Closing summary: a dramatic day for the pound
The day began with news of a flash crash in the value of the pound against the dollar in Asian trading.
The pound plunged from about $1.26 to $1.18 in the space of two minutes.
And no one knows why.
Before we close up for the day, here is a summary of the main developments:
- The sudden and shock 6% drop in the pound in Asia trading puzzled and shocked investors. Fat fingers, algorithms, and tough Brexit comments from President Hollande were all offered as possible explanations
- Sterling regained some of the lost ground, and is currently down 1.6% at $1.2416
- The FTSE 100 was the only major European index to rise, and is currently up 0.7% or 46 points to 7,046
- HSBC issued a very gloomy note on the pound, predicting it will fall to $1.10 and reach parity against the euro by the end of 2017
- UK industrial output fell unexpectedly in August, and is likely to be a drag on third quarter growth according to economists
- Speaking in Washington DC, Philip Hammond said the government will sell-off its remaining 9.1% stake in Lloyds Banking Group, selling directly into the market. It means Hammond is abandoning George Osborne’s plan to offer cut price shares to the public
- And sticking in the US, the September non-farm payrolls report was weaker than expected, but economists said it does not rule out the possibility of a rate hike in December
Thank you for reading the blog and for all your comments. The latest developments throughout the rest of the day will be here. Have a great weekend. AM
US markets are slightly down in early trading:
- Dow Jones: -0.3% at 18,214
- S&P 500: -0.04% at 2,160
- Nasdaq: -0.07% at 4,871
I’ve announced that the sale of the public’s stake in Lloyds will restart shortly https://t.co/oWV2HJxitu
— Philip Hammond (@PHammondMP) October 7, 2016
Returning Lloyds to the private sector is the right thing to do & our plan will get back all the cash taxpayers invested in it.
— Philip Hammond (@PHammondMP) October 7, 2016
Government announces Lloyds sell-off
While the non-farms were being published in the US, the UK government announced it is going to sell its remaining 9.1% stake in Lloyds Banking Group directly into the stock market.
This means it is abandoning George Osborne’s plan to offer the public cut price shares.
From Washington, the chancellor, Philip Hammond, said:
Returning Lloyds to the private sector is in the interests of the bank, taxpayers and the country as a whole. That is why exiting our stake in Lloyds in an orderly way and at the best possible price is one of my top priorities as chancellor.
I have listened to the experts. Ongoing market volatility means it is not the right time for a retail offer.
Our plan will get back all the cash taxpayers invested in Lloyds during the financial crisis and leave the bank in a better place to continue the crucial role it plays in supporting individuals, families and businesses up and down the UK.
It seems that Hammond’s aim is to get rid of the government’s stake in the bank over the next 12 months.
It looks like shares will be sold below the 73.6p average price at which taxpayers bought a 43% stake in the bank for £20.3bn at the time of the 2008 crisis. The shares are trading around 53p.
The Treasury says that overall it will not make a loss because it has already raised about £16.9bn from previous sell-offs of Lloyds shares.
Updated
The US non-farm payrolls in charts...
There were 156,000 jobs added in September, lower than the monthly average of 178,000 so far this year:
The US unemployment rate picked up to 5% in September from 4.9% in August:
Here is the full story on non-farm payrolls from the Guardian’s Jana Kasperkevic in New York:
Rob Carnell, ING’s chief international economist, appears underwhelmed by the US non-farm payrolls report for August, which he describes as “neither here nor there”.
He says that the report does not rule out a US rate rise in December.
Reasonable, but not great payrolls, an uptick in the unemployment rate, and softish wages growth – but still good enough to keep thoughts of a December rate hike alive – pending the market reaction to the presidential election, and further adequate labour reports.
Markets will see nothing in this report to encourage thoughts of a November Fed rate hike – most forecasters still expect the Fed to hike in December, and this release is good enough, without being particularly good, to keep such expectations firm.
Carnell flags up the key dates in the run-up to the Fed’s December rate decision:
The weaker-than-expected 156,000 rise in non-farm payrolls in September was weaker than the average monthly jobs growth of 178,000 so far this year.
The biggest single driver behind new jobs last month was the professional and business services sector, up 67,000.
There were also rises in healthcare jobs, retail, and the food and drink sectors.
But employment in other major industries, including manufacturing, construction, logistics and government were little changed.
US jobless rate rises unexpectedly
The September jobs report from the US Labor Department also revealed a surprise rise in the unemployment rate to 5% from 4.9% in August.
Average earnings were in line with expectations, rising by 0.2% month-on-month, following a 0.1% increase in August.
The weaker-than-expected jobs report will lower expectations that the Federal Reserve will raise rates before the end of the year.
Updated
Breaking: US non-farm payrolls lower than expected
There were 156,000 jobs added in September, lower than the 175,000 forecast by economists.
