Closing summary
With the dollar recovering from its recent weakness, and continuing uncertainty over Brexit, the pound has come under pressure today and is currently 0.63% lower at $1.4080.
Meanwhile bonds prices are falling and yields rising, as central banks increasingly look to move away from their low interest rate and QE programmes which have supported markets for several years now. German and US yields in particular have move sharply higher.
In the US, the Federal Reserve’s preferred measure of inflation - the PCE index - was in line with expections, up from 0.1% in November to 0.2% last month. But the savings rate fell to a more than 12 year low.
And cryptocurrencies were back in the spotlight on concerns about a crackdown in Japan after hackers stole $400m from the Coincheck exchange.
Finally, accountancy firm KPMG is to be investigated by the UK’s Financial Reporting Council over its role in the collapse of construction group Carillion.
On that note, it is time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Wall Street opens lower
With the recovery in the dollar, a decline in bond prices and a busy week ahead, US markets have slipped back from their record levels.
As well as the Federal Reserve’s latest interest rate setting meeting, there is the State of the Union address and a host of results from the likes of Apple, Alphabet, Facebook, Microsoft and Amazon.
Apple is already weighing on the markets, following reports it would make half the number of planned iPhone Xs this quarter.
So the Dow Jones Industrial Average has dropped 37 points or 0.15%, the S&P 500 lost 0.26% and the Nasdaq Composite fell 0.32%.
EU warns Trump on trade
Here’s our full report on the EU’s warning to Donald Trump over trade. Daniel Boffey writes:
Brussels has warned that it stands ready to retaliate and potentially open up a transatlantic trade war if the US delivers on apparent threats to restrict European imports.
The US president, Donald Trump, claimed in an interview with ITV broadcast on Sunday that the EU had been “very unfair” on American exporters, and that it would “morph into something very big” that would “turn out to be very much to [the EU’s] detriment”.
Washington is currently examining the case for protecting US economic interests on national security grounds, including the imposition of import tariffs on aluminium and steel.
Responding to Trump’s comments, a spokesman for the European commission told reporters in Brussels that the EU was ready to hit back if its importers were made to suffer.
The spokesman said: “For us trade policy is not a zero sum game. It is not about winners and losers. We here in the European Union believe that trade can and should be win-win.
The full report is here:
Saving down, consumption and sentiment up -- another sign we are approaching the latter stages of the expansion. pic.twitter.com/LQUK10VKBW
— Josh Wright (@JWrightStuff) January 29, 2018
US inflation rises in December
The latest set of US inflation figures have risen in December in line with forecasts.
The personal consumption expenditures price index - it may be a mouthful but it is the Federal Reserve’s preferred measure of inflation - climbed from 0.1% in November to 0.2% last month. On an annual basis it rose 1.5%, the same as in November. It is still below the Fed’s 2% target.
Meanwhile consumer spending increased by 0.4% last month, again in line with expectations. The November figure was revised upwards from an initial reading of 0.6% to 0.8%.
Personal income rose 0.4%, up from 0.3% in November, while wages increased by 0.5%.
The savings rate fell to 2.4% from 2.5% in November, the lowest level since September 2005.
A surge higher in yields on government #bonds is among the notable moves in financial #markets so far this morning.
— Mohamed A. El-Erian (@elerianm) January 29, 2018
Both 10-year US #Treasuries and German #Bunds are up some 6 basis points -- #Germany at 0.69% and the #US at 2.72% (charts below from @CNBC .com). pic.twitter.com/7BWuEeKjgP
Stock markets are pretty steady at the moment, but will that last if bond yields continue to climb?
"If the 10-year goes above 2.63 ... it will accelerate higher and equity markets are going to be spooked and maybe that's the cocktail that is coming our way." - @TruthGundlach on Jan. 10.
— Jamie McGeever (@ReutersJamie) January 29, 2018
10y yield now 2.72%. Stocks about to be spooked? pic.twitter.com/rqrhHRg0ch
Ouch! Global bond rout deepens w/ 10y US treasury yields jump >2.7%. pic.twitter.com/I3GzY4RfWE
— Holger Zschaepitz (@Schuldensuehner) January 29, 2018
On the weak pound, financial analyst Connor Campbell at Spreadex said:
With little else to focus on investors turned their attention to Theresa May’s most recent bout of Tory turbulence, much to the pound’s displeasure.
