And finally, here’s our news story about Mark Carney’s testimony to parliament.
Goodnight! GW
Pound steady as May hangs on
Sterling is resolutely refusing to rally tonight, despite Theresa May winning her no-confidence vote (as expected).
The pound is hovering around $1.2877, little changed against the US dollar on the day.
It’s a little higher against the euro, at €1.13.
Investors are weighing up the situation, with plenty of chatter that a soft Brexit is more likely.
Charles Hepworth, investment director at GAM, suggests Theresa May could rub out some of her ‘red lines’ to get a deal through:
A revised and watered-down deal getting through is probably the most likely scenario at the current time and a much softer Brexit seems to be the current expectation in markets. This scenario would require some kind of alignment with the EU single market regulation to avoid a hard Northern Irish border. But crucially was this what the electorate voted for in the original referendum? Politically it would be extremely messy.
“Other routes forward are being priced as lower probabilities now. There is very little chance of the UK parliament committing hari-kari and deciding that No Deal Brexit is the way to solve the current impasse. This would be economic suicide and result in a severe contraction in economic activity and a guaranteed recession. It is hard to see that this route will come to pass as there is no parliamentary majority for a No Deal cliff edge exit from the EU. Parliament will take control of the process should May fail to deliver any improved deal option and block this route by extending Article 50. So a No Deal Brexit has now morphed into a never ending Brexit.
“The only other option available is return to the electorate in some kind of Peoples Vote aka a second referendum. The probability of this is difficult to measure as many MPs publicly don’t support it. A Remain win on a second referendum would open fresh Brexit wounds (would Brexiteers demand a best of three?!) but the impact to certain financial markets would be instantaneously positive with sterling jumping. UK equities with international earnings wouldn’t necessarily jump on the news but domestic earners would fly.”
London’s stock market has closed for the day, leaving the FTSE 100 index of top shares in the red.
The Footsie lost 32 points, or almost 0.5%, to end the day at 6,862 points.
Domestic stocks such as house builders had a good day - another sign that no-deal Brexit fears have eased (for the moment, at least.)
Internationally focused firms had it tougher, though, as Connor Campbell of SpreadEx explains:
Stubborn losses in its commodity sector – with the likes of BP, Shell and Rio Tinto all feeling edgy about the state of the Chinese economy – meant that the FTSE 100 was stuck in the red.
Sterling spent the day acting as if it didn’t have a care in the world, posting a leisurely 0.3% increase against both the dollar and the euro. The currency is in for another rough night, however, as investors prepare for the no-confidence vote in Theresa May and, dun dun dun, whatever fresh Brexit hell its aftermath brings.
Kerim Derhalli, CEO of Invstr, fears investors are being too complacent about the Brexit risks:
“The markets have been remarkably calm overnight after yesterday’s historic government defeat. The rally in the pound from the 1.2670 low yesterday implies that the scale of the defeat makes a no Brexit outcome more likely. This has been the Prime Minister’s argument but seems naively optimistic.
“Without a re-negotiated deal, the possibility of a no-deal Brexit is the next most likely outcome. This would imply far greater political and economic uncertainty. The pound would fall towards $1.10 and lower.
“No Brexit, which the market is hoping for, could only be achieved by a second referendum or a general election. The only certainty in either of those scenarios is civil disorder in the UK similar to the gilets jaunes movement in France. A Labour government would create a greater market shock than a no-deal Brexit.
Goldman Sachs: Chances of scrapping Brexit have risen
Goldman Sachs’ European economist Adrian Paul has added his weight to the growing City chorus predicting that Britain will remain in the EU beyond March.
In a research note published today, Paul says:
“We still expect a slim majority of MPs to ultimately consent to a close variant of the current Withdrawal Agreement,”
But the size of May’s historic Brexit vote defeat does “skew the risks to that base case further in the direction of a softer, later Brexit — or no Brexit at all,” Paul added.
He also reckons that No Deal is looking less likely - while an extension to Brexit Day is more probable.....
We think the prospect of a disorderly ‘no-deal’ Brexit has faded further. That sharper skew implies a greater probability of an extension to the 29 March Brexit deadline embedded in Article 50.
Goldman Sachs sees greater chance of Brexit being scrapped altogether after historic defeat https://t.co/fI1NaMYPfe
— CNBC (@CNBC) January 16, 2019
Over in the US, Bank of America has defied recent market turmoil by beating forecasts.
