European shares turn in mixed performance
With a timetable for Brexit now unveiled, the pound dropped sharply but UK shares went in the opposite direction.
The UK currency is currently down 1% against the dollar and down a similar amount against the euro to a three year low, while the Bank of England’s trade-weighted sterling index is down more than 1% to a six and a half year low.
Uncertainties over the status of trade deals and economic growth once Brexit has happened has hit the pound, but conversely the FTSE 100 was flying, lifted by exporters benefitting from weaker sterling.
The UK index almost broke through the 7000 barrier for the first time since May 2015, but failed to quite make it. Elsewhere European markets were more mixed, although Germany was shut for a holiday.
Worries about Deutsche Bank continued to weigh on its US shares and helped pull the whole financial sector lower on Wall Street. The final scores in Europe showed:
- The FTSE 100 finished 84.19 points or 1.22% higher at 6983.52
- France’s Cac closed up 0.12% at 4453.56
- Italy’s FTSE MIB fell 0.77% to 16,273.95
- Spain’s Ibex ended down 0.32% at 8751.6
- In Greece, the Athens market added 0.74% to 569.72
On Wall Street, the Dow Jones Industrial Average is currently down 88 points or 0.48%.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Cutting interest rates further would increase risks - ECB board member
The European Central Bank’s negative interest rate policy has side effects and cutting them further would come with increasing risks, says ECB board member Yves Mersch.
In a speech in Luxembourg, Mersch said:
We are aware... that in particular our non-standard policy measures come with side effects. Therefore, it is important to consider the combined effect of the full package of our policy measures when assessing the impact of our monetary policy action on banks.
Low rates put pressure on banks’ profitability, particularly on banks which are very reliant on net interest income. Analysts forecast that negative interest rates will significantly reduce banks’ profitability over the next five years, with the return on equity in some cases falling from 6.5% to 2%.
Obviously, our monetary policy package consists of other measures as well and ECB staff estimates show that the overall impact on bank profitability of recent monetary policy actions is net positive, compared with a scenario with no monetary policy action[2]. But we cannot ignore such analyses. And yet, one also has to ask if a bank that cannot weather headwinds over a few years still has a sufficiently robust business model to stay in the market.
Mersh added:
Interest rates have to stay low until the economic recovery in the euro area has gained sufficient momentum to lift the inflation rate to a level in line with our definition of price stability. This is, however, taking longer than we had hoped, mainly because the necessary political changes to make economies more competitive and flexible are lagging behind. The sooner these reforms are implemented, the stronger and more sustainable the recovery will be.
Although the notion of a “zero lower bound” no longer stands, there is a limit to how low interest rates can go – the point at which the costs of lower rates incurred by the banking sector outweigh the benefits. Many consider that we have reached the “effective lower bound” or that it might be not that far from the current deposit facility rate of -0.4%.
This level I would still deem to be “mildly negative” – but I would shy away from moving into “wildly negative” territory. Cutting interest rates even more would come with increasing risks as reactions to such cuts might not always be linear.
Updated
The continuing fall in the pound is not necessarily a major reason for concern, according to Jonathan Loynes at Capital Economics:
While the latest dip in sterling has partly reflected concerns over the prospect of a “hard Brexit”, the currency’s depreciation should continue to cushion the economic impact of the vote to leave the EU.
Sterling’s latest drop appears to have been at least partly prompted by speculation that the UK government is willing to accept a hard form of Brexit, in which the country would forego full access to the EU single market, in order to secure full control over its borders. Along with confirmation that the Government will trigger Article 50 by next March, this may have increased concerns over the ultimate economic impact of the vote to leave the EU.
But there are a number of reasons not to be concerned about the currency’s depreciation. For a start, it is far from clear that further indications of a move towards a hard Brexit should necessarily be strongly negative for the economy or the pound. They may, after all, reflect increased confidence that the UK can negotiate favourable trading arrangements with the EU without the conditions that a “soft Brexit” might imply.
Second, the key driver of sterling’s depreciation (against the US dollar at least) has continued to be relative changes in expectations for UK and US interest rates. As such, there are few signs of a general “Brexit premium” being attached to the currency which might prompt a more disorderly depreciation.