The Prime Minister is dealing with the umpteenth swell of dissent over the state of her leadership, while at the same time having to try and quash the latest beef between her warring ministers, this round sparked by leaked Whatsapp messages from climate change minister Claire Perry calling Brexit voters ‘swivel-eyed’.
Add onto that the Lords constitution committee labelling the EU withdrawal bill as ‘fundamentally flawed’ just one day before the legislation is set to be debated, alongside a warning from EU leaders that the UK is ‘not ready’ to secure a divorce deal, and there was plenty for the previously soaring pound to fret about.
The pound continues to slip back against the dollar, and is now down 0.66% at $1.4074.
Against the euro, sterling is down 0.32% at €1.1352. As well as the dollar’s recovery, the pound is being hit by renewed Brexit uncertainty, after the continuing splits in the Conservative party and the prime minister’s perceived weakness.
EU responds to Trump on trade
President Trump said at Davos on Friday that he wanted free and fair trade, comments which did little to assuage fears of a possible trade war.
Especially since they followed the imposition of tariffs on washing machines and solar panels from China and South Korea. Michael Hewson, chief market analyst at CMC Markets UK, said:
President Trump’s speech on Friday did nothing to increase [concerns about a trade war], but neither did they assuage them. His comments that the US wanted free but “fair” trade suggested that he would not be shy in confronting what he considered unfair trade practices, potentially putting him on a collision course with China, as well as the European Union.
And here’s a response from Europe:
The European Union stands ready to react swiftly and appropriately in case our exports are affected by any restrictive trade measures from the United States. pic.twitter.com/sdYBSWlexb
— European Commission (@EU_Commission) January 29, 2018
Updated
On a lighter note:
Is this the end of the battle for the sunbed? Thomas Cook is offering holidaymakers the chance to pre-book sun loungers, eliminating the need for the dawn dash to the pool to bag one with a towel.
For €25, customers will be able to book a specific sun lounger for their entire holiday. The Anglo-German company says it is the UK’s first package holiday firm to offer this service, which it is trialling at three hotels in Lanzarote, Gran Canaria and Fuerteventura from the end of February.
Customers will receive an email six days before departure asking if they would like to choose their sunbed in advance. They will be able to choose their preferred spot on a pool plan featuring a compass to help them work out what time of the day areas will be in the sun or shade.
Read more here:
The FTSE 100 is currently managing to stay in positive territory, just. But European markets have slipped back after a bright early start.
The UK’s leading index is up 0.13% while Germany’s Dax has dipped 0.23% and France’s Cac is down 0.07%.
On Wall Street the Dow Jones Industrial Average is expected to open some 37 points lower, but Joshua Mahony, market analyst at IG, reckons US markets could generally be a better bet than European bourses. He said:
The FTSE 100 [is] gaining ground thanks to a weaker pound and a strengthening price of copper. Rising copper prices have helped boost the commodity-heavy FTSE 100, with Anglo American, Glencore, Rio Tinto, and Antofagasta helping drive the index into the green. After last week’s losses, UK traders will hope that this will represent the beginning of a resurgence for the FTSE, yet with the dollar devaluation likely to drive the pound higher yet, it makes more sense to be long US markets over their European counterparts.
Today sees a somewhat serene start to what is likely to be a fairly frantic week, with the second half providing a whole host of top tier economic data points to drive market sentiment. Donald Trump’s state of the union address tomorrow sees the market focus shift back to US economic prospects, and with the potential for a raft of infrastructure projects around the corner, there is another good reason to be long US stocks.
Here’s the Reuters report on the earlier Chinese central bank comments:
China will consider including shadow banking, property financing and internet financing in its macro-prudential assessment (MPA), central bank vice governor Yi Gang wrote on Monday, according to China Finance, a publication under the People’s Bank of China.
The world’s second-biggest economy still has problems and hidden dangers as the country’s debt levels are still high while asset bubble risks have not yet been fully contained, Yi wrote.
