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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound falls under $1.21 as Brexit fears hit sterling – as it happened

A terminal showing the rise in London’s FTSE 100 index today.
A terminal showing the rise in London’s FTSE 100 index today. Photograph: Benjamin Fathers/AFP/Getty Images

And finally, here’s my colleague Philip Inman’s summary of today’s drama:

The pound endured another day of pressure from investors on Tuesday after continued jitters on the foreign exchange markets pushed it down more than two cents to $1.21.

Sterling recorded its worst four-day performance since the Brexit vote as a Bank of England official said he expected the pound to fall further in the coming weeks, driven by the referendum result and the UK’s trade deficit with the rest of the world.

The exchange rate with the US dollar stood at $1.30 last week when Theresa May opened the Conservative party conference and appeared to put regaining control of immigration above staying inside the EU’s single market free trade area. Investors took fright at the prospect of a hard Brexit and the currency has declined more than 6% against the dollar since then.

A flash crash last Thursday, when the pound fell by 6% in 10 minutes, heightened concerns that investors had lost faith in sterling as a major currency. A year ago a pound bought $1.55.

However, the pound’s decline had the opposite effect on the UK’s leading share index. The FTSE 100 touched a new intra-day record of 7,129.83 during afternoon trading, although it closed nearly 60 points lower after a late bout of selling, below the record closing figure of 7,104 reached last year. The driving force for the UK market’s recent surge has been the rapid decline in the pound, which has boosted the value of companies that earn much of their revenues in dollars.

Michael Saunders, a former investment banker who joined the monetary policy committee in August, said Britain’s large current account deficit was adding to the anxiety about the ability of the nation to pay its way once it quits the European Union.

Saunders said the current account, which measures the balance of trade, cash transfers and investment income with other countries, was already undermining confidence in the UK’s ability to pay its way before the EU referendum.

Speaking to MPs on the treasury select committee, Saunders warned it was now a major issue and compounding the already weak sentiment on currency markets towards sterling.

Saunders told MPs:

“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,”

Saunders, who joined the MPC from the US investment bank Citi, where he was chief economist, said investors were weighing up the implications of Britain leaving the EU.

“The work done by the International Monetary Fund and the OECD suggests that the long-run effects of the UK’s exit from the EU is that growth will be lower. If all we are doing is adjusting to a new equilibrium, that is not a concern.”

Only if the pound plummets or triggers falls in other markets would the Bank of England need to consider cutting rates to bolster confidence and growth, he added.

“If such a scenario were to materialise then, provided inflation expectations and pay growth remain well-contained, I would expect the mpc to largely look through any such direct effects on inflation of sterling weakness, even if they extend for several years.”

But the lower pound, which reduces the cost of UK goods and services sold abroad, could boost exports and offset much of the anxiety caused by the Brexit vote.

A fall in imports would also help to reduce the current account deficit, he said, adding that the government could take advantage of the current depressed situation to boost growth with extra spending.

Several Tory MPs, including supporters of the Leave campaign, have warned that leaving the single market will harm the economy and have demanded ministers make every effort to negotiate continued access.

But the hardline taken by Downing Street and an equally robust response from European leaders, who have emphasised the free movement of labour as a pillar of the single market, have heightened concerns in the City that Britain will eventually leave all the EU’s major institutions.

Kathleen Brooks, research director at financial betting firm City Index and Forex.com, says traders fear the UK could be dragged back by Brexit uncertainty.

She told BBC News that:

“The weakness in the pound is really a sign that investors don’t have confidence in a post-Brexit UK economic outlook. They think Brexit is going to be very negative for the UK economy, and UK GDP could contract going forward.”

And that’s all for tonight. Do tune in tomorrow for more coverage of the pound, the financial markets, the global economy and more....

Remember, tonight’s ructions aren’t JUST about Brexit.

The dollar has hit an eight-month high against a basket of currencies, on speculation that US interest rates are heading higher soon:

Some more thoughts from Duncan Weldon of Resolution Group:

The FT’s John Gapper is concerned that parliament doesn’t have its eye on the ball....

This is a positively grim day for the pound, which just stuck its nose below the $1.21 mark as today’s relentless selloff continues.

More reaction to the pound’s recent slump.

Except, your average emerging market currency has performed an awful lot better than the pound this year. Brazil’s Real, for example, has surged by almost 25%.

Sterling is struggling to find a floor tonight – it just touched $1.2107, a decline of almost 2.5 cents against the US dollar today alone.

The pound vs the US dollar over the last six months
The pound vs the US dollar over the last six months Photograph: Thomson Reuters

Kathleen Brooks, Research Director at City Index and Forex.com, says traders fear the UK could be dragged back by Brexit uncertainty.