The Wall Street giant posted earnings of 73 cents per share, compared to 63 cents expected. At $22.7bn, revenues beat forecasts of $22.4bn - even though its bond-trading division saw revenues fall 15%
Significantly, CEO Brian Moynihan struck a reassuring tone about the state of the US economy, saying:
“Through the trillions of dollars of consumer transactions we process and from the steady confidence and activity of our small business and commercial clients, we see a healthy consumer and business climate driving a solid economy.”
Rival bank Goldman Sachs has also just smashed forecasts, with profits of $6.04 per share in profit for the fourth quarter of 2018, versus the $4.45 per share expected.
This has helped Wall Street open higher today, as investors take a break from worrying about economic slowdown (which wouldn’t make Brexit any easier...).
Stocks open higher after strong earnings from Goldman Sachs and Bank of America https://t.co/0eUQ8XoeEA pic.twitter.com/Ty97r50Om5
— CNBC Now (@CNBCnow) January 16, 2019
Over in Westminster, MPs are getting their teeth into the No Confidence motion that could bring down Theresa May. We’re live-blogging it here.
Sterling, though, is remarkably calm..... basically unchanged against the US dollar today after yesterday’s late-night recovery.
As the Commons begins its debate of no confidence in the Government, we'll be monitoring markets to see how investors are reacting. So far, at least, currency markets are quite placid - more so than yday. Here's £ vs $ pic.twitter.com/qgQ1lPowug
— Ed Conway (@EdConwaySky) January 16, 2019
And that’s because May is widely expected to survive. Many of her own MPs hate her Brexit bill, but they don’t love the idea of Labour winning a snap election either. Neither does Northern Ireland’s DUP, whose support should see the PM survive....
Charles St Arnaud, senior investment strategist at City firm Lombard Odier Investment Managers, has reckons a Brexit delay is now ‘unavoidable’ (providing further support to Mark Carney’s point this morning)
But there are six possible scenarios, he suggests:
-
Second vote (Almost certain to happen)
Prime Minister Theresa May is likely to meet with the UK’s European counterparts to try to secure concessions on the Irish backstop and other parts of her deal to make it more palatable to a majority of MPs, before resubmitting it to Parliament. However, it is still not clear whether it would be approved in a second vote, thus opening the door to other scenarios. -
General election
Opposition leader Jeremy Corbyn had been itching to trigger a no confidence vote in Parliament and force an early election and did so following the vote yesterday. Currently, Labour and Conservatives are neck-and-neck in the polls, so it is far from clear who would form the new government in this scenario. We see this as unlikely as, despite their differences on Brexit, DUP and tory rebels are still likely to support PM May, preventing the no confident vote from passing. -
Second referendum
Many politicians from both sides of the debate have been calling for a second referendum. However, many unknowns remain. The most important one being what question will be submitted to the electorate. It is very unlikely to be a repeat of the 2016 referendum where voters were asked whether they wanted to leave or stay in the EU. The next choice would rather be between types of Brexit relationships; some have even proposed a multiple choice referendum where voters rank by preference. The likelihood of this scenario has risen sharply in recent weeks. -
Norwegian-style Brexit
This has often been floated as the UK government’s plan B in case of a rejection of the deal. This would involve the UK joining the EFTA/EEA to offer the UK time to renegotiate the Brexit deal while being out of the EU but keeping very close ties to EU. However, this would still have to introduce border checks as the EFTA countries are not part of the customs union, leaving the question of the Irish border unresolved. Moreover, many members of the EFTA/EEA have expressed opposition to the UK joining their club on a temporary basis. This scenario is still possible but we think a second referendum is much more likely given the change in political rhetoric. -
No deal Brexit
The UK leaves the EU without any agreement with the EU or any ties to the zone and becomes a third-party country, meaning the end of the free movement of goods, services and persons and the reinstating of custom checks with the EU. Interestingly, the likelihood of this scenario has fallen sharply, especially given the European Court of Justice’s judgement that UK can unilaterally withdraw Article 50 -
Brexit is cancelled
In its recent ruling, the European Court of Justice said that the UK could unilaterally revoke Article 50 and cancel Brexit altogether. We believe this is very unlikely to happen as the political cost of ignoring the 2016 Brexit vote would be huge for all the stakeholders involved.
Professor Costas Milas of the University of Liverpool has compiled a neat chart, showing how economic and political crises are bad for sterling.
