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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound recovers from $1.20 tumble as government loses majority - as it happened

Gloomy OutlookCity trader with hands on head looking out over the city.
City investors fear that a no-deal Brexit is becoming more likely Photograph: coldsnowstorm/Getty Images/iStockphoto

Summary

Time for a recap.

Rising anxiety over Brexit and the possibility of a snap general election have sent the pound spiralling towards a 34-year low today.

Sterling suffered a sharp early selloff, dropping by a cent against the US dollar to just $1.1959. That’s the weakest level since a notorious flash crash in October 2016, and the weakest since 1985 in regular trading.

The slump came amid fears that Britain could crash out of the EU without a deal on 31 October. MPs are trying to block a no-deal tonight, which could prompt the government to push for a general election in the middle of next month.

But after a grim start, the pound has actually recovered this afternoon after Boris Johnson lost his majority in parliament.

The pound vs the US dollar today

Sterling bounced back as Conservative MP Phillip Lee crossed the floor of the House of Commons to join the Liberal Democrats.

It’s now up 0.2% today at $1.2090, after a wild day that left traders gasping for breath (and possibly a swift drink on the way home).

Sterling also had a wild ride against the euro, falling to just €1.0932 before bouncing back over the €1.1 mark.

City experts warned that the pound will remain volatile while the political crisis played out. JP Morgan advised against holding large positions in sterling, while Royal London Asset Management predicted the pound would rise if the Liberal Democrats helped form a new coalition.

Goldman Sachs warned that the risk of a no-deal Brexit has risen, but there’s still a possibility that Britain doesn’t leave the EU at all.

The 20% slump in the pound since the EU referendum has encouraged overseas investors to buy UK assets, new data showed.

Britain’s building sector has suffered a harsh Brexit shock. The latest manufacturing PMI showed that activity shrank again, with new orders tumbling at their fastest rate in a decade.

Our Politics Live blog will have all the action from Westminster tonight, as a crunch week for the UK’s future heats up.

After a turbulent day, the FTSE 100 share index has closed just 13 points lower at 7268, a drop of 0.2%.

UK-focused companies, who are vulnerable to a no-deal Brexit, had a poor day.

Housebuilder Persimmon lost 2%, airline group IAG fell by 1.7%, and Lloyds Banking Group fell by 1.5%.

Multinational companies, who earn much of their money in foreign currencies, did better. Silver miner Fresnillo rose by 2.4%, while chemicals firm Johnson Matthey gained 1.5%.

Updated

As a rule, political instability isn’t great for currencies. But today, the news that Boris Johnson has parted company with his majority has pushed the pound higher....

The pound has now recouped all today’s losses, just as Boris Johnson loses his majority in parliament!

Sterling is back at $1.207, where it ended last night.... just as Philip Lee MP dramatically leaves his seats among the government benches and joins the opposition Liberal Democrats.

That means Johnson’s majority has evaporated, even with the deal with the DUP party.

Heads-up: Boris Johnson is about to update MPs about the recent G7 summit. Our Politics Live blog has all the action.

Ouch! A second survey of America’s factories is even more grim.

The Institute of Supply Management have just reported that US manufacturing actually shrank last month - joining the wider global slowdown.

Bosses interviewed for its PMI report found a sharp fall in new orders last month.

This is providing the pound with some much-needed support! The dollar is sliding, pushing sterling up to $1.205. But today’s Brexit debate, and vote, could change that.....

Elsa Lignos of Royal Bank of Canada has drawn up this flowchart, outlining how the UK’s political crisis could play out.

Brexit scenarios

She argues that a snap election before 31 October would cut the chances of a no-deal Brexit, and would thus be good for the pound.

Assuming a 50/50 coin toss for who wins the election (so much will depend on alliances so it’s the most neutral assumption for now), a Labour-led government would open the way to the most GBP-positive scenario for Brexit (a second referendum – which we expect would be precondition from LibDems to offer their support).

