Closing summary
We are wrapping up for the day. It has been a quiet day on stock markets, but they are up and heading for their best week in a month – despite last Friday’s terror attacks in Paris.
The highlight in the eurozone was a speech in Frankfurt from ECB president Mario Draghi, who dropped strong hints that the central bank would cut its deposit rate and announce more economic stimulus through its asset purchase programme at its 3 December meeting.
Over here in London, official figures showed the worst October for government borrowing in six years – a severe blow to George Osborne’s deficit-cutting drive ahead of next Wednesday’s spending review and autumn statement.
Many thanks for all your comments. Have a great weekend. We’ll be back on Monday.
Indeed, this is what the European Commission says on its website:
Only a tiny fraction of the underlying consumer interviews were carried out after the Paris terror attacks of Friday 13.”
Beware the Nov rise in eurozone consumer confidence - very few interviews were after Paris attacks
— Paul Hannon (@PaulHannon29) November 20, 2015
Eurozone consumer sentiment improves
Consumer sentiment improved more than expected this month, according to the flash estimate from the European Commission. Its indicator rose to -6 from -7.6 in October.
In the EU as a whole, sentiment rose 1.3 points to -4.4.
Solid increase in Eurozone consumer confidence index (flash estimate), from -7.6 to -6.0.
— Frederik Ducrozet (@fwred) November 20, 2015
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Markets on track for best week in a month
Stock markets are trading higher but it’s a quiet day. On Wall Street, the Dow Jones is 0.8% ahead while the S&P 500 has gained 0.6% and the Nasdaq is up 0.5%.
In London, the FTSE 100 index has gained 0.38%, while the Dax in Frankfurt is up 0.46% and the CAC in Paris has edged up 0.1%.
Markets are on track for their best week in a month, despite last Friday’s terror attacks in Paris.
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Final decision on Greek bailout funds on Monday
The Greek parliament passed a reform bill last night to secure the release of more bailout funds, but a final decision on the next tranche of loans may not come until Monday.
Eurozone deputy finance ministers will discuss whether to disburse €2bn to pay state arrears and up to €10bn to recapitalise Greece’s top four banks, and might hold a teleconference on Sunday, Reuters reported. Even though a compliance report from the European Commission was positive, it listed one reform as pending while three need to be followed up. A senior eurozone official told Reuters:
I guess it’s a done deal that they will get the 2+10 billion, but some of the milestones are still not yet completed today, so a couple more days are needed.”
Greek finance minister submits 2016 budget plan to parliament
Greece has published its final budget plan for 2016, in which the government is projecting a smaller contraction than previously forecast. The economy is now expected to shrink by 0.7% next year rather than 1.3%, after an estimate of zero growth this year, revised higher from a 2.3% decline.
The budget, submitted by finance minister Euclid Tsakalotos to parliament this morning, stuck to a primary surplus target of 0.5% of GDP in 2016, and pencilled in privatisation revenues of €1.9bn – lower than the €3.7bn target under its bailout. The government expects to tap bond markets in the second half of next year.
Public debt is projected to rise to 187.8% of GDP in 2016, from 180.2% this year.
Parliament will vote on the budget on 5 December, after it has been debated by the parliamentary finance committee in four sessions. The first one happens next Wednesday, and a general debate in parliament is scheduled for 1 December.
#Greece govt submits 2016 budget. Sees GDP at 0% in 2015 (vs -2.3% in MoU !), -0.7% in 2016. Unemployment at 25.4% pic.twitter.com/kktqzictBJ
— Yannis Koutsomitis (@YanniKouts) November 20, 2015
#Greece was €2.1bln off primary surplus target already from 2014. Groundhog day #Budget pic.twitter.com/9rkklR28xn
— Yiannis Mouzakis (@YiannisMouzakis) November 20, 2015
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It’s a quiet day on the markets. Connor Campbell, financials analyst at spread-betting firm Spreadex, says:
Things may change this afternoon with the flash eurozone consumer confidence figure likely to provide insight into the impact of last Friday’s attacks in Paris.
The one white market knight remaining this Friday is the US open; the Dow Jones is currently looking at a 50 to 60 point jump when the bell rings on Wall Street, something that may inspire a bit more vigour in the European indices. However, there is nothing, beyond a speech from New York Fed President William Dudley, this afternoon to help sustain (or impede) the Dow’s current growth, meaning a quiet end to a complicated week may be on the cards.”