And finally, regardless of its causes, the drop in sterling has already had a substantial effect in cushioning the economic impact of the Brexit vote. Monday’s Markit/CIPS manufacturing PMI survey revealed a further rise in the export orders sub-index to a level consistent with a rapid acceleration in the growth of actual exports in the coming months.
Admittedly, the economy may currently be in a “sweet spot” in which the beneficial effects of the pound’s drop have been felt before the adverse effects on real incomes of the consequent rise in inflation. But provided that the pound’s fall remains relatively orderly – our forecast is that it will fall from around $1.28 now to $1.20 next year – we expect the inflationary effects to be fairly limited and short-lived, allowing the policymakers to continue to support growth.
Greek pensioner protests overshadow budget unveiling
Back to Greece where pictures of police firing tear gas at pensioners peacefully demonstrating against further cuts has caused deep embarrassment to the government – just as it tables next year’s budget in parliament. Helena Smith reports from Athens
The sight of protesting pensioners having pepper spray fired at them by police overzealously protecting the road on which his office stands, could not have come on a worse day for prime minister Alexis Tsipras. The leader, like all leftists in the ruling Syriza party, is painfully aware that it is pensioners who to date have paid the heaviest price for the austerity meted out in return for bailout funds. As I was told by many attending today’s (otherwise low-key) rally, the latest cut was the twelfth they have been forced to endure since the beginning of the debt crisis in late 2009. To make matters worse, Tsipras’ poll ratings are fading fast. In the most scathing survey to be published since he first assumed power in January 2015 – and in the newspaper of Avgi, the mouthpiece of his ruling Syriza party no less - the leader was found by the Public Issue polling company to be trailing Kyriakos Mitsotakis, chief of main opposition New Democracy, by 19 points in terms of suitability in the role of prime minister (42 percent against 23 percent). A whopping 36 percent of Greeks said they would prefer to see New Democracy in power compared to 14 percent for Syriza and its junior right wing partner, Anel.
Which explains why Tsipras, who was otherwise focusing on what he hoped would be an optimistic draft budget forecasting growth and debt decline, personally called the pubic order minister in fury that the tear gas was used at all. In an unprecedented statement the ministry announced: “After today’s incident the order was given to forbid any use of tear gas at demonstrations of workers and pensioners.”
That notwithstanding, the episode duly eclipsed any talk of the draft budget - which foresees growth of 2.7 per cent n 2017, debt dropping from 180 to 174.8 per cent of GDP and unemployment falling from 23 to 22.4 percent next year – being tabled and debated in parliament. Greek media have not been slow to pick up on the fact that it also projects an extra €1.8bn worth of revenues in taxes – prompting many to say that yet more punitive belt-tightening measures are on the way.
Royal Bank of Scotland will pay Connecticut $120m to resolve a mortgage bond probe, according to Reuters.
Meanwhile, as investors await news about whether the $14bn fine on Deutsche Bank demanded by the US Department of Justice will be reduced, the bank’s US shares have now dropped by around 2.5%.
The ISM report could also signal a reasonable non-farm payrolls number on Friday, says James Knightley at ING Bank:
Looking to Friday’s payrolls figure, the ISM employment component has offered encouragement to us regarding our above consensus 210,000 prediction for job creation. This index rose to 49.7, up from 48.3, while also rising above the six month moving average of 49.4. With the consumer confidence report showing a marked pick-up in households feeling that jobs are “plentiful” the signs look pretty good for a decent rebound following a rather disappointing 151,000 gain last month.
Despite the ISM manufacturing data strengthening the case for the Federal Reserve to raise interest rates before the end of the year, analysts are divided about whether it will actually happen.
David Morrison, senior market strategist at Spreadco, said:
Last month the US manufacturing sector contracted for the first time in six months. It was one of the major data releases which led many commentators to doubt that the Fed would hike rates at its September meeting. Today’s release has gone some way to countering fears that the US economy isn’t as robust as the FOMC would like us to believe. In that respect, it strengthens the likelihood of a December hike. Later this week we’ll get an update on the services sector with Non-Farm Payrolls wrapping things up on Friday. If the data comes in better-than-expected, the we should see the dollar strengthen further.
But Paul Sirani, chief market analyst at Xtrade, said:
It has been a tough few months for US manufacturing, so Janet Yellen and her colleagues at the Fed will be happy to see an above expectations rise on the ISM PMI gauge for September.
