is the reality of how much the pushback is to economic integration, the post World War II sort of era and really what has defined prosperity in this post World War II era and peace as well. And I think that's the market they're trying to struggle with is now, what does that mean? Where are we? It is an enormous amount of uncertainty and I think Mohamed El- Erian is exactly right on that. And that's not going to go away anytime soon. This will take years for the negotiations between the E.U. and Great Britain to be resolved.
Now, of course, Britain - the British have tried to push back and create a time of sort of some calm over the summer and not move forward on triggering this actual exit until the fall with a new prime minister. The E.U. is already pushing back on that because they want to make the process extremely arduous. They want to make it a deterrent to other European nations. We've already heard from leaders in France, leaders in the Netherlands that would like to follow suit and break away from the E.U.
There's this general backlash that I think is parallel in the United States. The dislike of Brussels and the government and its reach into the sovereignty of these countries is very similar to the backlash to the establishment in Washington, D.C. And I think all of that means a lot of uncertainty for our own elections here in the United States as well. And again, as I mentioned earlier in the program, the idea of free trade has already fallen by the wayside in the United States and immigration is clearly an issue here as well.
BERMAN: Mohamed El-Erian, we're now down 530 points four minutes into the trading day on Wall Street. It looks bad on its face, but last August I remember being here, looking at drops of some 500 points in one day and then it swung back the very next. Five hundred is bad. How - how does it go? When does it go from bad to really bad?
EL-ERIAN: It goes from bad to really bad if, as Diane said, those investors, especially hedge funds that are levered, who got sucked in, in the past few days thinking that Brexit would not happen, are forced to unwind their trades. I suspect you're going to see some of this, so expect quite a bit of volatility today, probably on Monday. The good news is that there is cash on the sideline, but this cash is not going to engage until there is greater certainty. Investors have to be extremely selective in this environment and make sure that they investment in companies that have very strong balance sheets and positive cash flows.
[09:35:05] BERMAN: Alison Kosik, you've been on the floor of the New York Stock Exchange for many uncertain days before. How does the feeling down there this morning compare to what you've seen in the past?
KOSIK: You know, it's pretty darn calm today. There are a lot of smiles on their faces. You know, I think that the way the traders see it, they see this as an opportunity. You know, they've got the stomach for this kind of risk.
But at the same time, you see lots of investors who don't have the risk tolerance for this. You see people flocking to safe haven assets. They're flocking to gold, they're flocking to U.S. Treasuries. We're seeing gold, John, up more than 5 percent. We haven't seen that kind of a jump since the financial crisis. People are, once again, also buying government bonds. And what that's doing is pushing yields lower. We're looking at interest rates on a ten year note seeing their biggest single day fall since 2011, and that was when the world was worried about the European debt crisis, and the U.S. debt downgrade. And if you want to see a positive for that investment, meaning the investment in U.S. Treasuries, that's pushing interests rates lower - even lower than where they area - they were, you know, yesterday. Mortgage res are following that track and mortgage rates, keep in mind, are at the lowest level in three years. So mortgage rates are also going to go lower. So it's going to be cheaper for you to finance your home or for you to refinance your home as well.
John.
BERMAN: Diane Swonk, 507 points down right now at 9:36 a.m. Eastern Time. A rough start to the trading day on Wall Street. But if investors are looking at the world right now and they're seeing uncertainty in Britain, they're seeing uncertainty in Europe, there was already uncertainty in China, might that make the United States more attractive? Isn't there relative stability here?
SWONK: Well, it has shown up already in the flight to safety and the flight into the U.S. Treasury market and gold, as you had mentioned. So it is showing up as that. But that doesn't mean that our stock market will necessarily perform as well because, as we know, non- financials are very dependent on what they make abroad. And so to the extent that this causes uncertainty about their profits abroad, that causes uncertainty about their ability to deliver on those profits. And I think that's very important.
Mohamed had made the point about cash flow and sort of having a cushion being very important in this environment. And, in fact, U.S. companies have been hoarding cash and not investing as much in the future as we would like. But that cushion of cash flow will be very important going forward. It doesn't really mean a lot for a basis for growth, though, and I think that's what's very important here is, we can't sort of think of ourselves as an island that's untouched by this. Whatever happens abroad, washes up on our own shores, sometimes with a vengeance, particularly when it comes through in profits.