The euro is now down nearly half a percent against the dollar at $1.0679, after ECB president Mario Draghi strongly hinted at rate and QE action at the 3 December meeting.
He used language reminiscent of his July 2012 pledge “We’ll do whatever it takes” to save the euro. Today he said the ECB would “do what we must to raise inflation as quickly as possible” and pointed to the eurozone’s slow economic recovery. It will take 31 quarters for economic output to get back to pre-crisis levels, and he expects this to happen early next year.
Here is our full story on Britain’s dire government borrowing figures. Katie Allen writes:
George Osborne’s deficit-cutting drive has been dealt a blow ahead of his spending review next week after official figures showed the worst October for the public finances in six years...
The chancellor wants to eliminate the deficit on the public finances by the end of the decade. As part of that push, he will unveil plans in his spending review on 25 November to cut government department spending by around £20bn over the next four years.
Economists said the latest public finances suggest Osborne will miss his deficit-cutting goals for this year and that he will redouble austerity measures in next week’s spending review and accompanying budget update, known as the autumn statement.
Greece’s two-year government bond yields have risen sharply, after Alexis Tsipras’ coalition government’s slim parliamentary majority shrank, sparking fears about political instability. The government lost two seats and can now only count on 153 votes in the 300-seat chamber. Two dissenters were expelled when Greece approved a reform bill last night to secure further bailout funds from its international lenders.
Two-year yields rose 60 basis points earlier this morning and are now up 46 bps at 5.66%.
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While European Central Bank president Mario Draghi said this morning that the central bank stood ready to act on deposit rates and asset purchases to breathe life into the slowest economic recovery the eurozone has seen since 1998, Bundesbank chief Jens Weidmann – who spoke at the same event in Frankfurt – urged caution. He thinks the ECB should wait and see.
I see no reason to talk down the economic outlook and paint a gloomy picture.
We should also not forget that the monetary policy measures already taken still need time to fully feed into the economy.”
Weidmann: "No reason to talk down the economic outlook and paint a gloomy picture."
— MNI Eurozone (@MNIEurozone) November 20, 2015
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Ross Campbell, director for public policy at the Institute of Chartered Accountants in England and Wales, says:
The government is seeing a lack of significant progress on reducing the deficit ahead of the autumn statement next week. This current trend could prove more problematic ahead for the chancellor. Our recent business confidence monitor suggests the economic recovery is slowing which could have an impact on tax revenues, which have been slowing and actually fell back year-on-year in October.
At a time of constrained public finances, impending cuts and tight departmental budgets, the UK government still needs to modernise its approach to financial management. With further austerity measures due to be announced, a comprehensive financial review would ensure sustainability is at the heart of long-term decision making. What is needed is a modern finance ministry to ensure all aspects of financial management – income, expenditure, liabilities, and assets – are taken into account, not just spending.”
John Hawksworth, chief economist at PricewaterhouseCoopers, says the figures were “a little disappointing” for the chancellor, and could mean some tough decisions at next week’s spending review and autumn statement.
Monthly data can be volatile, but the cumulative public borrowing total for the first seven months of the financial year was also only £6.6 billion lower than a year earlier, as compared to an OBR forecast in July that borrowing for 2015/16 as a whole will be around £20 billion lower than in 2014/15. Central government tax receipts have grown by 3% so far this financial year as compared to an OBR forecast of 3.6% for 2015/16 as a whole.
Our estimates based on simple extrapolation from these data suggest that public borrowing could overshoot the OBR target by around £5 billion this year. But we think there is still room for the Chancellor to make up this gap if self-assessment income tax receipts come in strongly in January and the Treasury pulls some levers to keep departmental spending under tighter control for the rest of the year. But it will be an uphill struggle.
Overall, these figures show that the chancellor still has a long way to go to achieve his target of eliminating the budget deficit by 2019/20. They are likely to stiffen his resolve to take some tough decisions in his spending review and autumn statement next week, offsetting any softening of planned tax credit cuts through tax rises or additional spending cuts elsewhere.”
Ruth Miller, UK economist at Capital Economics, says the poor public finance figures limit the chancellor’s room for manoeuvre in next Wednesday’s autumn statement.
Borrowing is still set to come in below last year’s level, totaling £54.3bn in the fiscal year so far, compared to £60.9bn at the same stage last year. But, the OBR expected a faster decline than this. Indeed, assuming the trend so far this fiscal year continues, borrowing in 2015/16 as a whole looks set to come in at about £80.4bn (from £90.1bn in 2014/15), about £10bn above the OBR’s July’s forecast.
