Afternoon summary: pound pummelled again
Time for a quick recap.
Growing anxiety over the UK’s EU referendum has driven sterling down to a new seven year low. The pound fell as low as $1.3879, as cabinet ministers clashed over the legal strength of Britain’s new deal with Europe.
Investors are also scrambling to protect themselves against fresh volatility ahead of the June referendum. The cost of insuring against sterling volatility has hit its highest level since 2011.
IMF chief Christine Lagarde has warned that Britain, and Europe, would bother suffer if the UK quits the EU. She fears that the uncertainty will hurt growth, at a time when the world economy is already fragile.
The Fund also cited June’s referendum as a potential threat to the UK’s recovery.
Several other City bosses have warned against Brexit. Ryanair, the budget airline, has even pledged to campaign actively to keep Britain inside the EU.
HSBC has predicted that the pound would slump by 20% in the event of a Brexit vote. It also warned that growth would fall sharply, with the housing market and the banking sector also vulnerable.
Updated
On top of Lagarde’s remarks, the IMF has also cited the Brexit referendum as a risk to the UK recovery.
In a note issued today, the Fund took a broadly positive view of Britain’s economy. It said “considerable progress has been achieved in the post-crisis repair of the UK economy”, citing the halving of the deficit and the steady fall in unemployment.
The Fund also expects the UK to keep growing, saying:
With the output gap now nearly closed, growth is expected to average near its potential rate of around 2¼ percent over the medium term, with inflation rising slowly from its current low levels to the 2 percent target by end-2017.
However, this benign baseline is subject to risks, it adds --including the threat of global financial turmoil, the UK’s current account deficit, and the possibility that productivity remains weak.
Plus the Brexit threat.
As the Fund puts it:
Uncertainty associated with the outcome of the forthcoming referendum on EU membership could also weigh on the outlook. Continued efforts are needed to complete the post-crisis repair, promote growth, and further bolster resilience.
Lagarde: Brexit would be negative for UK and EU
Christine Lagarde, the head of the International Monetary Fund, has just weighed in on the EU referendum.
And she’s not a fan of Brexit, warning that Britain and the EU would both suffer.
Speaking to CNN, Lagarde said:
“Uncertainty is bad in and of itself.
No economic player likes uncertainty. They don’t invest, they don’t hire, they don’t make decisions in times of uncertainty.”
Lagarde also argued that Britain had benefitted from trade and financial ties with EU, and from migration of workers back and forth.
She didn’t say how much damage would be caused by Brexit, though.
“My hunch ... is that it is bound to be a negative on all fronts.
For those that stay, because there are fewer of them, and for those who go, because they lose the benefit of [that] facilitation of exchange.”
Lagarde on a potential #Brexit --> "My hunch is that it is bound to be a negative on all fronts" https://t.co/JNOomSOv4P
— Bianca Facchinei (@BiancaFacchinei) February 24, 2016
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Yuk. Two pieces of rather grim economic data just landed from America, showing that its economy may be weakening.
First, data firm Markit has reported that activity across the US services sector is contracting, for the first time in 14 months.
Its PMI reading, which monitors thousands of firms, has fallen to 49.8 - just below the stagnation point. Analysts expected a reading of 53.5.
Recession alert: US services sector contracts in February for first time since Oct 2013, according to Markit PMI flash estimate.
— Jamie McGeever (@ReutersJamie) February 24, 2016
Markit’s #PMI shows significant risk of US economy falling into contraction. Full analysis: https://t.co/usD7YYrXsC pic.twitter.com/pjijgDOtzq
— Markit Economics (@MarkitEconomics) February 24, 2016
Secondly... new home sales across the US slumped by over 9% in January to a seasonally adjusted annual rate of 494,000.
January’s figure was the lowest since October and missed forecasts of a 520,000 annual rate from economists surveyed by MarketWatch. It was 5.2% lower than the same period a year ago.
The US stock market is following Europe lower, as Wall Street trading begins.
The Dow Jones industrial average has lost 1.1%, or 184 points. at 16,247 points.
Investors are disappointed to see the oil price sliding today - US crude has lost 3.7% to $30.69 per barrel, after Saudi Arabia dismissed the possibility of a production cut.
Opening Bell » US stocks open lower oil slides 3.8% https://t.co/UX23M9rj9x pic.twitter.com/ZsQwNfKQ6k
— CNBC Now (@CNBCnow) February 24, 2016
Ryanair is already cracking on with its campaign to keep Britain in the EU:
Ryanair has a somewhat patchy reputation for customer service - despite a recent commitment to be nicer to the punters.
So it’s not clear that O’Leary’s intervention will have a dramatic impact on the referendum. At least, not the way he hopes....