But what about the theory that markets would tumble if Jeremy Corbyn became prime minister, and pushed a left-wing agenda of nationalisation and wealth redistribution?

Lignos reckons Brexit is the bigger issue.

While we hear a lot of worry on how GBP-negative a Labour-led government would be because of Corbyn’s policies, Labour’s chance of winning an outright majority seems vanishingly slim.

Also most clients we speak to prioritise outcome on Brexit over Corbyn’s impact on domestic policy if governing in a coalition.

In other news, Donald Trump’s trade war appears to have driven growth across America’s factories down to a 10-year low.

Data firm Markit reports that US manufacturing barely expanded last month -- that’s a bad sign, but actually better than the UK or the eurozone which both suffered a contraction.

The slump in the pound today is helping to prop up London’s stock market.

Shares in multinationals such as building supply firm Ferguson, drinks giant Diageo and chemicals group Johnson Matthey have all risen, as a weaker sterling makes their overseas exports more valuable.

But with UK-focused firms like builders and banks falling, the FTSE 100 is down 17 points or 0.25%.

On Wall Street, though, the Dow Jones industrial average has lost 1% or 280 points on concerns over the US-China trade war.

Deutsche Bank has just told its clients that a general election before 31 October would be the “least worst” of all the scenarios on the table.

They argue it would cut the risk of a no-deal Brexit.

JP Morgan: Keep away from sterling

Karen Ward, chief market strategist at JP Morgan, thinks investors should keep away from the pound or risk getting badly burned fingers.

She believes the pound could rise back to $1.40 if Britain was to leave the EU under a withdrawal agreement, but could plunge to $1.10 in a no deal scenario.

So given this “binary outlook”, it doesn’t make sense to hold large one-way positions in sterling assets.

Ward told clients:

“MPs return to parliament today on the back of the latest slide in the British pound, which reflects an increase in market jitters around the potential for a no-deal exit.

A general election appears increasingly likely, although the events of the last few years have taught us that there is frequently an unforeseen twist in the Brexit tale. If the UK population are indeed sent back to the polls, this will only add to political uncertainty given the complexities in forecasting the result of an election that will clearly be dominated by Brexit.

Back in Westminster, government efforts to placate the group of Conservative MPs opposed to a No-Deal seem to have floundered.

The group, including former chancellor Philip Hammond, have met Boris Johnson, but say the PM only gave an ‘unconvincing’ explanation of how a new deal could be agreed in time.

That suggests they are likely to support today’s emergency motion which tries to block a disorderly exit.

The opposition Labour party, meanwhile, is indicating it won’t vote to trigger an early election until it’s certain that no-deal is off the table. That could make it hard for Johnson to swerve around the Fixed Term Parliament Act.....

Investors should also keep a close eye on Edinburgh today, where judges are hearing a court case on whether parliament should be suspended for five weeks.

The case was brought by a group of parliamentarians, who argue that Boris Johnson has acted illegally and unconstitutionally by proroguing Parliament ahead of the UK leaving the EU on 31 October.

The hearing began dramatically, with the production of a handwritten note showing that Johnson had approved a plan to shut the Commons down back in mid-August. That is well before the plan was made public.

If the court rules against the government, it could impose an interim interdict , or injunction, stopping the proroguing of Parliament. That could give MPs more time to vote for a deal, or to block no deal.

The pound is changing hands at $1.201 to the US dollar as City traders grab a lunchtime sandwich.

This minor recovery from this morning’s slump comes as opposition MPs look for a way to block no-deal on 31 October, before giving their approval for an election.

The BBC’s Laura Kuenssberg has the details:

Updated

Expert: Pound would rally if Lib Dems held balance of power

In theory, the pound is a global reserve currency, alongside the euro, the yen, and of course the US dollar.

In practice, it is behaving more like an emerging market currency - volatile, vulnerable to political crises, and prone to slumping at the first sight of an alarming headline.