This higher starting point and a slightly weaker outlook for nominal GDP growth could well erode much of the £10bn surplus in 2019/20 which was forecast back in July. So any money the Chancellor gives back to those losing tax credits is just likely to be offset by extra cuts elsewhere, tax rises or deeper departmental spending cuts.”
Photograph: Alamy
Here is a chart from Samuel Tombs at Pantheon Macroeconomics:
The terrible borrowing figures provide a grim backdrop to autumn statement, says Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics.
October’s poor borrowing numbers extinguish any lingering hope that the chancellor will be able to soften his austerity plans materially in next week’s autumn statement. Borrowing was 16% higher year-over-year in October; the Office for Budget Responsibility—OBR—predicted in July’s Budget that full-year borrowing would be a hefty 23% lower this year. And high borrowing prior to October means that borrowing in the first seven months of this fiscal year has totalled £54.3B, only 10.9% less than in the previous year. Barring revisions, borrowing would have to be an implausible 48% lower year-over-year in the second half of this fiscal year in order for the current official forecast to be met.
Admittedly, about one third of the overshoot reflects extra borrowing by local authorities, and those data often are revised significantly. In addition, the recent fall in gilt yields means the OBR can revise down its forecast for debt interest payments, freeing up funds for the chancellor to spend. What’s more, the chancellor’s fiscal rule only requires him to balance the books by the end of the parliament, with no major constraints on borrowing until then. But with the budget deficit equal to 4% of GDP and the OBR deeming most of it to be structural, any loosening now would require even more austerity in the run-up to the next election.
Accordingly, the chancellor probably will make only modest alterations to the overall spending plans, with any lessening of the cuts to tax credits likely being financed by deeper cuts to other areas of spending.
This means borrowing is now on track to total £80.3bn this fiscal year and therefore overshoot the OBR’s July Budget forecast of £69.5bn by nearly £11bn, according to the economist.
The figures come ahead of next Wednesday’s autumn statement (a mini budget) and spending review.
The £8.2bn deficit was the highest for the month of October since 2009 and higher than all forecasts in a Reuters poll that predicted borrowing would fall to £6bn.
The government spent more last month: other current spending, which comprises mainly departmental spending, was up £1.4bn compared with October 2014. Debt interest payments were also higher, by £300m.
In the first six months of the tax year, the government borrowed 10.9% less than in the same period last year, a total of £54.3bn.
But given the higher than expected deficit in October, it seems likely that the independent Office for Budget Responsibility will raise its prediction for government borrowing in the current financial year.
Treasury: Bigger deficit shows 'the job is not yet done'
Britain has had its worst October for government borrowing since 2009, according to official figures just out. Public borrowing rose to £8.2bn from £7.1bn a year earlier.
A Treasury spokesperson said the figures show “the job is not yet done and government borrowing remains too high”.
In recent weeks we’ve had good news showing our plan is working – real median wages are growing at their fastest in a decade, employment is at an all-time high and our economy is growing strongly.
But as today’s public sector finance figures show the job is not yet done and government borrowing remains too high. We’ve learned there’s no shortcut to fixing the public finances to provide economic security for working people – that’s why in the Spending Review next week we’ll continue the hard work of identifying savings and making reforms necessary to build a resilient economy.”
Draghi’s comments sent the euro down half a percent to below $1.07 after two days of gains. It is now trading at $1.0681.
ABN Amro shares rise as bank returns to stock market
The Dutch bank ABN Amro has returned to the Amsterdam stock market after seven years of government ownership following its costly bailout during the financial crisis.
It is the biggest European bank IPO since the financial crisis. The shares rose nearly 3% to €18.27 in early trading and are now at €18.24, after being priced at €17.75 each.
A phoenix rises, says Peter Garnry, head of equity strategy at Saxo Bank.
Much water has flown under the bridge since the mayhem of 2008-09, and it is a strong financial institution returning to public markets. We see a lot of value in ABN Amro.
ABN Amro was an aggressive European financial institution leading up to the financial crisis, expanding its commercial and investment banking operations in various European markets.
In 2007 a bidding war emerged for the Dutch bank, with Barclays fighting against a consortium of RBS, Fortis and Banco Santander.
The consortium won the battle, but the acquisition and financial crisis proved too much for Fortis which went to its knees. The Dutch government had to launch a rescue operation to take over Fortis’ assets in the Netherlands.