That’s a significant miss. Slightly better news was that the figure for August was revised up to 167,000 from 151,000. More soon.
It’s almost time for US non-farm payrolls for September.
Here are consensus expectations:
- Non-farms: 175,000 (151,000 in August)
- Unemployment rate: 4.9% (4.9% in August)
- Average earnings growth m/m: 0.2% (0.1% in August)
Worth mentioning this morning’s UK trade data for August, which was worse than expected.
Britain’s trade in goods deficit widened to £12.1bn in August, from a downwardly revised £9.5bn in July according to the Office for National Statistics. Economists had forecast an £11.3bn deficit.
The deficit widened so much because growth in imports was far sharper than growth in exports. Imports rose by £2.7bn to £37.9bn, while exports increased by just £100m to £25.8bn.
On a day when the pound is under the spotlight, the trade figures seem to suggest that as yet, the fall in sterling since the 23 June Brexit vote has yet to boost exports as hoped.
We haven’t heard anything yet from the chancellor Philip Hammond on the pound’s flash crash overnight.
He is in Washington DC (where it is almost 7.30am) for the IMF meetings. We’ll see if has any comment as business gets underway in the US.
In Washington DC for IMF meetings. More important than ever that Britain works with international partners to secure continued global growth
— Philip Hammond (@PHammondMP) October 6, 2016
The latest scores:
- Pound is down 2% against the dollar at $1.2358
- Sterling is off 2% against the euro at €1.1098
- FTSE 100 is up 49 points or 0.7% at 7,049
- FTSE 250 is down 0.6% at 18,007
Connor Campbell, financial analyst at Spreadex, says investors only now seem to the reality of Brexit:
If the pound was a prize fighter the referee would have already rung the bell, the currency bloodied and bruised beyond belief. It seems that sterling is recreating last night’s flash crash in slow motion, its losses against the dollar widening to 2.6%, taking it under $1.23 in the process; against the euro things were just as bad, the pound plunging under €1.13 following a 2.4% fall.
Beyond the post-flash crash fear that seems to have taken hold of investors, the intensification of sterling’s decline can largely be pinned on two factors this morning.
Firstly, both the manufacturing and industrial production readings came in below expectations at 0.2% and -0.4% respectively, somewhat contradicting the positive PMIs from earlier in the week. Secondly, and perhaps most damningly, HSBC issued a pretty bleak statement claiming that, as the ‘defacto official opposition to the government’s [Brexit] policies’, the pound could well find itself circling $1.10 by the end of next year.
As has been the trend this week the pound’s plight has proven to be catnip for the FTSE, with the UK index climbing 58 points to tickle 7070. The Eurozone indices, on the other hand, are less than enthused about the euro’s recent strength, with the DAX and CAC both falling 0.8% apiece.
Sterling: how low did it go? (And why does it matter?). This FT piece from Katie Martin and Jennifer Hughes is well worth a read.
It talks about the technical difficulty of finding one correct figure for the pound’s low in last night’s flash crash. They explain:
The problem with finding the actual low is that currencies are traded on dozens of different platforms, and the levels each shows reflect the trades that are conducted on that system. In normal market conditions, this makes little if any difference. The move overnight was… not normal.
EBS, the trading platform owned and operated by ICAP and one of the central points of reference, particularly for sterling, says it is taking $1.1938 as the low – a level that was traded “in low amount”.
Bloomberg’s reported low is $1.1841.
Thomson Reuters, however, is our outlier. Earlier, the system reported a trade at $1.1378 – wildly below the other big platforms. That has since been scrubbed from the system. It is however standing by an absolute low of $1.1491 in a trade at 23.07 GMT – or 7.07am Hong Kong time, which is when the plunge began.
That is not all. Reuters is also publishing a “market low” where a “good amount” – ie, £5m or more, was traded within a 3 minute window. This low was $1.15 and happened “around the same time as the absolute low.”
Good luck to the traders trying to work this one out.
Juncker: EU must be firm with UK on Brexit
The message is coming in loud and clear from the EU now: we will be tough with the UK on Brexit.
The latest comments come from Jean-Claude Juncker, president of the European Commission.
Speaking in Paris on Friday, he said:
It should be obvious that if the United Kingdom wants to have free access to the [EU’s] internal market all the rules and all the liberties...need to be fully respected.
You can’t have one foot in and one foot out. On this point we need to be intransigent. I see the manoeuvring.
Expectations are mounting that the UK is in store for a so-called “hard Brexit”, with the UK government prioritising greater control on immigration over full access to the single market.
