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Europe sinks 4.1% on Brexit hangover; pound hits 31-year low; banks tank

European stocks tumbled by Monday's close, as the fallout from Britain's decision to leave the European Union (EU) continues, sending the pound to a 31-year low.

The pan-European STOXX 600 fell 4.1 percent provisionally by the close, with sharp losses seen in U.S. trade not helping to alleviate the pain. All European sectors posted solid losses, with banks, travel and financial services all closing off 7.5 percent or more.

Cameron speaks

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London's FTSE 100 ended down 2.55 percent provisionally. Meanwhile, the FTSE 250 index—which is mainly made up of domestic-focused stocks—ended 7 percent down by the end of trade. Elsewhere, the French CAC and German DAX sank 3 percent each.

U.K. Chancellor George Osborne made a speech on Monday morning to try to calm markets. The finance minister said that financial market volatility was likely to continue but the government had spent the "last few months putting in place robust contingency plans for the immediate...aftermath" of the result.

He added that there were "further well-thought-through contingency plans" if needed but said there will be an "adjustment in our economy". Near the end of the trading session, U.K. prime minister David Cameron said in the House of Commons that the U.K. would seek the strongest possible economic links with its European neighbors after it left the EU.

This comes after investor sentiment was hard-hit on Friday when results of the U.K. referendum on EU membership went the way of the Brexit camp. Uncertainty over what this meant for Britain's future led to turmoil in global financial markets, with the pound slumping and stocks around the world tanking.

UK political turmoil

A TV reporter stands with a Great Britain flag at the Frankfurt Stock exchange the day after a majority of the British population voted for leaving the European Union on June 24, 2016.
Thomas Lohnes | Getty Images
A TV reporter stands with a Great Britain flag at the Frankfurt Stock exchange the day after a majority of the British population voted for leaving the European Union on June 24, 2016.

In the U.K., political turmoil continued through the weekend. The Conservative Prime Minister David Cameron, who favored a remain vote, announced on Friday that he intended to resign, setting the stage for a leadership battle within the country's ruling political party.

On the other side, the Labour party, led by Jeremy Corbyn, suffered an exodus of high-profile members of the shadow cabinet.

Sterling was under pressure again on Monday as it fell to hit a fresh 31-year low against the dollar, trading at $1.3206 when Europe markets closed. Gold was higher as investors put money into safe-haven assets. As a result, precious metal firms Fresnillo and Randgold Resources were Europe's best performers, closing up 7 and 9 percent respectively.

Banks at risk

On Monday, a number of banks downgraded U.K. stocks and warned of the sectors most vulnerable to the effects of a Brexit. Citigroup said banks were one of the most exposed sectors to Brexit, particularly the U.K.'s domestic lenders. But Citigroup added that European investment banks were also at risk.

Citigroup cut its price target and outlook on a number of Italian banking stocks, which have been under pressure because of their large portfolios of non-performing loans. Intesa Sanpaolo and BP Emilia were among the downgrades, while Citigroup said Unicredit could be seen by the market as one of the weakest Italian banks given the questions over its strategy and capital generation. All three banks posted losses by the close.

Deutsche Bank and UBS were among other major investment banks who suffered a price target cut from Citigroup. Deutsche Bank shares touched a record low level during trade, closing over 6 percent down.

Barclays waded in later in the morning with a note suggesting that a mild recession will begin in the second half of 2016 in the U.K. and the Bank of England will have to cut its key interest rate to zero from a current level of 0.5 percent. As a result, Barclays downgraded the European banking sector to "neutral", adding that earnings per share risks are skewed to the downside after the Brexit vote.

JPMorgan also said that it expects to see earnings per share cuts from European banks. But the British banks were feeling the pain, with Barclays down over 17 percent and Royal Bank of Scotland fell as much as 25 percent before paring to close 15.1 percent down, after receiving unfavorable outlooks from brokers.

Overall the banking sector was one of the worst hit, off 7.7 percent, with financial services and insurance also feeling the pain, both closing down more than 7 percent each.

Carmakers, travel stocks in focus

Meanwhile, Goldman Sachs lowered its U.K. and European car sales and production forecasts and removed Fiat Chrysler from its conviction list. Shares iof the Italian carmaker ended over 6 percent down, while tyre maker Nokian Renkaat closed over 6.5 percent lower.

Goldman also said that it expected lower air travel demand as a result of the expected hit to the European economy, leading to lower price targets for stocks in the aviation travel sector. The investment bank cut its price target for British Airways-owner International Airlines Group, which itself warned on Friday that annual profit would be lower than expected. Shares of IAG closed almost 16 percent down.

Budget airlines EasyJet and Ryanair both received price target cuts from Citigroup. EasyJet sank over 22 percent, while Ryanair fell over 15 percent. And on Sunday, European travel group TUI said that the Brexit-related fall in the pound would hit profits. Shares closed down over 10 percent.

Another casualty from the Brexit fallout was estate agent Foxtons, which issued a profit warning on Monday, sending shares tanking 22.6 percent. Housebuilders including Taylor Wimpey and Barratt Development also felt the heat, finishing 14.9 and 19.4 percent down respectively.

Elsewhere in Europe, Spanish elections produced another hung parliament, just six months after the last general election ended with the same result. Acting Prime Minister Mariano Rajoy's People's Party emerged as the single biggest party, but fell short of a majority. Spain's IBEX 35 index, which rallied in early trade, turned red amid broad negative sentiment across European markets.

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