Now, it could be short-term good for the U.S. consumer. That said, ultimately labor markets have to hold up and labor market situation is a little built uncertain at this point in time because we really had that bad May unemployment report. I think we're going to make it through that. I think we will weather this storm. But yet it is another storm to weather. And having the U.S. being a safe haven is not good for all those manufactures who are hoping to see a weaker, not stronger, dollar. And as I said, it sidelined the Fed. The Federal Reserve is trying all it can to sort of leave the punchbowl out and keep the party going in the United States, but they don't have much ammunition left if this economy were to falter more.
BERMAN: It's an important note, a stronger dollar, when things go back in Europe, it makes harder - it harder to sell U.S. goods overseas, so it's tough for U.S. manufactures.
Mohamed El-Erian, you're something of an expert on political economy right now. Over the last several hours, we've heard leaders from around the world trying to reassure people that things are going to be OK. Yes, we know this was a big decision, but, you know, the U.S. leaders are saying we have faith in the people of Britain. We will help move this forward. We are going to keep our alliance up. You hear people in Europe saying, we're going to work with Britain over the next two years to try to make this a smooth transition. Is it believable right now what these people are saying, what leaders are saying in terms of trying to reassure not just investors and voters, but common citizens?
EL-ERIAN: The problem is, a lot of people are not listening. In fact, the Brexit vote is yet another example where the majority of people have decided to go against not just expert opinion, but also the political and business elite. This is another major anti-establishment development. So the problem is that after so many years of sluggish economic growth, after so many years of inequality getting worse, there is an anti-establishment reaction and it's playing out on both sides of the Atlantic. And the politicians from the establishment are going to have to scramble in order to regain control.
Remember, we would not have had a Brexit referendum if it wasn't for the U.K. independence party. The U.K. independence party was threatening the base of the conservative party. Prime Minister Cameron felt that the only way he could gain re-election at the last general election is by promising a Brexit referendum. But I don't think he quite imagined that citizens would not listen to the establishment, would not listen to business leaders, and would opt for uncertainty. And I think that speaks to the political mood that is on both sides of the Atlantic right now.
[09:40:29] BERMAN: Yes, David Cameron may have bought himself an election, but it was one year in office. It may have helped him in his election to be prime minister a year ago, but ultimately that Brexit vote leading him from office sometime this fall.
Mohamed El-Erian, Diane Swonk, Alison Kosik, don't go far because we continue to watch the markets this morning, down 467 points, off the lows from a few minutes earlier, but still a rough opening just ten minutes in.
I want to shift gears right now and talk a little about the international implications of this, particularly in Britain. I'm joined by CNN's senior international diplomatic editor Nic Robertson right now.
And, Nic, one of the fascinating aspects of this is Scotland, largely voted to remain within the European Union. Scotland, which barely voted to remain part of the United Kingdom a year or so ago, voted to remain part of the European Union as well. Now, the Scotts are left in a very interesting position, where they aren't happy with the reset of the United Kingdom.
NIC ROBERTSON, CNN SENIOR INTERNATIONAL DIPLOMATIC EDITOR: Yes, we've heard from the Scottish first minister today, Nicola Sturgeon, saying that Scotland has been undemocratically pulled out of the European Union. She always said in the run-up to this vote that depending on the will of the people and the outcome of the election, if there was a vote to leave the European Union, that in all probability the will of the people would push them towards having another referendum on the future of whether or not Scotland will remain part of the United Kingdom. And that's a direction they're headed in right now it appears to leave (ph).
Why did Scotland stand out so much as a supporter of the European Union? Well, over the years, Scotland has benefited, particularly some of the sort of more remote parties from European Union financing, whether it's on the outer isles building bridges or putting in a stronger Internet structure in the more remote areas of the country so that people didn't have to dessert the highlands and the islands and could work from home, or whether it's the farmers that have seen subsides for their stocks, for their farming stocks been beefed up, if you will. Whether or not that's been at the heart of it, Scotland has, broadly speaking, across the board, supported being in the European Union. And now they see themselves at odds with the rest of Britain.