He explains:
I think the Governor is right to point out that we should not make much of the very short-run movements in the exchange rate. The exchange rate will only strengthen if Brexit uncertainty recedes. The best way to see this is by plotting together economic policy uncertainty in the UK ( based on newspaper articles regarding policy uncertainty from The Times and The Financial Times; available here) and the £ effective exchange rate from the BoE database.
To avoid the distraction of very short-term fluctuations, I plot together the two series in terms of 1-year rolling average growth rates. There is a very strong negative correlation: Rising policy uncertainty harms sterling growth. Notice that policy uncertainty has moved down notably since early 2017 when we finally triggered Article 50. This provided a lift to the exchange rate on the ground that Ms May engaged seriously with our EU partners in Brexit discussions. Will the exchange rate lift further if we extend Article 50? I suspect so provided that the extension is only short lived with the aim of tweaking Ms May’s deal slightly.
The pound is strengthening against the euro, up 0.3% today at €1.13.
That’s another sign that Brexit worries are fading, a little.
In the last hour, prime minister Theresa May has told parliament that the EU would only agree to delay Brexit if the House of Commons had agreed on a new plan. That’s seen as a softening of the PM’s position.
Theresa May did say to extend Article 50 UK would need to show it is getting towards a deal, so first acknowledgement that changing the timetable is possible if there's a compromise to be found. The other reasons the EU might extend timing are second referendum or new govt
— Krishnan Guru-Murthy (@krishgm) January 16, 2019
Another potentially significant move -- Conservative MP Dominic Grieve has presented a bill that would put another referendum on the table....
BREAKING: Dominic Grieve has just tabled a bill for a new European Union Referendum in the House of Commons pic.twitter.com/kcpfMHcF5L
— Charlie Proctor (@MonarchyUK) January 16, 2019
Andy Bruce of Reuters has rounded up the latest City views on Brexit:
There's a huge range of views among economists on how Brexit will turn out. But they're leaning towards delay.
— Andy Bruce (@BruceReuters) January 16, 2019
UBS: No deal chance ⬇️, A50 ext ⬆️
Oxford Econ: May deal(ish) likely
Schroders: No-deal risk high, soft Brexit unlikely
Natixis: May deal <20%, likely delay/revoke A50
ADM: A50 ext then 2nd ref or hard Brexit
— Andy Bruce (@BruceReuters) January 16, 2019
Berenberg: Softer Brexit or 2nd ref
Capital: A50 ext, Norway-ish Brexit
ING: A50 ext
Franklin Templeton: A50 ext most likely, hard Brexit wouldn't be so bad
RBC: A50 ext, then "truly alternative path" like 2nd ref
AXA: No deal risks are receding
David Page, senior economist at AXA Investment Managers, has weighed in to support Mark Carney.
He concurs that investors believe Britain is less likely to crash out of the EU without a deal, now that MPs have delivered such as resounding defeat on the PM.
Here’s his logic:
- Parliament rejected the government’s negotiated exit deal with the EU by an historic 230 votes.
-
Labour have tabled a motion of no confidence, which could deliver early elections, but we expect it to fail at 7pm tonight.
- The government must produce a new plan on Monday. We doubt it has such a plan, but Parliament will become increasingly involved in the sculpting of a new deal.
- This suggests a more politically centrist driven approach to Brexit, suggesting a softer Brexit (Norway/Customs Union) or even a second referendum.
- However, there is no majority position within Parliament and no clear path to an alternative outcome. This process is likely to require longer than the 10 remaining weeks until Brexit, and we see a delay to Brexit from 29 March as likely.
- Markets consider Parliamentary involvement, to see a receding risk of “no deal” Brexit. This is supporting sterling.
Carney testifies: the key points
Governor Mark Carney played today’s session fairly tightly -- understandably keen not to spook the markets at such a crucial time. But there are a few key points to flag up.
The financial markets believe that Brexit could be delayed, according to Carney. He believes the recovery in sterling since last night’s vote shows a no-deal Brexit is seen as less likely.
Governor Carney also predicted that there will be more volatility in the weeks ahead.
Carney remains confident that the UK banking sector is resilient enough to cope with a hard Brexit - citing the capital reserves that could be deployed to support lending.
Carney denied there is a big rift with the European Central Bank over Brexit - but the two sides do still disagree over derivative contracts (there are tens of trillions of pounds of derivatives contracts owned by EU firms held in the City)
He also warned that China’s economy will keep slowing this year, due to the trade war with America and the clean-up of its shadow banking operations.