After many years of state ownership, cost restructuring, asset divestment, boosting Tier 1 capital as well as navigating the European debt crisis, ABN Amro is ready to re-enter public markets. Investors will be pleased to see the strength of the bank compared with its peers.”
Staying with Greece for the moment, the country’s current account surplus increased in September from the same month in 2014, the Bank of Greece said. This was mainly due to a smaller trade in goods deficit because the country imported less.
The central bank said:
A decline in the balance of goods deficit... offset a fall in the surplus of the services balance.”
The current account surplus widened to €838m from €61m a year earlier. Last year, Greece posted a surplus of €1.66bn, up from €1.09bn in 2013, on the back of higher tourism revenues.
Greek bond yields head to one-year lows, below 7%
Greek bond yields are heading back towards their lowest levels in a year, below 7%, after the Athens parliament approved a reform bill to secure further bailout funds from international lenders.
DZ Bank strategist Felix Herrmann told Reuters:
It was not easy for the Greek government to pass this legislation. It is an important step that paves the way for the next tranche of aid and a positive factor for Greek government bonds.
The yield on the Greek benchmark 10-year government bond fell 6 basis points to 6.98% – below the psychologically significant 7% level (the level at which several eurozone countries had to ask for bailouts during the financial crisis).
And Mario Dragh’s dovish comments bolstered expectations for ECB action in a fortnight, underpinning the eurozone bond market.
Mario Draghi is preparing the market for the European QE bazooka https://t.co/meQWQHBqyj pic.twitter.com/01w9lbnoGV
— BI UK Finance (@BIUK_Finance) November 20, 2015
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Euro weakens on Draghi comments
The euro has weakened on the Draghi comments, which hinted strongly at ECB action as soon as the December meeting.
Strong applause in Frankfurt after #Draghi speech on #ECB monetary policy. Mildly surprising, innit?
— Alessandro Speciale (@aspeciale) November 20, 2015
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Draghi: Eurozone recovery weakest since 1998
Downside risks have increased in recent months, Draghi says, pointing to emerging markets (but without mentioning China).
The outlook for global demand, especially in emerging markets, has notably worsened, while uncertainty in financial markets has increased. Global growth this year will be the weakest since 2009. Global growth this year will be the weakest since 2009.
Even factoring in those headwinds, the strength of the underlying recovery is modest. Taking the Purchasing Managers’ Index, the present upswing which started in 2013 is the weakest euro area rebound since 1998. That is striking considering that we are in the early phase of a recovery, where one would expect to see a much more vigorous pickup.
He concludes:
We have a situation where we cannot yet say with confidence that the process of economic repair in the euro area is complete.”
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Draghi: Eurozone to return to pre-crisis levels in Q1 2016
Draghi says that the eurozone’s recovery remains “very protracted” by historical standards.
It took between five and eight quarters for the countries now making up the euro area to recover their pre-recession level of real output after the slumps of the 1970s, 1980s and 1990s. During the recent recession – which was admittedly the worst since the 1930s – it took the US economy 14 quarters to reach its pre-crisis peak. If our current assessment is correct, it will take the euro area 31 quarters to return to its pre-crisis level of output – that is, in 2016 Q1”.
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Draghi says that ECB policy has already helped small and medium-sized enterprises (SMEs) in most countries, with the notable exception of Greece.
In the most recent October round of our survey, the number of SMEs reporting an increase in revenues was almost 20% larger than those which reported the opposite.”
Do we need to do more? asks Draghi, highlighting changes to its asset-purchase programme and deposit rates as possible tools.
We consider the asset purchase programme to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary stance. The level of the deposit facility rate can also empower the transmission of APP, not least by increasing the velocity of circulation of bank reserves.”
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Draghi is now delivering the speech in Frankfurt.
Draghi hints at deposit rate cut and changes to QE
The text of Draghi’s speech has been released on the ECB’s website. Draghi will tell the European Banking Congress in Frankfurt:
If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us.”
You can read the full speech on the ECB’s website.
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ECB chief Mario Draghi says the central bank will do what it must to raise inflation quickly.
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Sanofi and AstraZeneca swap compounds to speed up drug development
French drugmaker Sanofi and Britain’s AstraZeneca have agreed to exchange 210,000 chemical compounds to speed up the development of new medicines. No money will change hands and both companies will be free to use the compounds without restrictions.
The companies explain:
Chemical structures and synthetic procedures will be shared to facilitate the use of these compounds. The compounds will be exchanged in sufficient quantity to enable the receiving company to carry out high throughput screening for several years to determine whether they are active against specific biological targets. If a compound matches a target (a “hit”), it may go through several modifications to optimise its structure before being classified as a “lead compound” and potentially taken forward through development.