@graemewearden Great, I might have to reconsider my yes vote now.
— cordial (@cordial) February 24, 2016
@graemewearden Getting more even: Farage+Galloway vs O'Leary
— grodaeu (@grodaeu) February 24, 2016
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Ryanair; We'll campaign to keep Britain in the EU
Breaking news: Ryanair, the budget airline, has called for a “Big Yes vote” to stay in the European Union, in the June referendum.
Ryanair also says it will “actively campaign” for Britain to Remain in the EU.
In a statement released to the City, the airline says it supports Britain’s membership of the EU because:
- this will lead to more UK jobs & better economic growth
- EU open skies has transformed UK tourism & job creation prospects
- the free movement of goods & services has made the UK one of Europe’s most competitive & best performing economies
- David Cameron’s negotiated reforms protect Sterling, limits immigration and closer Union, while reducing bureaucracy
- foreign inward investment in the UK will be lost to Ireland & Germany if the UK leaves Europe
CEO Michael O’Leary says that Ryanair believes the UK’s economy and its future growth prospects are better inside the EU, not outside.
Leaving Europe won’t save the UK money or red tape because like Norway the UK will still have to contribute to Europe, and obey its rules if it wants to continue to trade freely with Europe, so it’s clear that UK voters should vote Yes to Europe and Yes to the reformed Europe, that David Cameron has delivered.
Ryanair, our people and I hope the vast majority of our customers, will all work together over the coming months to help deliver a resounding Yes vote on June 23rd.”
However, O’Leary has also said that Brexit wouldn’t drive up air fares....
Breaking: boss of @Ryanair tells @itvnews "I don't believe leaving the EU will cause airfares to rise" Although he doesn't want Brexit.
— Joel Hills (@ITVJoel) February 24, 2016
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The London stock market is falling in sympathy with the pound.
The FTSE 100 is now down by 95 points at 5867, a one-week low.
Conner Campbell of Spreadex, the City trading firm, says a volley of Brexit warnings have helped to push shares down.
Warnings from a variety of sources, including HSBC (here), Sir Martin Sorrell (here), Airbus (here) and hedge-fund Man Group (here), about the pound-plaguing, growth-sapping issues the UK would suffer if the ‘out’ vote prevails in June’s referendum have only exacerbated the nascent jitters that appeared during yesterday’s trading, helping send the FTSE nearly 80 points lower.
If anything the Eurozone indices were even nervier than their UK counterpart, the DAX and CAC plunging 230 and 90 points respectively. Of course the main causality in the increasingly heightened debate over Britain’s place in the EU is sterling, the currency hitting levels not seen since March 2009
Cabinet split hits sterling.
The pound is continuing to slide today, as Conservative ministers clash over the EU referendum.
It just fell below $1.39 for the first time since March 2009, a drop of 0.9% or 1.2 cents since last night.
Sterling has hit a 16-month low against the euro too; at €1.2659. That means one euro is now worth 79.06p.
We can’t put ALL the blame on the EU referendum. Traders are also calculating that the Bank of England may cut interest rates to fresh record lows this year, given the weakness in the global economy.
But Alex Edwards, currency analyst at UKForex, says Brexit is a major factor.
He explains:
Brexit headlines are hitting sterling hard, with talk of a Cabinet split weighing heavily on the pound.
It’s going to be a very bumpy ride for sterling in the run up to June’s referendum, and we can expect new lows and increased instability as the rhetoric heightens, polls are released and rumours abound.”
That cabinet split involves Michael Gove, the justice secretary (and Out campaigner).
Gove claimed this morning that the deal agreed between Britain and Brussels isn’t legally binding as it hasn’t (yet) been included in an EU treaty.
Attorney general Jeremy Wright has now weighed in, saying Gove is wrong.
But some legal experts have suggested Gove has a point.
Gove is correct; Number 10 is not.
— David Allen Green (@DavidAllenGreen) February 24, 2016
Nothing in the deal is, by itself, binding. https://t.co/ki2EmR1PIj
Our Politics Live blog has all the action:
WPP chief says Brexit is a "black hole"
Britain’s most powerful marketing and advertising boss has warned that the EU referendum is spooking his clients, and could force him to move some operations abroad.
Sir Martin Sorrell, the head of WPP, says Britain faces “a period of unstability and uncertainty” ahead of June’s vote, and confidence is already being hit.
Speaking on Bloomberg TV a moment ago, Sorrell said he shared concerns over the extent of EU bureaucracy. However, he is still worried about the consequences of an Out vote, calling Brexit a “black hole”.
Sorrell said:
I think it is really important to be inside the tent, trying to reform and change Europe, rather than being outside the tent in a completely unknown situation, where it will be very hard for several years to work out Britain’s role in the world.