This chart shows how sterling volatility has spiked in recent days - back towards levels seen before the 2016 referendum, and in the run-up to the March deadline.

Sterling volatility

That means investors have been taking steps to protect themselves from a juddering lurch in the value of the pound.

Trevor Greetham, head of multi asset at Royal London Asset Management, says the threat of a general election just before the Brexit deadline is spooking the City.

He’s spotted that the pound is now almost as volatile as the stock market, which is “a very unusual state of affairs for a developed economy.”

Greetham predicts more volatility:

“It’s very hard to know where sterling will be a few months from now. A disruptive No Deal Brexit could see the pound weaken much further. On the other hand, a delay in Brexit with increased prospects for a deal, or even a referendum with remaining in the EU as an option, could see the pound recover sharply.

A General Election would create a further layer of uncertainty for sterling. We learnt in 2017 that opinion polls can shift dramatically during an election campaign. There is little prospect for a new deal with the EU under the short timetable currently available so the markets would probably be forced to factor in a No Deal Brexit under a majority Conservative government. A majority Labour government, on the other hand, would usher in a range of market-unfriendly policies. Arguably the pound would rally most on a hung parliament with centre parties including the Liberal Democrats needed to form a government.

Pound recovers as MPs move to block No-Deal Brexit

After a torrid morning, sterling has suddenly bounced back off the mat.

The pound is now back over $1.20 against the US dollar, shaking off much of its earlier slump.

But it’s still down on the day, at $1.203, and still at risk of closing at its lowest level since the 1980s.

The sudden bounce came as MPs submitted their request for an emergency debate to rule out a no-deal Brexit. This move was expected, of course, but investors may still be encouraged that the ‘rebel alliance’ are moving fowards.

Wall Street titan Goldman Sachs has warned its clients that a no-deal Brexis is a growing risk.

Its base case scenario is that a variant of Theresa May’s deal is approved by MPs. But it also believes there’s a possibility that Britain will never leave the EU at all.

In a new report, Goldman estimates that:

  • No Deal is a 25% chance, up from 20%
  • No Brexit is a 30% chance, down from 35%
  • Leaving with a deal is a 45% chance - unchanged.

Over in Brussels, the European Commission is confirming that the UK side haven’t yet provided ‘concrete’ proposals to replace the Irish Backstop.....

At least the two sides are talking, though....

Updated

Expert: Pound would plunge below euro after no-deal

The pound would plunge below parity with the euro if there is a No Deal Brexit, predicts Ranko Berich, head of market analysis at Monex Europe.

He says the “fragile support” created by Boris Johnson’s trips to Paris and Berlin last week have been obliterated by the political drama back in Westminster.

“No-deal risk remains the be all and end all for sterling.

Given that sterling’s fall over the past six months has been driven by an increase in the no-deal risk, from an outside possibility to approximately 50% chance today, we estimate that the pound is likely to weaken by around a further 7% if no deal actually happens – taking GBPUSD to around $1.12 and EURGBP to just below parity.

One pound is worth €1.096 right now, meaning one euro is worth 91.2p, close to last month’s 10-year low.

The pound/euro exchange rate
The pound/euro exchange rate Photograph: Bloomberg

Updated

The slump in the pound since the Brexit referendum has helped overseas investors to cherry-pick UK assets.

Foreign companies spent £18.4bn buying UK companies in April-June, up from £10.8bn in January-March, according to new figures from the Office for National Statistics.

These charts show this ‘inward investment’ jumped after the 2016 vote (which sent the pound down from almost $1.50 to below $1.20 today):

UK inward investment
UK inward investment

Rob Donaldson, RSM’s head of corporate finance says sterling’s weakness is turning UK companies into prey, rather than predators:

Given the persistent weakness of sterling overseas acquisition by UK companies is challenging whereas inbound investment from abroad is, despite some of the obvious uncertainties for the UK economy, encouraged by the relatively low multiples in the UK particularly when sterling weakness is taken into account.