The reading signifies a return to expansion for the manufacturing sector, and will provide another tick for the Fed’s widely-expected interest rate hike later this year.
However, that rate increase remains contingent on stable growth, and as we enter the final weeks of a highly contentious presidential election, unpleasant surprises could be just around the corner.
US manufacturing rebounds in September - ISM
If Markit’s survey is showing a slowdown in US manufacturing growth, then a second survey is more positive.
The Institute of Supply Management’s manufacturing index jumped to 51.5 in September, a turnaround from August’s surprisingly weak 49.4. Anything below 50 shows contraction, so the September figure shows a return to growth.
The outcome is better than the 50.3 expected by analysts. The new orders and employment indices were also higher than had been forecast.
Updated
Markit’s chief business economist Chris Williamson has a rather downbeat view on the US PMI data. He said:
Manufacturing growth slowed to a crawl in September, suggesting the economy is stuck in a soft-patch amid widespread uncertainty in the lead up to the presidential election.
The survey saw firms pulling back on expanding production and focusing instead on cost-cutting, as inflows of new business slowed to the weakest seen so far this year.
Any growth is largely being driven by the consumer, in turn helped by tail-winds of low interest rates, low inflation and a solid labour market.
Business spending, in contrast, is being subdued by the headwinds of uncertainty about the economic outlook, cost-driven inventory reduction and the strong dollar, the latter linked to yet another drop in exports.
Updated
US manufacturing dipped slightly in September but came in slightly better than initially anticipated.
In the first of two surveys, Markit’s final manufacturing PMI for September was 51.5 compared to the flash estimate of 51.4 and 52 in August.
Deutsche Bank’s US shares are currently down around 1.2% in early trading, as investors await any signs that a deal on its Department of Justice fine may be near.
Updated
Wall Street opens lower
US markets are on the slide in early trading, as investors await a spate of data this week, starting with manufacturing PMIs and culminating on Friday with non-farm payrolls.
With oil prices coming off their best levels, the Dow Jones Industrial Average has dropped around 70 points in early trading while the S&P 500 and Nasdaq Composite have both opened around 0.25 lower.
The fall on Wall Street has taken the shine off shares elsewhere, with the FTSE 100 off its best levels at 6971, up around 72 points.
Deutsche Bank's US shares down in pre-market trading
Deutsche Bank’s shares jumped on Friday on talk it may agree a deal with the US Department of Justice to pay a fine of some $5.4bn over mis-selling mortage bonds, rather than the $14bn initial demand.
There was even some talk of a deal coming over the weekend, given some plausibility by the fact that the bank’s chief executive John Cryan is in the US. Germany’s stock market is closed today for a holiday which would - the theory went - give some breathing space for a deal to be done.
But so far no announcement, so the bank’s US shares - also up sharply on Friday - are down around 1.8% in pre-market trading, according to Reuters.
And here is a sign of improvement in Asia:
PMI surveys show Asia #manufacturing has eked out its first quarterly growth in 1½ years. More here https://t.co/tNb4GNkbie pic.twitter.com/HainJU7ShL
— Chris Williamson (@WilliamsonChris) October 3, 2016
FItch cuts US growth forecast
Ahead of the latest US manufacturing data- which are expected to be fairly upbeat - ratings agency FItch has cut its forecast for the country’s growth this year.
In its latest bi-monthly Global Economic Outlook, Fitch says:
Downside risks to advanced country economic growth have risen in recent months... With populism gaining traction in many countries, the risk of political shocks adversely affecting the outlook for private investment has increased. At the same time, the capacity of central banks to engender stronger growth appears to be diminishing...
With eurozone growth looking likely to have peaked in early 2016 and no significant changes to Fitch’s UK and Japanese growth forecasts - despite significant monetary policy moves - the outlook for the advanced countries is best described as a low-growth, muddle-through path. Advanced country growth over 2016 to 2018 will be hardly any better than the lacklustre 1.5% annual average growth rate seen over 2011 to 2015. Moreover, downside risks to advanced country growth have increased.