She told BBC News tonight that:

The weakness in the pound is really a sign that investors don’t have confidence in a post-Brexit UK economic outlook.

They think Brexit is going to be very negative for the UK economy, and UK GDP could contract going forward.

Kathleen Brooks
Kathleen Brooks Photograph: BBC News

Summary: Another bad day for the pound

If we have many more days like today, then talk of a Sterling Crisis won’t seem far-fetched.

So let’s quickly recap, as City traders take a breather.

The pound has suffered another day of heavy losses, shedding two cents against the US dollar to $1.214, and one euro cent to €1.098.

The selloff was triggered by fresh worries about the cost of a hard Brexit, after leaked Treasury papers suggested leaving the single market would ultimately cost £66bn in lost tax receipts.

That forecast has been criticised by pro-Brexit ministers, who accuse the Treasury of scare-mongering. Labour, though, fear that “jobs, livelihoods and public services” are at risk.

Two leading bankers, from Citi and Morgan Stanley, have warned they could start to move jobs out of London in 2017.

Rob Rooney, CEO of Morgan Stanley International, was blunt about the consequences fo a hard Brexit:

It really isn’t terribly complicated. If we are outside the EU and we don’t have what would be a stable and long-term commitment to access the single market then a lot of the things we do today in London, we’d have to do inside the EU 27.

And two Bank of England policymakers have issued warnings about the impact of Brexit.

Michael Saunders, of the Monetary Policy Committee, predicted that the pound could fall further.

And Anil Kashyap of the Financial Policy Committee warned that Britain could suffer a budgetary black hole if well-paid City jobs move overseas.

The weak pound did push shares in London up briefly, to a new all-time high. But then a late selloff sent the FTSE 100 into the red.

Analysts say the pound is also being squeezed by the recent strength of the US dollar, which is benefitting from speculation that Hillary Clinton will win next month’s presidential election.

Paresh Davdra, CEO of RationalFX, predicts a lot more volatility for sterling...

“In the short term, I think we will see the pound continue to slide. A lot of what has been happening has been in reaction to political events, namely any update on Brexit that comes from the government. This week we have seen the first evidence from the Prime Minister that Britain is heading for a clean break from the EU –traditionally the least desirable option for the economy –which has been a major factor behind the pound’s slump.

As we get closer to Article 50 being invoked, I think we will see the pound continue to fall further. In addition, we face added uncertainty over the US Election -there is a strong chance that if Hilary comes into power the US Dollar could gain a lot of strength on the back of that. In regards to the long-term, I think we could see the pound make a recovery, as we begin to see what a post-Brexit UK looks like. The biggest obstacle for the poundcurrently is the uncertainty and anxiety that surrounds the nature of divorce proceedings from the EU. But once we overcome that, we should begin to see the trend reverse. Until then however, it will likely continue to a bumpy ride for the UK’s currency.”

Updated

The pound is also suffering a late rout against the euro, as Brexit fears thump sterling again.

It’s fallen by one euro cent, or around 1%, to €1.098.

Crumbs, make that $1.2153 -- which means the pound has lost two cents against the US dollar today!

The pound is ploughing new lows, and is now down 1.75 cents at $1.2177.

That’s a new 31-year low, if you exclude the odd flash-crash last Friday...

Sterling is now at an eight-year low against a basket of major currencies.

And if it weakens much further, we could hit 40-year lows, according to Reuters journalist Jamie McGeever.

Pound has lost 6% since Tory conference

Today’s selloff means the pound has suffered its worst four-day run since late June, and the aftermath of the EU referendum vote.

Back then, sterling was worth around $1.48. It has now shed around 17.5% of its value since.

The selloff has intensified since Theresa May declared that she’ll trigger article 50 by the end of March.

The pound has dropped by 7 1/2 cents, or nearly 6%, since the start of the Conservative Party conference, from $1.2975 to $1.22-ish.

That’s a really sharp decline, as investors have faced up to the prospect of Brexit taking place by spring 2019.

May’s promises of immigration controls also pushed the pound down, as traders anticipated a Hard Brexit, which would deprive UK firms of membership of the single market.

The red arrow shows the point when the Conservative Party conference began
The red arrow shows the point when the Conservative Party conference began Photograph: Thomson Reuters

My colleague Aditya Chakrabortty has written a scorching piece about the sterling slump. Here’s a flavour:

So let’s have some ugly facts. First of all, the crash in the pound is a reminder of one overriding danger that some of us have been warning about for years: Britain does not pay its way in the world. It buys far more goods and services from other countries than it sells to them.