Carney makes one final point on the Bank’s ‘worst-case’ disorderly Brexit scenario (in which the pound plunges 25% and a staggering 8% is wiped off GDP).
That scenarios is mainly based on the imposition of tariffs and economic dislocation, not higher interest rates (which has a longer-term impact). the governor adds.
[Some critics, though, insist that the bank would cut rates, not hike them].
That’s the end of the session.
BoE policymaker Richard Sharp makes an important point -- the economy will suffer if global investors lose faith in the credibility of the government to handle its financial affairs.
In other words, uncertainty over Brexit (or a general election) could hurt demand for UK assets (an interest rate hike to prop up the currency could drive debt defaults and cost jobs, for example)
So how will markets respond of MPs grab control of Brexit back, John Mann asks...
Sharp declines to speculate....
How much more uncertainty and delays can we take?
Sharp replies that, in his experience, there is always uncertainty at the climax to a major negotiation.
But with the global economy already slowing, Brexit uncertainty is another reason for firms to hold back from fresh investment.
More Christmas card news -- John Mann MP reassures Mark Carney that his Christmas card went on the main mantlepiece at Mann Towers (not with the missives from “politicians and other curiosities”).
Carney’s card was proudly displayed between Borussia Dortmund Football Club and the ambassador of Nepal, apparently.
Ever on the pulse, Carney suggests Mann doesn’t let any Tottenham Hotspur fans know of this Germanic friendship (ahead of their Champion’s League clash #coys).
Mann then turns to the serious stuff -- is there a row between the Bank and the European Central Bank over how a Brexit deal will play out?
Carney insists that relations are “exemplary”.
However, there is a difference of opinion over how derivatives contracts would be handled in a no-deal, no transition scenario.
Updated
Labour MP Wes Streeting asks Carney about another big issue - the rise in unsecured household debt. It has hit £15,400 per person, according to the TUC.
Carney argues that the true picture is lower -- the TUC’s data includes student loans, which are effectively a tax (you only pay them back at a certain income level). It also includes loans to non-profitable bodies such as schools and hospitals.
But still, the Bank does watch this issue closely, and has noted that the burden of unsecured debt is highest in the North West of England - while secured debt (mortgages) is highest in London.
The Treasury committee now turn to the UK’s persistent current account deficit (the gap between the goods and money flow into and out of the country)
Q: Could Brexit make it worse?
BoE policymaker Alex Brazier says there is a potential danger that foreigners could lose their appetite for UK assets. That would worsen the deficit.
Brazier also warns that new tariff and non-tariff barriers would make the “sustainable size” of the UK current account deficit smaller. That would create a painful adjustment, in which the pound falls, saving rises, and investment falls.
As a nation we are spending more than we earn.... the onus is on the UK to maintain its attractiveness for that overseas investment, unless we want to go through that painful adjustment.
Here’s our news story on this morning’s inflation data:
Back on China, Mark Carney warns that Chinese lenders have been using some of the techniques seen in America in the run-up to the financial crisis.
Brexiteer Steve Baker MP starts his questioning with an apology.....for not sending Mark Carney a Christmas card! Apparently it was part of a wider failure.... (readers can insert their own joke about Brexit planning).
Baker then asks about the government’s decision to end the “zero risk weight rule” on eurozone government debt in a no-deal scenario.
Currently, EU banks in Britain don’t need to set aside extra capital to cover losses on their own government debt, as they’re assumed to be so safe they carry a “zero” risk weight. That deal would end if Britain leaves without a deal, according to a ‘statutory instrument’ issues last year.
Q: Did the FPC ask the government to do this?
Carney says it did not - this is a mechanical consequence of the UK leaving the EU.
Baker is concerned about the explosion in government debt since the financial crisis a decade ago, and fears problems ahead.
BoE policymaker Richard Sharp weighs in, concurring with Baker that government debt can turn from safe to risky.
At the start of my career, Sharp says, Venezuala had a top-rank Triple A rating at the start of his City career (it’s now languishing at C, close to default).
Christopher Smart, head of macroeconomic & geopolitical research at Barings, thinks Mark Carney is right -- the markets do believe the Brexit date could be extended, and that a hard Brexit can be avoided.