‘Meanwhile UK domestic activity is relatively strong as consolidation is more attractive than new investment, which has been weak.

‘In the absence of any change in Q3 we would expect these trends to continue for the rest of the year, absent a chaotic “Halloween” Brexit.

There’s every danger that the pound will end today at its weakest closing level in 34 years.

That would hang over MPs heads as they vote tonight on whether to block no deal by seeking another Brexit extension, a move that could trigger an election next month.

The pound is struggling back from the three-year low hit this morning, but it still below the $1.20 mark.

The pound vs the US dollar today
The pound vs the US dollar today Photograph: Refinitiv

The slump in UK construction this year shows there is a desperate need for clarity about Brexit, says Duncan Brock of the Chartered Institute of Procurement & Supply.

He says building firms are suffering badly, because nervous clients aren’t happy about making major sending commitments in the current uncertain climate.

“The sector fell deeper into contraction as continuing uncertainty and a weakened UK economy took a sizeable bite out of this month’s construction activity. Inevitably business confidence followed suit, dropping like a brick to its worst since December 2008 and close to the lowest depth seen in the previous recession.

“As Brexit creeps closer and confusion still reigns, this will undoubtedly heap more pressure on the UK Government to create much-needed clarity in the market.

The commercial sector particularly has been devastated by reluctant clients fearful of taking a wrong turn in a confusing landscape and delaying project starts, resulting in the fastest drop in new orders since March 2009.

UK builders suffer biggest drop in new orders since financial crisis

Construction continues at pace at the construction site of the Hinkley Point C nuclear power station being built near Bridgwate.

Newsflash: Britain’s construction sector has been hit by a collapse in orders, as Brexit worries hurt building firms.

Data firm Markit has just reported that builders suffered the sharpest fall in new business since March 2009 - when Britain had fallen into recession after the financial crisis.

Housebuilding, commercial construction and major civil engineering firms all suffered, with business optimism hitting its lowest level since December 2008.

Companies reported that Brexit-related uncertainty was encouraging “risk aversion”, and encouraging clients to set tighter budgets. This means building firms are running short of work, if they can’t find enough new business to replace completed projects.

This dragged Markit’s construction PMI index down to 45.0 - below the 50-point mark which shows growth.

UK construction PMI
The UK construction PMI shows the sector shrank, for the fourth month running Photograph: Markit

Tim Moore, economics associate director at IHS Markit, said “domestic political uncertainty” is hurting the construction sector......and there could be worse to come.

“Concerns about softening demand for new projects resulted in a fall in business optimism across the construction sector to its weakest since December 2008.

This provides an early signal that UK construction companies are braced for a protracted slowdown as a lack of new work to replace completed contracts begins to bite over the next 12 months.

Yesterday’s manufacturing PMI showed that factory output fell at its fastest pace in seven years last month -- raising fears over the health of the UK economy.

Updated

Euro hits 28-month low

The euro is also suffering from the threat of a disruptive Brexit.

The single currency has fallen to a 28-month low against the US dollar at $1.092. That’s a reminder that No Deal is seen as bad for both sides.

Kit Juckes of French bank Société Générale says Brexit uncertainty is “reaching new heights” and is dragging the “terrible twins” of sterling and the euro lower.

The £/$ and €/$ exchange rates
The £/$ and €/$ exchange rates Photograph: Kit Juckes

Juckes says we face 48 hours of uncertainty, which could be followed by six weeks of uncertainty (and markets, they say, really don’t like uncertainty).

He told clients:

The first question that will be answered - today - is whether the rebels can indeed get control of the order paper again. At the moment, it isn’t clear when we might find that out (today is, after all, the first day back for MPs after their summer holidays!).