“The rise in populism seen in many advanced countries could be a precursor to increased trade-protectionism and growing fragmentary tensions in the eurozone, both of which would increase uncertainty and damage prospects for private sector investment,” added [Fitch chief economist Brian] Coulton.
On the US in particular it says:
Fitch has revised down its forecast for US growth in 2016 to 1.4% in today’s Global Economic Outlook from 1.8% in the July [report].
“This year is likely to see the lowest annual growth rate for US GDP since 2009 as oil sector adjustments, weak external demand and the earlier appreciation of the dollar take their toll on industrial demand,” said [Coulton].
Fitch also believes central banks may be running out of ammunition:
Meanwhile, the capacity of central banks to counter adverse growth shocks may be falling. The implications of low and negative interest rates for bank profitability, the increasing complexity of central bank easing announcements, reductions in interest income for savers and market distortions are complicating the transmission of unconventional monetary easing to the economy. Furthermore, the historically unprecedented nature of negative nominal interest rates may be limiting the benefits of central bank easing announcements on inflation expectations.
Rising political pressures and concerns about the effectiveness of monetary easing have contributed to growing support among policy makers for fiscal stimulus as a means of restoring growth. A wider shift to fiscal easing is increasingly apparent in the numbers and while its effectiveness may be hindered in some countries by high and rising public debt levels, a co-ordinated fiscal reflation is likely to have growth benefits, at least in the short term.
The Fed is likely to be the only major central bank tightening monetary policy in the near term as it lays the groundwork for a December rate rise. With unit labour costs and core inflation measures suggesting underlying inflation close to the Fed’s target and the labour market holding up, the conditions look to be in place for a continuation of gradual normalisation in the Federal Funds Rate. The ECB is expected to extend its quantitative easing programme beyond its current scheduled end-date of March 2017, and will likely need to adjust the limits on bond purchases. The new monetary policy approach adopted by the Bank of Japan (BOJ) opens the door for further cuts in the policy rate, taking it deeper into negative territory. This will allow the BOJ to steepen the yield curve while it varies its asset purchases to hold 10-year JGB yields flat at around 0%. We now forecast the BOJ policy rate will fall to -0.5% by end-2017.
In the UK, the Bank of England’s (BoE) aggressive easing package in early August has had a positive impact on sentiment. With recent UK data slightly better than expected, the BoE is unlikely to follow through on forward guidance to cut rates again before year-end.
In emerging markets, Fitch sees signs of improvement:
Most importantly, China’s efforts to stabilise growth in the face of a sharp slowdown in exports and private-sector investment look to have gained traction. Russia’s economy looks to be stabilising after massive import compression, real wage adjustment and fiscal tightening saw domestic demand plummet in 2015. In Brazil, the impeachment of President Rousseff and installation of a new leadership team have renewed focus on fiscal reforms, which should support confidence and help the economy stabilise by year-end.
Summary: Factories fly, but pound slides
Time for a catch-up, as City traders scoff down a quick sandwich before facing another volley of economic data from across the Atlantic.
Exports, new orders and staffing levels all increased in September, as the weak pound helps firms sell overseas.
Economists broadly agree that UK manufacturing appears to be in decent health right now, and helped the economy grow in the last quarter.
Capital Economics, for example, say:
The Markit/CIPS manufacturing PMI for September showed that both the domestic and export-facing parts of the manufacturing sector are weathering the Brexit vote well. And the sector should contribute to an expansion in GDP in Q3.
In the Eurozone, Germany’s manufacturing firms also had a good month. France, Ireland and the Netherlands did less well, though, while Greece slipped back into contraction.
The pound has fallen by 1%, close to a 31-year low against the US dollar. The selloff was sparked by prime minister Theresa May laying out her Brexit plans. Analysts fear that sterling will remain weak, as the government appears to be heading towards a hard Brexit.
Currently, the pound is hovering around $1.288 against the US dollar - a three month low. It’s also close to the 31-year low struck in late June.
Sterling falls to within a cent of hitting its lowest level since 1985. pic.twitter.com/hxVbok61ee
— Jamie McGeever (@ReutersJamie) October 3, 2016
Sam Hill of RBC Capital Markets says the City is worried about the prospect of Smexit - or exit from the Single Market.
For businesses whose prospects are sensitive to the freedoms of Single Market membership, the Prime Minister’s broad message is the clearest signal yet that Brexit could force potentially significant changes to current arrangements with EU countries.