Smart writes:
“Theresa May has been the Energizer Bunny of British politics. She just keeps going, in spite of all obstacles. Everyone hates her plan, but they hate the alternatives even more. Lots of people want her job, but they don’t want it now.
With this vote, however, she may be coming to the end of her rope. Even if she wins the confidence vote tonight, it’s just hard to imagine that in consultation with other party leaders she can develop a fresh approach that will garner broad support.
This raises the chance of a general election, with the EU offering more time for a democratic consultation that will help identify a path forward that does garner broad support. The EU doesn’t want to risk a hard Brexit any more than most British businesses do.
This chart from Refinitiv shows the pound’s rebound last night which Carney alluded to.
As you can see, sterling weakened steadily through Tuesday as the meaningful vote loomed, only to bounce back off the mat once the scale of May’s defeat became clear.
Updated
Uh oh.... Mark Carney is now talking about potential problems in the financial system.
This includes the growth in leveraged loans and loan securitisation (bundling debt into new securities - a popular and dangerous practice that led to the 2008 crisis).
Mark Carney said he's "concerned" about leveraged loans: "This is very clear evidence of a steady decline in underwriting standards."
— Oscar Williams-Grut (@OscarWGrut) January 16, 2019
@bankofengland Mark Carney, taking about potential for sub-prime crisis repeat, makes important point that UK and #euro banks must retain a portion of any loans securitised and sold on. In US, lending originators "don't have any skin in the game" once loans are sold. US at risk!
— Phillip Inman (@phillipinman) January 16, 2019
Conservative MP Colin Clark turns to the trade dispute between the US and China.
Q: Has the UK already been hurt by the trade war?
Governor Carney says third countries such as the UK are relatively insulated, unless it spills into the financial markets.... which has already happened.
There is a possibility, over time, of trade diversion to third countries - which would help UK companies. But that happens over time.
Q: Is the dispute reaching a resolution?
It’s hard to say, Carney replies, as the talks aren’t being conducted in public.
The US president thinks they are, Clark jokes, pointing to @realdonaldtrump’s twitter feed.
Q: What’s a bigger threat - Brexit, or China’s slowdown?
Alex Brazier, BoE executive director for risk, says the Bank doesn’t rank them -- it trie to ensure that the financial system is strong enough to cope with both.
Carney: China is slowing....
Brexit isn’t the only risk facing the UK economy, of course.
Mark Carney is now outlining how an economic shock in China could hurt Britain, as it’s such an open economy.
Q: Does Apple’s profits warning show that a China downturn is coming?
The governor says there are several signs that China’s economy has slowed in 2018, and will continue to slow in 2019.
He says this is partly due to “trade tensions”, particularly due to the trade war with the US.
The “necessary but difficult” reform of China’s shadow banking sector is also a factor -- credit conditions are tightening, as Beijing clamps
The UK’s exposure to China is relatively modest, Carney continues, but it does have considerable exposure to the Chinese banking sector. So the City could be hurt by a China hard landing.
Anil Kashyap, an external member of the Bank’s FPC, suggests that a 3% shock in Chinese GDP could knock 0.5% off UK growth.
Carney adds that Chinese growth could potentially slow to the “high five percent” level, which would be lower than Beijing’s target of 6%-6.5%.
We are looking to avoid a situation where the financial system makes the next downturn worse, Carney says.
He points out that the Bank has forced commercial banks to hold more capital (through its counter-cyclical capital buffer). That cash is effectively on standby for an economic shock, and could be released to support lending.
Carney: Financial system is resilient to Brexit shock
Labour MP Catherine McKinnell is quizzing Mark Carney over the Bank’s predictions that interest rates could rise sharply if Britain crashes out of the EU without a deal.
The governor explains, at some length, that the bank’s “mechanical formulae” models how such a shock would ripple through the system, and the actions policymakers should take.
That’s why the Bank has designed such tough stress tests, to ensure that the financial system is robust enough to handle whatever Brexit (or anything else) throws at it.
Carney says:
We have confidence that the core of the system is resilient to the kinds of shock we could see.
McKinnell isn’t convinced. Wouldn’t hiking rates to 4% simply help banks profits, even though it would also hurt the economy?