That deficit is made up entirely by what Mark Carney, governor of the Bank of England, has called “the kindness of strangers”. Which is fine, for as long as those foreign strangers consider London a safe haven for their cash. That shouldn’t be taken for granted now that Britain is about to take a giant political and economic leap into the dark – and sterling has already plunged further this year than the Argentinian peso. Remember, Whitehall is only beginning to think seriously about the mechanics of leaving the EU: years of this mayhem are still to come.

Ah, we’re told: but all this currency weakness is just brilliant for British exporters. It makes their goods so much cheaper to sell abroad. True, but that is to overestimate the bag of bones that is the British manufacturing sector 30 years after the Thatcher revolution.

Updated

Back over in Dublin, the Irish government has unveiled a series of measures designed to protect the economy from a Brexit shock.

It aims to protect foreign investment, boost tourism and reduce the exposure of farmers in the wake of the collapse of sterling.

  • Under the “Getting Ireland Brexit Ready” programme, announced by the finance minister, a “rainy day fund” will be built up from surplus budgets for use as a contingency for public services in the event of a shock to the economy after Brexit Day, expected in 2019.
  • A special €150m loan fund to help farmers with cash flow and short term borrowings is to be established amid concern many are struggling to cope with the sharp decline in the value of their exports to the UK,
  • A special tax relief programme designed to help foreign investors with the smooth movement of staff from the US and elsewhere is to be extended until the end of 2020.
  • This programme will allow employers to relocate state from overseas offices with minimal tax complications.
  • A reduced nine per cent VAT rate is to be retained in the tourist sector to assist the competitiveness of the hospitality sector which is heavily dependent on UK tourists.

The government says:

“The measure acts to secure and embed investment, which can lead to sustainable growth and strengthens Ireland’s innovative capabilities.”

At the same time the government has released a sector by sector analysis of the impact Brexit could have on trade with Britain, the country’s biggest trading partner. Agri-food and computer services are among the most exposed sectors.

The Revenue commissioners have also been asked to scope out how potential customs with the UK and with Northern Ireland would work.

Unveiling the package, finance minister Michael Noonan said the Brexit vote posed “important challenges for the Irish economy” and it needed to “protect the progress” made to the economy since the crash of 2010.

FTSE 100 falls back from record highs

Breaking: Britain’s stock market has failed to hit a new closing high, as the City frets about the costs of a hard Brexit.

A late afternoon selloff sent the FTSE 100 down by 0.38%, or 26 points, to 7070 points. It had earlier hit a new all-time high of 7129 points (as covered here).

Retail stocks rallied, with Next up 4% and Marks & Spencer up 3.2%. But mining stocks fell, as the strengthening US dollar pushed down commodity prices.

The FTSE 100 tonight
The FTSE 100 tonight Photograph: Thomson Reuters

Now, in theory, the weak pound should have driven the FTSE 100 higher.

But it appears that Brexit worries have pushed shares price down, especially predictions that leaving the single market would create a fiscal black hole.

Top bankers from Citi and Morgan Stanley also dented confidence, by warning they could quit the City of London next year.

Conner Campbell of SpreadEx explains:

A lunchtime surge saw the FTSE smash through to 7129; now it’s back hovering below 7100, that midday burst of energy proving to be brief.

Perhaps reports that both Citi and Morgan Stanley have stated they will leave London if Britain appears to be heading for a hard Brexit have weighed on investors’ appetite for the UK index; perhaps it was a bout of profit-taking. Either way the FTSE couldn’t hold onto its highs for long.

Wall Streeet is also in the red, with the Dow down around 1% after aluminium firm Alcoa disappointed the markets.

Chris Beauchamp of IG says investors are also driving the US dollar higher, because they expect American interest rates to rise before Christmas.

The blame for the general ‘risk off’ mood can be attributed partly to Alcoa, whose disappointing figures have put US markets on the defensive, but overall the equity rally is being knocked by a rising US dollar, as traders rush back to the greenback thanks to soaring expectations of a move by the Fed in December

Updated

The pound is hitting new lows against the US dollar in late London trading.

It has now shed almost 1.5 cents today, to just $1.221.

That partly reflects fears over hard Brexit. It’s also due to the fact the US dollar is strengthening against most currencies.

Updated

Worth noting that the euro is also having a bad week.

Traders are piling into the US dollar in anticipation that American interest rates might rise in December.

Fujitsu says that its 1,800 planned job cuts are not a response to the Brexit vote, and it remains committed to the UK (that’s hot off the Reuters terminal)

The pound is taking another pummelling, now down its lowest point of the day at $1.223.