It is too soon to know whether or not successor arrangements will end up being better or worse for the UK’s prosperity in the long run. But, even if current economic data suggests economic performance is showing resilience to the referendum result, May’s stance is a reminder that uncertainties related to Smexit turbulence could be costly for the economy in the short run.
But London’s stock market is romping ahead, hitting a new 16-month high today. The FSTE 100 is up 83 points at 6982, as the weaker sterling pushes up the value of international blue-chip companies.
Other markets are calm, as traders take a day off worrying about Deutsche Bank’s negotiations with the DoJ over a multi-billion fine for misconduct before the financial crisis.
Henry Croft, research analyst at Accendo Markets, says:
Equities are making gains globally, with weakened Pound Sterling affecting play in the UK whilst subsiding fears about the size of the impending US DoJ fine for Deutsche Bank are helping global markets during a market holiday in Germany.
Updated
Greek media are now reporting that the government has banned the police from using teargas against pensioners, after today’s clashes.
Nektaria Stamouli of the Wall Street Journal tweets that the order came from prime minister Alexis Tsipras:
.@atsipras spoke w/t Min of Civil Protection after teargas against pensioners-Min. announces ban of teargas use in pensioners'workers rally
— Nektaria Stamouli (@nstamouli) October 3, 2016
AP has more details of today’s clashes:
Dozens of protesters at the front of the rally tried to break through a police cordon and chanted “Shame on you, shame on you!”
The protesters were trying to tip over a riot police bus when officers fired the pepper spray.
A moment when Greek pensioners tried to remove the police bus from the road via #Greece #Grčija #Athens https://t.co/lrPIUPAyZo pic.twitter.com/lgXkWkpDI5
— Katja Lihtenvalner (@Lihtenvalner) October 3, 2016
There’s not much cheer in Greece this morning, as the government prepares to present its 2017 budget to parliament.
First up, Markit reported that Greece’s manufacturing sector shrank in September - after posting some much needed growth in August.
The manufacturing PMI fell to 49.2 points last month from 50.4 in August, indicating activity contracted.
That won’t help Athens hit its growth and fiscal surplus targets, set with its lenders in return for a third bailout.
Meanwhile on the streets, Greek pensioners have scuffled with riot police during a protest against pension cuts. Local media report that the police fired pepper spray at the crowds.
James Knightley of ING also believes there is “significant doubt” that the Bank of England will cut interest rates at its next meeting, in November.
It all depends on the economic data, including a healthcheck on the dominant services sector on Wednesday.
We will see later this week if the (much larger) service sector is rebounding to the same extent. If not...then there remains a case for further BoE stimulus later this year.
However, if the service PMI does indeed improve then it is looking as though the BoE will hold off until the new year and it will be up to Chancellor Philip Hammond to provide some medium to longer term fiscal support in November
Today’s strong-looking manufacturing data gives the Bank of England lots to think about.
BoE policymakers may feel they deserve some credit. They rapidly slashed interest rates and boosted its stimulus programme after the Brexit vote, in an attempt to prop up confidence.
But...if that plan is actually working, there’s less justification for another cut in borrowing costs, from 0.25% to just 0.1%.
Economist Rupert Seggins tweets:
More like this & the BoE may not only have to stave off another cut but also reset policy to where it was before the referendum. https://t.co/4AFjSfqT6p
— Rupert Seggins (@Rupert_Seggins) October 3, 2016
Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, is encouraged that Europe’s factory sector posted faster growth last month too (see earlier post for details).
“Today’s expectation–busting surge in manufacturing activity points to conditions across industry being considerably better than business as usual, with expansion in output and new orders in all industry segments boding well for growth in the second half of this year.
“The UK is not alone in seeing positive manufacturing indicators this month with solid gains in the eurozone suggesting there is some momentum building behind the manufacturing recovery in developed economies. While UK exporters have the added boost from the weaker exchange rate, it’s the prospect of brighter demand prospects that provides confidence that growth will hold up.”
Today’s PMI report is the latest sign that Britain’s economy didn’t shrink after the Brexit vote, says Sky News’s Ed Conway.