Here is our full story on those tough Brexit comments from the French President, François Hollande:
Simon French from Panmure Gordon draws a parallels with other periods of economic crisis in the UK:
1.223 GBPUSD will bring YoY bear market in cable. They were not great economic events that led to four previous occasions #sterling #Brexit pic.twitter.com/VJmXc71VGg
— Simon French (@shjfrench) October 7, 2016
Pound falls below $1.24; FTSE gains 75 points
After regaining some ground following the overnight 6% drop in the pound, it is now down 2% against the dollar at $1.2335.
But investors are putting their money into Britain’s biggest, global companies, listed on the FTSE 100. The index of major shares is up 76 points or 1% at 7,075.
Jasper Lawler, market analysts at CMC markets, said markets are a little “dazed and confused” today.
Traders have been left reeling from a historic flash crash in the pound. A weaker pound continues to be a positive for UK equities, which were flirting with record highs.
But the size of the drop in currency markets was not mirrored in the rise in the FTSE 100. The benefits of a weaker pound for exports and higher inflation are being offset by a concern the exchange rate’s decline has become destabilising.
Equity indices in the Eurozone, which don’t reap the currency benefits of a devalued British pound were showing caution, down slightly, ahead of this afternoon’s US jobs data.
The FTSE’s top risers at the moment:
Updated
UK industry shrinks unexpectedly in August
There have been disappointing figures from Britain’s industrial sector this morning.
Industrial output fell unexpectedly in August by 0.4%, following a 0.1% rise in July according to the Office for National Statistics. Economists polled by Reuters were forecasting a 0.1% increase.
Manufacturing output - classed as a sub sector of the broader industrial measure - also disappointed, rising by 0.2% in August against expectations of a 0.5% increase. It was better than July however, when output fell by 0.9%.
Mining and quarrying was the biggest drag on industry in August, falling by 3.7%, largely because of maintenance in several North Sea oil fields .
It slowed the annual growth rate of industrial production to 0.7% in August from 2.1% in July. Economists said the sector was likely to be a drag on economic growth in the third quarter overall.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, believes industrial production is set for a 0.2% fall quarter-on-quarter in the third quarter.
He adds:
Thankfully, however, strong increases in services output in June and July suggest that GDP growth won’t slow too sharply in Q3; we still expect 0.5% growth.
Bank of England to investigate crash in pound
The Bank of England has confirmed that it will investigate why the pound plunged inexplicably overnight.
A simple statement from the Bank, but a significant one:
We are looking at the causes of the sharp falls over night.
Although the pound has regained some ground following the 6% fall, it is still down 1.6% at $1.2409 against the dollar.
It has left the pound on course for its worst week since the Brexit vote in June.
Updated
Jeremy Cook, chief economist at World First, says the slump in the pound has “all the hall marks of a computer system going a bit haywire”.
He also says it seems possible that some orders placed overnight might become the subject of dispute.
HSBC: pound will drop to $1.10 by end of 2017
A very gloomy prediction from HSBC. The bank’s currency experts say the pound has some way to go before it reaches a bottom.
Specifically, they say the pound will fall to $1.10 against the dollar and hit parity against the euro by the end of 2017, as fears of a hard Brexit intensify.
David Bloom, HSBC’s global head of FX, says the pound has become a political currency.
Brexit, whether one likes it or not, is a political decision, one we have to respect. The currency is now the de facto official opposition to the government’s policies.
The argument which is still presented to us, that the UK and EU will resolve their difference and come to an amicable deal, appears a little surreal. It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome.
The pound used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin deficits.
Tin hats on folks!
Updated
And again, off that cliff:
The FT has taken an interesting look at how the pound fell from $1.26 against the dollar to a little over $1.18 in two minutes.
Below is an extract, but you can read the full piece here.
In the Hong Kong/Singapore timezone, 7.07am to 7.09am. In the 60 seconds from 7.07am, the pound moved from $1.26 through $1.25 to a low of $1.203. Between $1.26 and $1.25, traders say the move was orderly. But when it tumbled through $1.24 “that was when all hell broke loose,” according to one banker.
The low was $1.1819 at 7.09am, based on Reuters data. It took a further 30 minutes for the pound to regain $1.24, during which time activity was fairly steady as traders regained composure after that unnerving tumble.
Updated
The pound is on course for a 4% drop against the dollar, currently trading at $1.24.
The pound is also down 1.1% against the euro, at €1.1181.
So how is the dramatic overnight crash in the pound going down in the City?
Here is a inside take on what might be happening on London’s trading floors:
GBP you want to know what's gong on? I can have a pretty good guess - https://t.co/AOVrk4vKfc A dealing room perspective.
— Polemic Paine (@PolemicTMM) October 7, 2016
US non-farm payrolls expected to rise
As well as being ‘flash crash’ day, today is also non-farm payrolls day in the US.
The latest official monthly snapshot of the US jobs market will be published at 1.30pm UK time.