Alex Brazier, the Bank’s executive director for Financial Stability Strategy, denies it -- high interest rates are actually bad for the banks, he argues, as they also create more bad debts (as households default on mortgages, credit card loans, etc)
Nice to see that @catmckinnell isn't buying the @bankofengland line that it would jack up interest rates in the midst of a no-deal #Brexit. Mark Carney says it would save the banks. But neglects to say it exacerbates the dive in GDP, rise in unemployment and home repossessions
— Phillip Inman (@phillipinman) January 16, 2019
UK inflation has fallen
Just in: UK inflation has fallen to its lowest level in almost two years -- giving households some relief as they brace for possible Brexit upheaval.
The consumer prices index shows that prices rose by 2.1% year-on-year in December, down from 2.3% in November, thanks to falling fuel costs.
*U.K. DECEMBER INFLATION RATE FALLS TO 2.1%, AS FORECAST
— WorldFirst (@World_First) January 16, 2019
Bank off England governor Mark Carney has told the Treasury select committee the markets reacted positively to last night's Government defeat because they anticipate the Article 50 process will be extended.
— Theo Usherwood (@theousherwood) January 16, 2019
Carney adds that he wouldn’t put ‘too much weight’ on short-term market moves.
Carney: Sterling recovery suggests Brexit could be delayed
Mark Carney begins his session by talking about the financial markets’ reaction to last night’s Brexit vote.
The governor says that market sentiment across a range of markets are affected by Brexit developments, particularly in parliament.
Last night, Carney explains, there was a “sharp rebound in sterling following the vote”. That reflects some investors’ belief that Brexit could be delayed beyond the end of March.
Carney says:
Public market commentary, consistent with our market intelligence, that rebound appears to reflect some expectation that the process of resolution would be extended and that the prospect of no-deal may have been diminished.
As this tweet shows, the pound fell below $1.27 after May lost the vote, but is now back at almost $1.29.
Pound sterling plummets then rallies as Commons overwhelmingly rejects PM Theresa May's Brexit deal | The Independent https://t.co/j9GyDN5RQQ
— Ahmed Abdullah (@AhmedMascot) January 16, 2019
Carney insists he isn’t giving his own opinion of how Brexit will develop -- he’s simply citing the market’s initial take, and how it was expressed.
The issue remains in the hands of parliament, he continued, adding:
The markets, like the country, are looking to parliament for direction, and one could expect continued volatility.
Updated
Mark Carney’s hearing is underway now. It’s being streamed live here.
Global tensions holding back climate change fight, says WEF
Newsflash: Environmental threats, and politicians inability to tackle them, are the biggest risk to the global economy, the World Economic Forum has warned.
WEF’s annual global risks report, just released, cites extreme weather events, natural disasters, and failure to address climate change as the three biggest threats.
WEF, which will hold its annual meeting in Davos next week, warns:
Is the world sleepwalking into a crisis? Global risks are intensifying but the collective will to tackle them appears to be lacking. Instead, divisions are hardening...
The report is based on the views around around 1,000 experts and decision-makers, and most are worried.
WEF adds:
Nine out of 10 respondents expect worsening economic and political confrontations between major powers this year. Over a ten-year horizon, extreme weather and climate-change policy failures are seen as the gravest threats.
More here:
Updated
The pound is calm now, but may rally if Theresa May wins today’s no-confidence vote, called after last night’s historic Brexit deal defeat.
Kit Juckes of French bank Société Générale says:
The UK voted for Brexit, markets priced it in (to a large degree) and now are watching, slack-jawed, as the Government tries to find a path to the exit which it can rally politicians behind.
Today’s confidence vote isn’t quite a done deal and so if the Government survives, sterling should get a bit of a lift.
Credit rating agency Moody’s isn’t considering cutting the UK’s credit rating, yet anyway, following the Meaningful Vote on the Brexit deal last night.
It says:
The outcome of the vote further extends the period of uncertainty over the UK’s relationship with the EU, a credit negative for many rated debt issuers.
However, the vote against the deal is not, in itself, sufficient grounds for Moody’s to shift its base case to a no-deal scenario in which the rating agency would formally review the UK’s credit profile and other affected issuers
Brexit vote: What the financial experts say
City analysts and fund managers have been scrambling to update clients on the Brexit situation, after Theresa May’s withdrawal deal was resoundingly rejected by MPs.
David Lafferty, chief market strategist at Natixis Investment Managers, says the drubbing highlights the PM’s weak position:
“From our view, the most likely outcome is that May acquiesces and either delays or revokes article 50, effectively pushing the ‘pause button’ just before the train flies off the tracks. UK businesses and consumers should expect to live under continued uncertainty for quite a while longer.