Yet more evidence that UK economy not in recession: manufacturing PMI jumps to highest level since June 2014(!) pic.twitter.com/LAaOKejPnk
— Ed Conway (@EdConwaySky) October 3, 2016
A weak currency may be good for exports, but it also pushes up the cost of imported goods.
And today’s report shows that UK manufacturers are having to pay more for raw materials from overseas, and – importantly – passing some of the bill onto their own customers.
Markit says:
Higher import costs, a by-product of the weak exchange rate, led to a further substantial increase in average purchase prices in September. Manufacturers passed on part of the rise to clients in the form of higher charges.
Output price inflation remained well above the series average.
Sterling tumbled by over 10% after the EU referendum, and has struggled to recover any ground since. This chart shows how this quickly hit factories in the pocket:
Not everyone is convinced that Britain’s factory sector has entered the sunlit uplands of prosperity and growth.
Shannon Murphy, manufacturing specialist and assistant head of risk underwriting at Euler Hermes (the trade insurance group) says UK manufacturing still faces challenges:
“Pent up order books from before the EU referendum provided a late summer boom that has glossed over the more modest reality facing manufacturers.
“Confidence remains thin on the ground. Most management teams are more concerned with protecting margins and avoiding payment issues, rather than exploring growth opportunities.
“Rising staffing levels indicate that firms are not expecting a significant slump, but increasing import costs are putting up barriers to growth and inflating end-user prices.”
Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Banking, says UK factory bosses have responded well to the Brexit vote:
“British manufacturers have used their agility and experience to build momentum during a period of uncertainty, growing their order books in a time when others have put expansion plans on hold.
After its early wobble, the British pound is doing its best to recover. But despite the strong factory growth, sterling is still down around one cent at $1.288 - a three month low.
£/$ bounces off lows after PMI manufacturing data comes in way stronger than expected...55.4 = highest reading since June 2014 pic.twitter.com/A45LxXGDSd
— Caroline Hyde (@CarolineHydeTV) October 3, 2016
Mike Rigby, head of manufacturing at Barclays, says the jump in UK factory output last month is encouraging:
“Manufacturers continue to show their grit following the Brexit vote with today’s figures reporting increasing output and a healthy flow of new orders for September.
Moreover, exporters continue to step up activity to make the most of the weak pound although the flip side of that coin is that rising input costs will have to be absorbed somewhere. We can now expect the sector to be looking increasingly towards November’s Autumn Statement to see how the government proposes to bolster industry and the UK economy.”
Today’s forecast-smashing data shows that Britain’s factories are benefitting from the slump in sterling since June’s referendum.
So argues Rob Dobson, senior economist at IHS Markit:
“September saw the UK Manufacturing PMI rise to its highest level since mid-2014, recovering further from its EU referendum inspired low in July. The rebound over the past two months has been encouragingly strong, and puts the sector on course to provide a further positive contribution to GDP in the third quarter.
“The weak sterling exchange rate remained the prime growth engine, driving higher new orders from Asia, Europe, the USA and a number of emerging markets. The domestic market is also still supportive of growth, especially for consumer goods. Further step-ups in growth of new business and output in the investment goods sector may also be a sign that capital spending is recovering from its early year lull, in the short term at least.
UK factories post fastest growth since June 2014
Hold onto your hats, folks. Britain’s factory sector has just posted its strongest growth in over two years.
The latest manufacturing healthcheck, from Markit, shows that export orders jumped at their fastest rate since January 2014. That suggests the weak pound is helping UK firms sell their goods overseas.
Factories also took on more workers, with employment rising for the second straight month.
Markit says that:
Job creation was linked to increased capacity requirements, new order growth and the launch of new product lines.
This drove the UK manufacturing PMI up to 55.4 in September, up from 53.4 in August. That’s the highest since June 2014.
It’s the latest sign that the June EU referendum has not sent the UK economy into a recession.
Firms reported that production grew at its fastest pace since May 2014 - led by the consumer goods sector.
Reaction to follow....
Updated
That strong eurozone factory data, plus the impact of the weak pound, has driven Britain’s FTSE 100 even higher:
The pound, though, continues to suffer a bad morning - hitting a three-month low against the US dollar.