It is expected to show a 175,000 increase in jobs in September, following a disappointing 151,ooo rise in August.
Average earnings are expected to pick up 0.2% over the month, following a 0.1% rise in August.
As ever, the report will be closely scrutinised by investors and economists for signs of whether it makes a US rate hike more or less likely before the end of 2016.
Any number above 200,000 is likely to trigger a spike in expectations that the Fed will raise rates in December.
FTSE 100 rises in early trading
The FTSE 100 is up 28 points or 0.4% in early trading.
The FTSE 250 - which features more UK focused companies - is also climbing this morning, up 0.2% at 18,160.
All other major European indices are in the red:
- FTSE 100: +0.4% at 7,028
- Germany’s DAX: -0.4% at 10,523
- France’s CAC: -0.5% at 4,459
- Italy’s FTSE MIB: -0.1% at 16,489
- Spain’s IBEX: -0.5% at 8,717
- Europe’s STOXX 600: -0.5% at 341
Back to the theory that the massive sell-off of the pound was down to algorithms...
Analysts say that the move could have been triggered by automated trading systems reacting to the news report on Hollande.
The idea is that computers are set to sell the pound if they detect negative news stories on Brexit.
Of course, the good old fat finger theory has not been discounted, which refers to human error, when a trader enters a number by mistake.
Kathleen Brooks, research director at City Index, says the pound had a “rollercoaster ride” overnight.
She says the politics are proving a dangerous game for the pound:
The big issue for the pound right now is that it has become detached from the economic fundamentals and politics have become king. This is where things will get dangerous for the currency going forward.
Theresa May’s hard-line on Brexit negotiations and her insistence that negotiations will take place in private have only increased uncertainty for the market, with traders left combing news websites for the latest headlines to try and gauge for themselves the state of play between the UK and the EU.
Brooks also explains that we might never know what triggered last night dramatic crash (and we might see another one):
This highlights the drawback of machines making trading decisions, however, it is the reality, and it is only getting more popular. Thus, another flash crash is possible.
Unlike the flash crash that impacted the Dow Jones in 2013 and which triggered an investigation by the US authorities, the FX market is not regulated in the same way, so there is unlikely to be an investigation and we may never know what actually happened last night. But, if there is another flash crash, the pound is vulnerable because such unstable forces are driving it.
The FTSE 100 is expected to open higher this morning following the crash in the pound overnight.
Our European opening calls:$FTSE 7067 +0.95%
— IGSquawk (@IGSquawk) October 7, 2016
$DAX 10594 +0.24%
$CAC 4495 +0.33%$IBEX 8784 +0.31%$MIB 16530 +0.23%
Hollande's Brexit comments blamed for pound's flash crash
The finger is being pointed at French President François Hollande this morning.
According to some, Hollande’s tough comments about Brexit negotiations are behind the shock fall in the pound overnight.
Speaking in Paris at a dinner attended by some of the most senior EU officials, including the Commission’s President Jean-Claude Juncker, Hollande said:
The UK has decided to do a Brexit, I believe even a hard Brexit. Well, then we must go all the way through the UK’s willingness to leave the EU. We have to have this firmness.
If not, we would jeopardise the fundamental principles of the EU. Other countries would want to leave the EU to get the supposed advantages without the obligations.
There must be a threat, there must be a risk, there must be a price. Otherwise we will be in a negotiation that cannot end well.
Referring to the time when Jacques Delors, Hollande’s mentor, had to deal with “a crisis triggered by the UK too”, the French President said:
Then Ms Thatcher wanted to stay in Europe, but she wanted a cheque in return. Now, the UK wants to leave and pay nothing. It’s not possible.
Waking up to a tumbling pound. fat finger trade?algos in low liquidity? Hollande comments?
— Carolin Roth (@CarolinCNBC) October 7, 2016
Updated
This is what happened to the pound vs the dollar overnight in Asia:
It's all about the pound today! -6.1% in a two-minute selloff https://t.co/ySecMJc4ZU pic.twitter.com/uJjegS04HT
— Sarah McDonald (@mcdonaldsarahj) October 7, 2016
The agenda: pound suffers flash crash
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The dramatic fall in the pound overnight has shaken the City this morning. The UK woke up to the news that sterling crashed more than 6% in two minutes in Asian trading, taking it to a new 31 year low of $1.1841.
Sterling has since regained some ground, and is now down 1.3% at $1.2453.
Algorithms, fat fingers, and mounting fears over a Hard Brexit have all been offered as possible explanations behind the major move, but nobody really knows why.
It’s worth pointing out that trading volumes were thin at the time, heightening the impact of any move.
This will be considered a warning shot by some. A taste of things to come perhaps as Britain faces up to the serious challenges posed by the process of exiting the EU.
We will be bringing you the latest throughout the day.
Updated