It's no surprise that just over a week ago the Scottish first minister, Nicola Sturgeon, was one a debate face to face with Boris Johnson (ph), one of the prime leading movements in the leave campaign, positioning herself there after a referendum vote outcome like this, to be able to point to the new, potential leadership of England and say, look, we have struggled with the last referendum under a more centrist, conservative party. It is moving to the right. We need to leave. We need to leave for the betterment of Scotland. We need to leave to give our people a better future.
This is a direction it is heading in. It may not happen overnight, but this is a discourse, a political discourse, that's going to unfold in Scotland. And certainly for Nicola Sturgeon and the others in the Scottish national party who have been looking for this sort of opportunity for years to take Scotland out of - out of the - out of Great Britain, this is going to be an opportunity that won't be missed.
John.
BERMAN: Nic Robertson, stand by.
We're watching the Dow right now, down 424 points right now off its low. It was down below 500 just a few minutes ago. A little bit of a bounce back now, 418. We'll continue to watch that.
Diane Swonk, Nic Robertson gets to one of the hearts of why there is so much concern now this morning. As we say, the market hates uncertainty. Investors now can't even be certain if Scotland will be part of the United Kingdom a few years from now.
SWONK: Well, that's the key issue here. I think one of the things that's getting lost, and you're hearing it in the political rhetoric, and I really agree with what Mohamed El-Erian has pointed out, this is a global debate in scope. This scope is global in nature. And that is that the whole is greater than the sum of its parts. And now what we're doing is breaking the world down into parts. And that is something that is being missed in the political debate, but is being reflected in financial markets.
Financial markets realize how connected we are. And there is this break between the political elite, the establishment, the political establishment, but also the financial elite. And I think that's where the breakdown is occurring is that, you know, they're saying, listen, the whole is greater than the sum of the parts, and now we're just getting the parts. And that - if we continue to move in that direction and just see more and more parts, instead of us bound by that greater good that we get by unity, we're going to see more problems in the global economy, more geopolitical risks arise. The whole issue for Europe expands not only to - within the European Union, but how Europe deals with Russia and its incursions into Eastern Europe. All of this comes out of this kind of instability. And I think that's something that financial markets are going to have to grapple with and it's not going to be certain for days or weeks, or maybe even years to come as we see these elections ripple through not only Europe but also the United States.
[09:45:25] BERMAN: And they are rippling this morning. 9:45 a.m. Eastern Time, just 15 minutes into the trading day here in the United States, the markets down more than 420 points. Mohamed El-Erian, Diane Swonk, Alison Kosik, Nic Robertson, thank you so much.
A lot to discuss this morning. We're getting new reaction from the White House. That, after the break.
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BERMAN: All right, welcome back. John Berman here.
The stock market down. The Dow down about 440 points this morning, 20 minutes into trading. This after the United Kingdom voted to leave the European Union. Just moments ago, we got a statement from the U.S. Treasury secretary, Jack Lew. He writes, "the people of the United Kingdom have spoken and we respect their decision. We will work closely with both London and Brussels and our international partners to ensure continued economic stability, security, and prosperity in Europe and beyond. We continue to monitor developments in financial markets. I have been in regular contact in recent weeks with my counterparts and financial market participants in the U.K., E.U., and globally, and we are continuing to consult closely. The U.K. and other policymakers have the tools necessary to support financial stability, which is key to economic growth."
[09:50:40] What you see in that statement from the U.S. Treasury Secretary Jack Lew is an effort, almost a desperate effort, to reassure investors, to calm nerves around the world. Investors, frankly, shocked by the vote in the United Kingdom. They had been betting against this Brexit vote. They were wrong. And this morning you have leaders from Jack Lew, Barack Obama, the vice president, Joe Biden, David Cameron in the U.K. leaders all over the world trying to tell people now, it will be OK. They have the situation under control.
Are investors convinced? Let's go to Alison Kosik on the floor of the New York Stock Exchange.
Alison, what are you seeing right now?
KOSIK: Not so sure investors are convinced, but the kind of selling that you're seeing right now where the Dow is down 540 points, it is not panic selling. This is a more orderly selling going on. I mean if you want to look at the bright side here, we are off - the Dow, at least, is off its lows of the session. We did see the Dow down as much as 539 points.