Conner Campbell of City firm SpreadEx comments:
Plunging 1% against the dollar and 0.9% against the euro, sterling has been spooked by May’s promise to trigger the dreaded Article 50 by the end of March 2017. Not only that, the PM has also put her weight behind a ‘hard Brexit’ to appease the more rabid members of the Tory party, something that is set to cause conflict between her and her backbenchers. Combine all this volatility together and the pound has been left at its worst price since the start of July.
For the FTSE, on the other hand, sterling’s slump is merely another reason to climb higher.
Eurozone factory output surges despite Brexit fears
Newsflash: The Eurozone’s factory sector picked up pace in September, as the Brexit shock faded away.
A new survey from Markit, the data provider, shows that manufacturing activity jumped last month - mainly driven by Germany.
In an encouraging sign, output, new orders, new export business and employment all improved during the month.
This pushed up Markit’s manufacturing PMI (a measure of activity) up to 52.6, from 51.7 in August. That shows that growth accelerated.
However, growth slowed in the Netherlands and Ireland - and France suffered another (small) contraction.
Chris Williamson, Chief Business Economist at IHS Markit, says the eurozone manufacturing sector expanded at an “encouragingly solid pace”
“Production gains are being driven by welcome signs of improving demand from both within the region and from wider export markets.
”For a region beleaguered by still-high overall unemployment, the fact that the upturn is generating more jobs is especially good news. The latest rise in factory payroll numbers was one of the best seen over the past four years.
However, the upturn is “worryingly uneven”, reliant on a ‘core’ centred on Germany and its neighbours.
German manufacturers reported their second-best month for two-and-a-half years, with strong performances also seen in the Netherlands and Austria.
“In contrast, growth remains far weaker than earlier in the year in Spain, Italy and Ireland, while manufacturing in France continues to decline. Greece has meanwhile also slipped back into contraction. Policymakers will nevertheless at least be pleased to see survey indices coming off their recent lows in Spain, Italy and Ireland.”
Updated
FTSE 100 hits new 2016 high
Shares are rallying in London this morning, as traders start the final quarter of 2016.
The blue-chip FTSE 100 has gained 57 points in early trading to 6956.
That’s a new 16-month high!
Internationally-focused companies are leading the rally, as they get a lift from the weaker pound (it makes their exports more competitive, and their foreign earnings more valuable in sterling terms).
So, it’s no surprise to see oil group Royal Dutch Shell and pharmaceuticals firm Hikma among the risers.
But.... the smaller FTSE 250 index, which contains more UK companies, is also having a good morning. It’s up 129 points, or 0.7%. That’s partly due to a 17% surge from Henderson, the fund manager, which announced a shock merger with asset manager Janus this morning.
Bill Gross' Janus Capital to merge with Henderson, creating a $320bn giant https://t.co/BWy3g3hf3F pic.twitter.com/BZ6XTIx2QQ
— City A.M. (@CityAM) October 3, 2016
Updated
Follow the Tory conference here
The pound’s weakness is casting a shadow of the Tory party conference, as delegates convene for the second day of their Birmingham shindig.
And as we like to spoil you, here’s Andy Sparrow’s Politics Live blog, with all the latest developments:
Sterling selloff worsens
Boom! The pound just hit a new three-year low against the euro, at 87.34p, as the selloff intensifies.
It just hit a three-month low against the US dollar too, at $1.2845.
Traders are reacting to Theresa May’s Brexit strategy, and the potential economic cost of exiting the single market by 2019.
Marc Ostwald of ADM Investor Services says:
The Tory party conference is the main item on the policy events agenda. The weekend announcement that Article 50 will be triggered by March 2017, and that there will be an omnibus bill to repeal EU laws and convert them into UK laws confirms that the ‘phoney war’ is now effectively over.
British Lira sinks to below 1.29 vs USD pic.twitter.com/Pam9gDHw7x
— Alberto Gallo (@macrocredit) October 3, 2016
The City is also waiting to hear chancellor Philip Hammond’s conference speech this lunchtime.
He’s expected to pledge to deliver ‘fiscal discipline’, even as he (probably) abandons the goal of a surplus this parliament.
There appear to be only two Brexit certainties: Brexit does indeed mean Brexit ... and a weaker pound. Sterling hits 7-week low below $1.29. pic.twitter.com/rBF73qvqLt
— Jamie McGeever (@ReutersJamie) October 3, 2016
Theresa May's article 50 pledge: What the experts say
The prime minister’s pledge to make a clean break from the EU, starting in March 2017, has electrified the City this morning.