It is important to recognize that the Brexit referendum was about an ideal – a United Kingdom independent of the EU. So far, that ideal has not been matched by a realistic plan or process to deliver it. Until such a plan emerges, the withdrawal process will probably be put on hold.”
Dean Turner, UK economist at UBS Global Wealth Management, sees more storms ahead.
At this stage we do not advocate taking directional views on sterling and UK assets. The reaction of the pound following the vote would suggest that markets are not currently increasing the risk of an adverse outcome.
For the time being, we expect that uncertainty will remain high and UK markets will stay volatile. Within portfolios, exposure to sterling-denominated assets should be maintained at benchmark levels until more clarity emerges.”
Alastair Winter, chief economist at investment bank Daniel Stewart, predicts Brexit will be delayed, or even cancelled....
As Mrs May licks her wounds after last night’s humiliating defeat what matters now is how hard she tries to build a consensus on the basis that a large majority in the Commons including half her ministers (and possibly herself but she is not saying) are determined to avoid ‘no deal’. She has her work cut out as nobody really trusts her competence or veracity any more (ironically, rather like Mr Trump, whom she no doubt fastidiously disdains as her mirror image).
She may genuinely be taken aback by the intensity of division both in Parliament and amongst voters but as Prime Minister she has to deal with it responsibly in order to limit the economic and social damage.The scale of the defeat means there is little point in her persisting with the current deal as Europhile MPs who loyally supported her yesterday will now feel able to go their own way. This, in turn, means that Brexit will not take place on 29 March, if at all.
Mark Carney will be quizzed today about the Bank of England’s latest Financial Stability Report, released at the end of November.
That report predicted that the UK banking sector could survive a disorderly Brexit, thanks to the Bank’s work since June 2016 (if only the rest of the system had worked as efficiently....)
The Bank’s Financial Policy Committee (FPC) declared:
The FPC has reviewed a disorderly Brexit scenario, with no deal and no transition period, that leads to a severe economic shock.
Based on a comparison of this scenario with the stress test, the FPC judges that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit.
Introduction: Mark Carney to testify on Brexit financial stability
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Mark Carney has played the ‘adult in the room’ role a few times since he joined the Bank of England in 2013. And today, MPs and investors alike will be looking to the BoE governor as he testifies to parliament on the UK’s financial stability.
He’ll be quizzed about the City’s ability to handle Brexit, and the preparedness (or otherwise) of firms for a cliff-edge, or disorderly, departure.
He’ll be accompanied by Alex Brazier, Executive Director for Financial Stability Strategy and Risk, and two external members of the financial policy committee -- Anil Kashyap and Richard Sharp. It kicks off at 9.15am.
Carney’s hearing is well-timed -- barely 12 hours after MPs threw Brexit into fresh chaos by sensationally rejecting Theresa May’s deal by a historically thumping 230 votes.
May now faces a confidence vote tonight, while the rest of the country faces further uncertainty. Will the UK crash out without a deal on 29th March? Will MPs now force a softer Brexit, a second referendum, or even a revoke Article 50 altogether?
The markets are taking the uncertainty remarkable well. Sterling is hovering around $1.28 against the US dollar - having swiftly rebounded from yesterday’s losses last night.
That doesn’t mean the business world are relaxed about the situation, of course, with barely 70 days until Brexit day (delays and cancellations notwithstanding).
Allie Renison, head of Europe and trade policy at the Institute of Directors, warned Bloomberg TV that the vast majority of companies simply aren’t prepared for a no-deal, so they want parliament to move swiftly onto the next step.
Robert Ward, editorial director of the Economist Intelligence Unit, reckons Theresa May options are running thin...
Unable to command her party or parliament, Theresa May limps on, sustained by #Brexit policy chaos on all sides, lack of an obvious replacement. But her options & time running out. Also hard to see her surviving a 2nd referendum scenario. #BrexitVote
— Robert Ward (@RobertAlanWard) January 16, 2019
We also discover whether the Brexit uncertainty has hit house prices this morning. Plus new inflation data, which may show the consumer prices rose by 2.1% per year in December, down from 2.3% in November.
The agenda
- 9am: World Economic Forum issues 2019 Global Risks Report.
- 9.15am GMT: Mark Carney testifies on financial stability at the Treasury committee
- 9.30am GMT: UK inflation data for December
- 9.30am GMT: UK house price data for November
Updated