To further muddy waters, a judge in Edinburgh’s Court of Sessions will also be asked for a ruling on whether the Prime Minister is acting illegally in suspending parliament for 5 weeks ahead of the Queen’s Speech on October 14. If we can survive today’s uncertainty, we may move on to a vote tomorrow which will then determine whether the rebels have succeeded in the plan to force the PM to ask for a delay. Whether that vote passes is uncertain, since while there are enough Conservative rebels to win the vote if the opposition supports it, there may be some Labour rebels from Brexiteer constituencies who support the Government.

But, if that vote passes, there will almost certainly be a vote as the PM seeks elections instead. Could he win the two-thirds majority needed to force elections? Gain, that’s not certain and after that, there is the biggest uncertainty of all, which is what happens at an election in October. The Conservatives have performed well In opinion polls, at the expense of the Brexit Party, but may not have the4 seats to win outright majority.

Updated

Banks and housebuilders fall

Shares in UK-focused companies are falling this morning, hit by the threat of a disorderly Brexit.

Housebuilders are among the top fallers, with Barratt Development and Berkeley Homes down 1.5%. Online estate agent Rightmove has lost 1.2%, on fears that the property sector would freeze up after No Deal.

Banks are also under pressure, with Royal Bank of Scotland and Lloyds Banking Group down over 1%. A recession could drive up their bad loans, and hurt demand for credit.

Supermarkets could be another Brexit casualty, if disruption at the ports prevents food reaching the shelves. Wm Morrison and Sainsbury are both down 1.2%.

There’s been a lot of political drama already today, which is helping to push sterling deeper into the mud.

Already:

Conservative MP Justine Greening, who opposes a no-deal Brexit, has said she won’t run in the next election, and compared Brexit to a contagious, highly virulent, virus.

Former chancellor Philip Hammond has said Boris Johnson is maneuvering for an election, and claimed the PM can’t be trusted not to move the date until after the Brexit deadline.

The Daily Telegraph have created quite a stir. It’s reporting that top advisor Dominic Cummings has described negotiations with the EU as as “sham”, and that the attorney general has rubbished the idea that the Irish Backstop could be ditched.

That undermines Johnson’s claim that MPs would undermine his negotiations if they took a no-deal Brexit off the table.

Theresa May’s former chief of staff, Gavin Barwell, has heard similar claims.....

Our Politics Live blog has all the details:

Renewed pressure sends pound to $1.196

Newsflash: The pound just fell to $1.1960 against the US dollar, down a whole cent today.

Again, that’s the weakest point since October 2016 when sterling suffered a brief, punishing ‘flash crash’ in the aftermath of the June 2016 referendum.

The pound-dollar exchange rate
The pound-dollar exchange rate, which is its lowest since October 2016 Photograph: Refinitiv

If you strip that flash crash out of the data, the pound hasn’t been quite so weak since 1985.

Nervous investors are piling into UK government bonds in a scramble for safety.

This has forced prices to record highs, driving the interest rates (or yield) on 10-year gilts down to a record low of 0.384%.

That might sound like a vote of confidence in the UK. But actually, it’s due to worries about a general election, and concern about a possible recession.

Other government bond yields are also hitting record lows, as investors worry about the health of the global economy (which would be hurt by a disorderly Brexit).

Today’s rout means the pound has lost five cents against the US dollar since Boris Johnson became Conservative Party leader in mid-July.

How bad could it get for the pound? Much worse, according to some City analysts.

Neil Wilson of Markets.com predicts sterling could fall to $1.15, or even $1.10, in the coming weeks.

He writes:

Ignoring the flash crash [in 2016], we are very much in uncharted waters here. We could feasibly see 1.15 or even 1.10 in the coming weeks if traders decide to move against the pound.

Elections are never easy to call – the risk of Corbyn to UK assets is probably greater than a no-deal Brexit, after all. The outlook for sterling may well worsen if there is an election and will certainly deteriorate if it’s a no-deal.

Updated

Sterling slumps to $1.1975

The pound is continuing to slide, and just hit $1.1975 against the US dollar.