Many experts are warning that the pound could suffer further losses in the run-up to Christmas.
Kathleen Brooks, research director at City Index, says there is still uncertainty over Britain’s future relationship with the EU, and over how the exit will be handled.
While May suggested that the UK would shift away from the single European market, she did not mention what it will be replaced with, or how the UK will negotiate new trade deals with Europe and the rest of the world.
May’s speech seems to suggest that the UK’s prime minister is content with winning back the UK’s “sovereignty” at the cost of a period of economic disruption, which is likely to be negative for the pound. While sustained pound weakness may be less fierce than it has been in recent months – sterling had its worst quarterly performance between June and September since 1984 - we continue to think that the balance of Brexit talk remains bearish for the pound, and sterling could remain unloved into the end of this year.
Kit Juckes of French bank Societe Generale confirms that May’s promise to trigger Article 50 by the end of Q1 2017 has hurt the pound, but adds:
Absolutely no-one is going to change their view of the UK economy, sterling or the wider implications of ‘Brexit’ until there are mountains of evidence about the economic impact.
Sunny, autumnal, with a Brexit chill settling over London. £ down small, Asian stocks up small, PMI-watching day + politics + banks as usual
— Kit Juckes (@kitjuckes) October 3, 2016
The pound has also hit a seven-week low against the euro, at 87.18p. That’s a drop of 0.6% this morning.
Pound falls to $1.29 as traders fear Brexit turbulence
Brexit worries have pushed the pound back towards the 31-year lows plumbed in the aftermath of June’s referendum.
Sterling has lost over half a cent in early trading, dropping to £1.2902 against the US dollar. That’s the lowest level in seven weeks.
That follows yesterday’s surprise news that article 50 will be triggered within six months.
Traders are also reacting to Theresa May’s declaration that she wants a clean break from the European Union, with full control of immigration and an end to the jurisdiction of the European Court of Justice.
This is being interpreted as leading to a ‘hard Brexit’, in which Britain would also leave the singe market - meaning significant disruption for the City.
Hussein Sayed, chief market strategist at currency trading firm FXTM, predicts months of lively trading in the foreign exchance markets.
Teresa May announced on Sunday that U.K.’s divorce from the EU will start within 6-months. Article 50, the official notification to Britain’s partners will be triggered before the end of March 2017, which gives another two years to agree on the terms of the most complicated divorce in recent history.
The pound’s imminent reaction was a drop of 0.5% against the dollar in early Asian trading session, nothing compared to the 11% freefall after U.K.’s vote to leave the EU on June 23. Now with the timeline being set, the negotiation of the terms will be a key driver for sterling going forward, but I expect it to be rough ride in the next few months.
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The Agenda: Hard Brexit, Deutsche Bank, and Factory PMIs
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Just three months to go until we consign 2016 to the history books, and investors have lots to worry about.
1) Britain’s exit from the EU became rather more real yesterday, after Theresa May announced she would trigger article 50 by March 2017. The PM also appeared to throw her weight behind a so-called ‘Hard Brexit’, meaning the UK could leave the single market in two years.
Our Politics team report that some Conservative MPs will be pushing for a softer Brexit instead; meaning more uncertainty over the whole thing.
2) Deutsche Bank faces another crunch week in its battle to secure its future. There’s no word, yet, on whether it has managed to haggle down that $14bn fine from the DoJ.
Over the weekend, top German business leaders rallied behind the company, with some accusing America of “economic warlike traits”. It looks like talks are continuing between the two sides over a final deal.
3) We get a new healthcheck on the European economy this morning, with the latest manufacturing PMIs. They’re expected to show that factory output continued to grow in September, as Brexit fears dissipate.
Britain’s manufacturing survey, due at 9.30am BST, will be particularly closely watched. Its expected to show that growth slowed last month, with the PMI dropping from 53.3 to 52.1.
Consensus forecasts suggest that manufacturing activity in the UK remained in expansion territory in September, slower than August.
— Tim (@TimCIIA) October 3, 2016
We’ll be tracking all the main events through the day....
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