WPP’s clients are “at best neutral, and at worst highly negative” about the referendum, he continued.
Clients will be postponing investment decisions, postponing trade decisions and considering alternative scenarios - like we all are - about what we will do if the country decides to leave the EU.
So are you considering moving your HQ, asks Bloomberg’s Francine Lacqua.
We are examining the implications of a negative vote, Sorrell replies.
He suggests that the terms of Britain’s relationship with Europe would be critical, saying:
The thing that worries me most is that our biggest trading block, whether we like it or not, is Europe.
Its GDP is roughly equivalent to the United States...If access to that is restricted, or limited, that will exacerbate the issues.
German is WPP’s 4th largest market, while France is the 7th. They, along with Italy and Spain, are all “pretty critical”, said Sorrell, concluding:
Any structural change [in Britain’s relationship with Europe] will force us to look very closely at how we are organised.
The Brexit uncertainty isn’t helping the mood in the City today.
Europe’s stock markets are all in the red this morning, as investors get another bout of jitteriness over the global economy.
The oil price has fallen by 2%, after the latest rumours of an OPEC production cut were punctured yesterday.
In London, the FTSE 100 (the largest blue-chip companies) has lost 73 points or 1.2%, dragged down by mining stocks.
Ipek Ozkardeskaya of London Capital Markets says the bears are on control this morning.
All sectors are trading in the red. Materials and energy stocks lead losses in London given that oil and commodity prices face rising selling pressure.
US oil gave back the $2 it gained yesterday as Iran called the Saudi-Russia agreement to freeze production ‘ridiculous’ and Saudi Oil Minister made it clear for everybody: there will be no such thing as a production cut. Hence the possibility of a slide to $25 could be kept on the table.
Andy Scott, economist at currency firm HiFX, confirms that the pound is suffering from Brexit fears again.
He says:
“Sterling fell to a fresh 7-year low against the Dollar on Wednesday, below the psychologically important $1.40 level, as polls remained tight over the outcome of June’s EU referendum.
With investor sentiment souring again after oil prices retraced gains made at the beginning of the week, Sterling once again came under pressure due to the risk of a ‘Brexit’.”
Scott reckons that the pound could soon fall towards $1.35, last seen in the early months of 2009 during the financial crisis.
Airbus, the planemaker, says it doesn’t believe its UK operations would benefit from Britain leaving the EU.
Tom Enders, chief executive of Airbus, told a news conference this morning that:
“If Britain leaves, I cannot imagine that this would have positive consequences for our competitiveness in Britain.”
Some firms are treading cautiously over the Brexit question, for fear of upsetting customers [the supermarkets have been particularly tight-lipped].
But Airbus - which is headquartered in France - is less reticent. Yesterday it hosted senior Labour MP Alan Johnson, who gave a speech warning that 50,000 engineering jobs could be lost if Britain quits the EU.
Updated
Here’s another slide from today’s HSBC’s note on the UK’s EU referendum:
Updated
Another seven-year low....
The pound has just fallen to a new seven-year low, hitting $1.3926 against the US dollar.
HSBC warns on Brexit perils
Investment bank HSBC has issued a stark warning about the impact of Brexit on the UK economy.
In a new research note, HSBC predicts that the pound would tumble, and the economy would grind to a near-standstill next year. It also fears that banks would face new pain, and that London’s property market would suffer too.
Here’s the key points:
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Sterling could lose 20% of its value against the US dollar. That would send the pound towards $1.10, a level not seen since 1985 (the year of the Miners’ Strike, and the launch of the battery-powered C5 vehicle).
-
UK growth would slow sharply. HSBC sees 1.5 percentage points being knocked off the GDP growth rate in 2017. That would wipe out almost all the expected growth.
-
Inflation would spike. Imported goods would be more expensive, due to the weak pound, and the Bank of England would be reluctant to raise interest rates.
HSBC on Brexit scenarios:
— Jamie McGeever (@ReutersJamie) February 24, 2016
Sterling -20% vs dollar
GDP growth -1.5pp
Inflation +5pp
BoE could cut rates
HSBC says:
Our central case in the event of a vote for Brexit is that uncertainty grips the economy. This could take around 1.0-1.5 percentage points off the GDP growth rate by the second half of 2017. This would push our 2017 growth forecast, currently 2.3%, into the 0.8-1.3% range.
And if sterling were to fall by around 15-20% (as our currency strategists predict), UK inflation could rise by up to 5 percentage points (our end-2017 inflation forecast is 1.8%). In the event of a vote for Brexit, concerns about deflation could swiftly give way to worries of stagflation.