That takes it below the January 2017 low. Indeed, if you exclude a currency “flash crash” in October 2016, it’s the lowest since 1985!

This chart shows just how weak sterling has become in historical terms.

The pound-dollar exchange rate since 1980
The pound-dollar exchange rate since 1980 Photograph: Refinitiv

The pound is likely to fall further if a snap general election is called, predicts Elsa Lignos of Royal Bank of Canada.

She told clients:

Parliament reconvenes today. While the opposition MPs’ motion is expected to be tabled today, it will only move to a key vote tomorrow if MPs vote today to take control of Commons business – so a two-step process: vote to take control today, vote on the bill tomorrow (though if the first passes, the second is expected to also).

Tory MPs have been told they will be de-selected which some speculate could dissuade younger MPs but with the govt’s majority so tight, the opposition’s hurdle is achievable.

The Parliamentary session may start early, but the key vote is expected late tonight (potentially 9.30-10pm according to ITC). If the vote does pass, the vote on a snap election is expected on Thursday. If the vote fails, we expect the probability of no-deal exit to surge (and GBP to fall).

The pound is also losing ground against the euro, fast!

Sterling has dropped to €1.096, down nearly half a euro cent this morning. That’s only a two-week low, though (the pound hit €1.072 in mid-August).

Updated

If the pound falls much further against the US dollar today, it will hit levels last seen under Margaret Thatcher in 1985!

Pound slumps below $1.20 for first time since 2017

Boris Johnson making a statement on Brexit last night.
Boris Johnson making a statement on Brexit last night. Photograph: Wiktor Szymanowicz/REX/Shutterstock

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The pound has slumped to its lowest level since January 2017 this morning, as fears of a no-deal Brexit grip the financial markets.

Sterling was driven through the $1.20 point in early trading in London. It has shed half a cent to hit $1.1995, its weakest point in 32 months.

Traders are shunning the currency, as speculation swirls that Britain could be heading for a general election.

The pound-dollar exchange rate
The pound-dollar exchange rate over the last five years. Photograph: Refinitiv

The City is hunkering down ahead of a seismic day in Westminster. A group of rebel Conservative MPs are expected to try to block a no-deal Brexit - despite being threatened with deselection, meaning they’d lose their jobs at the next election.

Last night, prime minister Boris Johnson pledged that he didn’t want a general election, but sources said last night that a poll could take place on 14 October -- if MPs took control of the House of Commons.

Triggering an election would require a vote of no confidence in the government. So, with Brexit due in under 59 days, investors across the globe are worrying that the UK could crash out of the EU without the cushion of a withdrawal agreement.

Ipek Ozkardeskaya, senior market analyst at London Capital Group, explains:

At this point, with a slim majority of just one in hand, Johnson cannot afford to lose support from the Conservative Party members. As a result, he is now pressuring Tories to stand next to him at this week’s vote in the House of Commons to deliver Brexit by October 31 with ‘no ifs or buts’. If not, he is threatening to expulse rebels and to throw a snap election by October 14.

As a result, on the final run-up to the critical October 31st deadline, the pound is shaken by more political uncertainties. Cable hit a fresh two-week low on rising tensions among British lawmakers. Traders are now pricing in the possibility of a no-confidence vote this week, a scenario which could get the UK’s political scene uglier than it already is. A snap election would mean that either Johnson receives a mandate to quit the EU with no deal on October 31st, or the Brexit deadline is postponed – again. Both scenarios justify a weaker pound.

A new business survey is expected to show that the UK construction sector contracted last month, adding to worries about the economy.

Yesterday we learned that manufacturing activity declined in August, at the fastest pace in seven years, as Brexit uncertainty and the US-China trade war hurt factories.

The agenda

  • 9.30am BST: UK construction PMI for August (expected to rise to 45.9 from 44.3, still showing contraction)
  • 3pm BST: US manufacturing PMI for August

Updated

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