The central bank will maintain prudent and neutral monetary policy while seeking to increase flexibility and effectiveness of liquidity management, Yi said.
China has conditions to keep the yuan basically stable, Yi said, adding that the regulator will look to increase the yuan’s exchange rate flexibility.
Updated
Bitcoin falls after cryptocurrency hack
Back in the volatile world of cryptocurrencies, bitcoin is down 3.5% at $11,284 on fears of a further crackdown by regulators, this time in Japan.
This follows news that one exchange, Coincheck, would refund around $400m to customers after hackers stole holdings in NEM, the world’s tenth biggest cryptocurrency. NEM is currently down around 8%. Fiona Cincotta at City Index said:
This incident highlights one of the biggest concerns towards crypto currencies, namely security. The Japanese government have ordered Coincheck to beef up its security to prevent a repeat incident, as more authorities are clamping down on the virtual currency. Given the headline grabbing numbers, this hack is unlikely to disappear into headline history fast. Japan is one of the largest markets for cryptocurrency trading, accounting for around 30% -40% of global traded volume last month. Should this hack seriously dent confidence in virtual currencies, Bitcoin could see the selloff extended.
Updated
Bond prices under pressure
Bond prices are coming under pressure on the growing signs that central banks are moving away from their low interest rate and QE programmes.
With the US economy growing at 2.6% in the final quarter and the Bank of Japan governor saying inflation was close to reaching its target, US Treasury bonds fell and the yield [or interest rate] rose.
In Europe comments over the weekend from Klass Knot, head of the Dutch central bank, that the ECB should clarify how it will end its asset purchases have also hit the bond market. Germany’s yield on its five year bonds has risen to 0.004%, the first time it has been in positive territory for more than three years. French and Dutch bond yields have climbed to their highest levels since July. Neil Wilson, senior market analyst at ETX Capital, said:
US 10s [ten year bond yields] just hit 2.71%, while German bund yields are also on the march higher with the 5-year turning positive for the first time since 2015. It does look like this is capitulation time for bond bulls as yields are entering breakout mode, which will have important consequences for equity valuations. At this stage in the cycle it makes sense for yields to be climbing but breakout beyond the 30-year trend line does signal the bond bears are here at last. A spike to 3% in the 10-year now looks very possible and a bond market rout could spook the market.
China’s central bank says it will keep a prudent and neutral monetary policy, but admits the country’s economy still has problems, including high debt levels and the risks of an asset bubble.
It added in its latest bulletin that it had the right conditions to keep the renminbi basically stable, and said a two way fluctuation in yuan rates would become the norm.
Updated
Julian Dunkerton, the co-founder of Superdry, is nearly £18m richer after selling part of his stake in the fashion retailer.
Dunkerton, which is now the company’s product and brand director, sold one million shares at the end of last week at £17.80 each. That amounts to 1.23% of the company and still leaves him with more than 25%, making him its largest shareholder.
Superdry shares have surged 20% over the past year but an update earlier this month saw them slip back after it revealed a 28% fall in half year profits.
Carillion collapse: KPMG to be investigated
More on the collapse of construction group Carillion. Julia Kollewe reports:
Accountancy firm KPMG is to be investigated by the UK’s Financial Reporting Council over its role in the collapse of Carillion.
The business secretary, Greg Clark, welcomed the investigation, which the accounting watchdog said followed inquiries made since Carillion’s shock profit warning in July. The FRC said it would conduct the investigation, which will cover 2014 to 2016, and additional audit work carried out during 2017, “ as quickly and thoroughly as possible”.
Carillion went into compulsory liquidation two weeks ago with debts of £1.3bn, a pension deficit of nearly £1bn and a host of unfinished public contracts.
The full story is here:
The move comes ahead of a select committee hearing tomorrow with the FRC, the Insolvency Service and Carillion pension trustees.
MPs have already accused the Pensions Regulator of failing to act while Carillion racked up debts to pay dividends and executive bonuses, as the business built up a pension deficit that reached nearly £1bn by the time it collapsed this month.