HSBC’s analysts also predict that some UK firms could struggle to attract qualified staff from overseas if the Out campaign win, as this chart shows:
Updated
Sterling volatility hits four and a half-year high
The cost of protecting against sharp swings in the value of the pound has jumped, to the highest level since 2011.
The move suggests heightened concern over the strength of sterling, and the possibility of significant volatility over the next few months.
Reuters has the details.
Six-month implied sterling/dollar volatility, derived from options that cover the June 23 referendum date, hit 13.35% on Wednesday as investors sought protection against further big falls in the pound.
That was its highest since September 2011.
A leading City hedge fund manager has warned that Britain could face serious repercussions if it leaves the EU.
Manny Roman, chief executive of the London-listed hedge fund Man Group, cautioned that:
“Whilst it is hard to say exactly what the impact would be, the uncertainty and potential negative consequences of Brexit for the UK’s economy should not be underestimated.”
Worth noting that the pound is holding up better against other currencies, rather than the US dollar.
Sterling is only at a two-year low on a trade-weighed basis (against a basket of currencies). That’s partly due to the relative weakness of the euro, which is likely to also suffer from a Brexit.
For all the bluster of a weak pound, GBP is still above its trade-weighted average since the beginning of the GFC pic.twitter.com/zV4r05UBS9
— World First (@World_First) February 24, 2016
Jeremy Cook of FX firm World First also fears the pound will keep falling:
There are a lot of news pieces floating around this morning asking how low can the pound actually fall?
“How low can X go?” pieces are normally a sign of a bottom but you’d be a braver man than I to begin betting on an immediate bounce back for the pound.
There’s a few reasons why Brexit would be bad for the pound:
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The uncertainty and disruption of an Out vote would hit growth. That would mean interest rates would remain at record lows for even longer, meaning a lower return for holding sterling.
- Some investors would sell UK assets and pull out of the country. These capital outflows would weaken the pound (as those investors would be exchanging sterling-denominated assets for another currency).
- Brexit might intensify concerns over Britain’s current account deficit - the gap between what Britain buys and sells to the rest of the world. Currently, that deficit is financed by borrowing, and by selling assets to foreigners.
A weak pound isn’t a complete disaster, though. It should give a boost to exporters and the UK tourism industry, and would also push up the cost of imported goods.
A poll of City economists has found that most expect the pound to suffer steep losses if Britain votes to leave the EU:
How Low Could Pound Go in a #Brexit? Economists See 1985 Levels. https://t.co/IEO70TgrKP pic.twitter.com/9XBvdnlUVA
— Holger Zschaepitz (@Schuldensuehner) February 24, 2016
Could sterling hit a 30-year low?
This morning’s selloff means the pound has now lost four cents, or over 3%, since David Cameron secured his new settlement with the EU on Friday night.
Many analysts believe it could keep falling, perhaps as low as $1.30.
That would take the pound through its 2009 low ($1.35), to hit its lowest level since the sterling crisis in 1985, in the middle of Margaret Thatcher’s premiership.
Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam, has predicted that the pound would slump to $1.20 if the British public choose to exit the EU.
He told Bloomberg that:
“A vote for Brexit would hit sterling hard.”
Introduction: Pound falls below $1.40
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Fear and uncertainty over Britain’s upcoming EU referendum continue to loom over the City today.
The pound has taken another dive - dropping below the $1.40 mark for the first time since March 2009.
At one point, sterling was as low as $1.3962, on concerns that the Out campaign will win on 23 June.
Pound Weakens Below $1.40 for First Time Since March 2009 pic.twitter.com/dSN1dMT5PJ
— Francine Lacqua (@flacqua) February 24, 2016
Chris Weston of IG reports that international investors have been very keen to buy and sell ‘cable’ -- City jargon for trading the sterling/US dollar.
The Remain campaign is tipped to win in June, but the possibility of a shock result is causing angst in the international markets.
Weston explains:
The market is pricing in around a 40% chance of ‘Brexit’ and the bookies slightly less.
However, if we do see an exit, it promises to get very messy indeed, specifically given the current positioning within the Tory party and the fact the party will effectively be all over the place.
Yesterday, Bank of England governor Mark Carney warned that there was heavy demand for protection against the pound tumbling further this summer.
We’re expecting to hear from budget airline Ryanair about the Brexit issue today, at a noon briefing.
And European stock markets are expected to dip, adding to yesterday’s losses. Britain’s FTSE 100, which lost 75 points on Tuesday, is tipped to lose another 16 points.
Our European opening calls:$FTSE 5947 down 16
— IGSquawk (@IGSquawk) February 24, 2016
$DAX 9394 down 23
$CAC 4226 down 13$IBEX 8242 down 26$MIB 17118 down 45
We’ll be tracking all the main events through the day.....
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