You want to look at other areas where the glass is half full? Look at the currency market. The pound dropping to levels we haven't seen since 1985. So we're seeing a very strong dollar. So the positive here, the upside for Americans, if you've got your pockets full of dollars and you want to take that trip that you've been hoping for to the U.K., now may be the time just because the exchange rate is so good for the dollar because the dollar will give you more bang for your buck.
Also, mortgage rates. Mortgage rates are expected to go even lower than where they are now. That's because we're seeing investors pile into U.S. Treasuries. That's considered a safe haven investment. And that, in turn, is pulling down interest rates as well, pulling down your mortgage rates as well. So it makes it cheaper for you to finance your house or to refinance the mortgage that you already have, John.
BERMAN: Alison Kosik, you bring up an excellent point that I think I want to address again right now, this is not chaos selling right now.
KOSIK: Right.
BERMAN: This is not plummeting. This is sort of organized disappointment. The Dow down now 448 points.
KOSIK: Right.
BERMAN: It was down more than 500. We have seen worse than this before. Yes, it's a bad opening -
KOSIK: Right.
BERMAN: But it doesn't appear to be out of control just yet. Why? One of the reasons may be this intense effort among U.S. leaders and financial leaders to reassure investors, reassure the public along those lines. Just moments ago we got a statement from the Federal Reserve, the U.S. Fed. Let me read it to you. "The Federal Reserve is carefully monitoring developments in global financial markets in cooperation with other central banks following the results of the U.K. referendum on membership in the European Union. The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks as necessary to address pressures in global funding markets which could have adverse implications for the U.S. economy." Alison Kosik, if you're still with me, that sounds like the Fed
saying, we are here. We are watching. We will make sure this doesn't spin out of control.
KOSIK: Right. And that very statement, that kind of safety net that the Fed is offering, that is music to investors' ears, especially when you hear the Fed saying we're going to keep the liquidity going.
You know, one of the things that many investors have been saying about the Fed, as it's slowly been raising interest rates, it raised interest rates once so far this year is, part of the reason some believe that the Fed has started to raise rates, not only because the Fed believes that the economy is ready for rates to go higher, but that it gives the Fed some ammunition that in times like this if it does need to cut an interest rate, it's got an interest rate to cut. So it does have some ammunition, albeit very little at this point, but there are still some tools in the tool shed that the Fed can use to calm the markets.
John.
BERMAN: All right, stand by, Alison Kosik. Again, the markets down 430 points. It was worse before. Sort of organized disappointment is what we're calling it, not chaos.
Let's go to the White House right now. Suzanne Malveaux is there.
What are you hearing now, Suzanne?
SUZANNE MALVEAUX, CNN NATIONAL CORRESPONDENT: Well, John, as you noted, there really is a coordinated messaging effort that's taking place in the administration and the White House. Just getting this release from the president. I'm going to read it in its full.
It is -- says that "the people of the United Kingdom have spoken and we respect their decision. The special relationship between the United States and the United Kingdom is enduring and the United Kingdom's membership in NATO remains a vital cornerstone of U.S. foreign security and economic policy. So too is our relationship with the European Union, which has done so much to promote stability, stimulate economic growth and foster the spread of Democratic values and ideals across the continent and beyond. The United Kingdom and the European Union will remain indispensable partners of the United States, even as they begin negotiate their ongoing relationship to insure continuous stability, security and prosperity for Europe, Great Britain and Northern Ireland and the world."
[09:55:17] A couple of things that jump out here, John. One of them is that it mentions NATO. That is very important because what the administration is trying to say here is thank goodness U.K. is still a member of NATO. That it is important to have these partnerships, to have these global organizations, and for the United Kingdom to still be a part of that. That this is not a go it by yourself, go it alone kind of approach because they do believe that that will diminish and weaken the United Kingdom. That is the main concern here and they're trying not to be alarmist about it, but they certainly are trying to put a good face on this development, John.
BERMAN: Great points. Thank you so much. Suzanne Malveaux at the White House.
We did just get a statement from Hillary Clinton as well. That and much more. The next hour of NEWSROOM begins right after a break.
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