European markets edge higher
As expected, most European markets have opened in positive territory - just about - helped by the weakness of the pound and euro against the dollar. A weaker currency gives a boost to exporters, with the FTSE 100 in particular packed with overseas earners.
The UK’s leading index is up 0.14%, also benefiting from positive performances by mining groups after a 1% rise in the copper price. But drinks group Diageo, one of those which might be expected to benefit from a weaker pound, is down nearly 1% after a downgrade by analysts at RBC.
Germany’s Dax and France’s Cac have climbed 0.1%, Italy’s FTSE MIB is up 0.17% but Spain’s Ibex has dipped 0.2%.
Updated
Despite the prospect of further US interest rate rises this year, ING Bank believes the dollar weakness is likely to continue (notwithstanding today’s move higher.)
Apart from the US inflation data later and the two day Federal Reserve meeting which starts tomorrow, there is another big event which could have a major impact on the curreny. ING foreign exchange strategist Viraj Patel says:
In an action-packed week for global markets, the main event will be President Trump’s State of the Union address (Tueday 2100 ET) – which is set to outline the administration’s 2018 policy agenda ahead of the pivotal November midterms. With US trade policy in particular focus, the burning question for investors is which type of Donald Trump will turn up: Dr Jekyll or Mr Hyde?
While the former manifestation may have appealed to the international elite at Davos, we would not be entirely surprised to see the more fiery characteristics of the President surface back on home soil in Washington. Indeed, with President Trump fighting low approval ratings, fresh allegations that he wanted to fire Special Counsel Robert Mueller last year and with little policy progress to show (beyond the Tax Bill) – there’s every chance that the ‘America First’ policy talk has a protectionist sting in the tail this week. As such, we expect global risk sentiment to remain on red alert ahead of the speech – with outside risks that USD/JPY could fall to the 107.00 level on a more contentious Trump State of the Union address.
As for the dollar’s broader trajectory, it will now be very difficult for Washington to put the ‘weak dollar’ genie back in the bottle. The damage is already done – and with structural factors – such as a late US economic cycle, relative US asset valuations and the twin current account and fiscal deficits – all supporting a weaker dollar trend, the naturally tendency will be for the greenback to fall over the course of 2018. Add a US political and policy uncertainty premium into the mix – and the dollar’s decline could transpire quicker than what we had initially expected.
Agenda: Currencies in focus as dollar strengthens
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The dollar has been under pressure for some time now, and is set for its worst start to a year for around 30 years. Conversely US stock markets are making their best start for the same period, partly due to that very dollar weakness.
Concerns that President Trump’s tax reforms will add to the already hefty US deficit have undermined sentiment for the US currency, as has the prospect of a trade war which picked up pace last week as the US slapped tariffs on washing machines and solar panels from China and South Korea.
Contrasting comments at Davos did not help. Treasury secretary Steve Mnuchin said he didn’t mind a weak dollar, then Trump said virtually the opposite a day or so later.
But the weakness in the dollar looks like it might be starting to attract some bargain hunters, with the currency regaining a little ground in Asia and edging higher in Europe.
And although the Federal Reserve is expected to make no move on interest rates at this week’s meeting - the swansong for Janet Yellen as Fed chair - further rises are expected this year.
Later today come some US inflation figures which are likely to influence whether the dollar can hold onto its gains. Jasper Lawler at London Capital Group said:
Investors will now look ahead to the release of US PCE [personal consumption expenditure] figures, the Fed’s preferred measure of inflation. Month on month inflation is expected to have increased 0.2% in December, from 0.1%. Meanwhile, on a annualised basis a constant reading of 1.5% is forecast. Given the ongoing concerns at the Fed over the sluggish inflation in the US, a higher reading this afternoon, could help cement the dollar’s bounce.
At the moment the dollar’s recovery has left the pound 0.28% lower at $1.4128 while against the euro sterling has dipped 0.1% to €1.1376.
As well as being affected by the dollar’s recovery, the pound is being undermined by renewed Brexit concerns, with peers saying the EU withdrawal bill needs to be withdrawn and the prime minister under growing pressure amid calls for the chancellor to be sacked.
The US PCE figures are due at 1.30pm GMT, which is the main item on the economic agenda.
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