Elias Zerhouni, president of global R&D at Sanofi, says:
We are happy to work with other companies if it will speed the discovery of new life-saving or life-enhancing therapies for patients. We believe that this collaboration will increase our capacity to deliver innovative solutions that have the potential to add significant medical value and transform lives.”
Mene Pangalos, executive vice president of innovative medicines & early development at AstraZeneca, added:
This is a highly innovative agreement which speaks to our open innovation approach. We have worked hard to enrich our compound library in recent years and this exchange, which is by far the largest we have achieved, enables us to significantly increase its diversity. Most importantly, it will accelerate our ability to identify unique starting points that could become new medicines for patients.”
European stock markets have opened higher:
- UK’s FTSE 100 index up 0.3%
- Germany’s Dax up 0.4%
- France’s CAC up 0.3%
- Italy’s FTSE MIB up 0.1%
- Spain’s Ibex up 0.2%
The European Commission’s flash estimate of eurozone consumer confidence in November should provide a first indication of the impact on household sentiment from last Friday’s Paris terror attacks. Economists at Daiwa say this measure of confidence has been declining gradually since March, but the current consensus expectation is for a flat reading today. They say that today’s ECB speakers
will all be worth watching for further insight into what specific measures next month might bring. Given the dovish tone of the account as well as the additional downside risks to the economic outlook associated with the Paris attacks, we now expect the asset purchase programme to be extended beyond September 2016 by at least one year; the asset purchase programme to be increased in scope and size (perhaps by €20bn per month to €80bn); and the deposit rate to be cut by 10bps to -0.30%.
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It’s going to be a quiet end to the week with a rather bare economic calendar today. Apart from the UK public finance figures, the only other big releases are Canadian retail sales and inflation data at 13.30 GMT and eurozone consumer confidence for November at 15.00.
Simon Smith, chief economist at online broker FXPro, says:
As a result markets are calm going into the week end following a quiet Asian session overnight that had a positive bias to it. Investors seem to be more accepting of a possible Fed rate hike next month but for now the dollar’s strength has been put on pause.”
In Athens, Alexis Tsipras’ coalition government has been weakened as it pushed through another round of controversial EU-mandated reforms. He saw his slim parliamentary majority shrink to two seats in the 300-member House after dissidents refused to endorse the measures. You can read the full story here.
The reform bill was necessary to unlock €2bn of bailout funds for Greece and up to €10bn for the recapitalisation of its banks.
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At 9.30, we are getting the UK public finance data for October. In September tax receipts for income tax, VAT and corporation tax were the highest on record, so George Osborne will be hoping that trend continues ahead of next week’s autumn statement and comprehensive spending review.
Hewson says:
One thing is sure, in light of the shocking events in Paris he will have to find extra money to address the heightened security threats now facing the UK, which is likely to change the way he looks at next week’s spending review.”
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
There is a raft of European Central Bank speakers today and anything other than dovish rhetoric would be a surprise. The central bank’s president Mario Draghi is speaking at Euro Finance Week at 8.00 GMT, followed by Benoît Cœuré, a member of the ECB’s executive board at 8.15. Peter Praet , the ECB’s chief economist, is speaking in Frankfurt at 10.00, followed by Vítor Constâncio, the bank’s vice president at 13.00. Bundesbank president Jens Weidmann is also speaking this morning.
Earlier this week, Praet cited concerns surrounding China and the downward pull of falling oil prices on core inflation as key risks, laying the ground for further policy easing at the ECB’s 3 December meeting. At the last meeting, Draghi hinted that a rate cut could be on cards.
Over in the US, interest rates are expected to move in the opposite direction in December. Two Federal Reserve officials could shed more light on the US central bank’s thinking: James Bullard, president of the Federal Reserve Bank of St. Louis, who is due to speak on the economy in Arkansas at 14.00 GMT and William Dudley, president of the Federal Reserve Bank of New York.
Michael Hewson, chief market analyst at CMC Markets UK, says:
Listening to the comments from the number of Fed speakers this week, not least the New York Fed’s Bill Dudley, the markets have come to the conclusion that we will see a move on rates next month, though how the tone of it will be communicated is far from clear. Yesterday’s sell-off in the US dollar would appear to suggest that investors belief that the pace of any increases are likely to be slow, but how do you communicate a dovish hike, it’s a complete oxymoron.”
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