It was briefly lower on Friday, during the flash crash that drove sterling to fresh 31-year lows.

Updated

Bad news for UK workers at Fujitsu. The Japanese electronics firm is planning to cut up to 1,800 jobs as part of a ‘transformation programme’.

That’s via the Press Association.

No word if it’s Brexit-related....

Global stock markets are turning a little sour now, dragging the FTSE 100 away from today’s record high.

US aluminium firm Alcoa has disappointed investors, by missing revenue and profit forecasts today.

That’s a downbeat start to the latest earnings season, leaving Wall Street traders unimpressed.

Naeem Aslam of Think Markets says:

Expectations were that we will finally get a quarter when we can be confident to say that earning season will give us a number which will make the foundation a little more stronger for the US economy.

But the number released from Alcoa was simply just a disaster and has made investors angry who are willing to liquidate their position.

So, all the main markets are now in the red:

The main American and European stock markets right now
The main American and European stock markets right now Photograph: Thomson Reuters

The pound is still looking weak, too, down almost one cent today at $1.228

Updated

The government won’t be lured on whether we’re in a full-blown sterling crisis, or not, reports Paul Waugh of Huffington Post.

Personally, I think $1.20 might be the trigger point for some serious “Sterling Crisis” headlines; so we’re still a few cents away.

Updated

Bank bosses warn they could quit London due to Brexit

City workers head to work during the morning rush hour .
City workers head to work during the morning rush hour. Photograph: Toby Melville/Reuters

Two senior bankers have warned that they could start moving jobs out of the City, perhaps next year, if Britain appears to be heading for a hard Brexit.

Speaking at a London conference today James Bardrick, the boss of Citi’s UK operation, said his bank could trigger its contingency plan by early next year.

Bardrick said:

“How do we and when do we start making decisions ... knowing the plan is ready to go ... it could be in the first quarter of 2017.”

Rob Rooney, CEO of Morgan Stanley international, gave a blunt warning that jobs would have to move back into the EU, if Britain quit the single market.

As Rooney put it:

“It really isn’t terribly complicated. If we are outside the EU and we don’t have what would be a stable and long-term commitment to access the single market then a lot of the things we do today in London, we’d have to do inside the EU 27.”

(thanks to Reuters for the quotes).

This is what Bank of England policymaker Anil Kashyap was banging on about this morning, when he predicted a “non-trivial” impact on the UK’s fiscal plans if lots of well-paid City jobs moved overseas.

Today’s stock market surge is only a ‘hollow victory’, argues Laith Khalaf of financial services group Hargreaves Lansdown.

He says it’s being driven by currency movements rather than a fundamental improvement in UK companies.

Nonetheless UK investors will still be cheered to see a boost to their pension pots and ISA valuations, as it represents a genuine increase to their wealth in pounds and pence.

The concern will be that a reversal in fortunes for the currency could see the gains wiped off as quickly as they appeared. That may well be the case, though it’s hard to see anything in the foreseeable future that’s going to propel the pound back to its former glory.

Will FTSE hit a record closing high?

Having smashed through the intraday record high, City traders are now wondering if the FTSE 100 will do the double and close at a record high.

And with two and a half hours to go, it’s nip and tuck, frankly.

The Footsie has dipped back a little, since hitting 7129 points two hours ago. It’s now just 7097, compared to an alltime closing high of 7104 points.

This is good, from the Press Association:

The Irish government also warned that the Brexit vote is “a real risk” to the Republic’s economy, due to the close trade ties.

Dublin has already trimmed its growth forecast for 2017, as this statement from today’s 2017 Budget explains:

Irish finance minister defends corporation tax rates

Ireland’s Minister for Finance Michael Noonan displays a copy of the 2017 budget, delivered today
Ireland’s Minister for Finance Michael Noonan displays a copy of the 2017 budget, delivered today Photograph: Clodagh Kilcoyne/Reuters

During the delivery of his budget to the Dail (Irish parliament) this lunchtime Ireland’s Finance Minister Michael Noonan was quite bullish in defending the Republic’s controversial low corporation tax regime.

Despite the EU ruling that Apple owed billions in tax thanks to the taxation policy in Ireland, Noonan told the Dail:

“Ireland’s 12.5% corporation will not be changed and nobody in Europe or anywhere else is asking for it to be changed.”

On the Republic’s international tax strategy, Noonan says it:

“restates our commitment to meet international tax principles and how our corporate tax regime remains fair but competitive into the future.”

Overall he has announced around €300m in tax cuts mainly for the lower paid.

Around €1.7bn will be allocated to extra spending for the public services.

Updated

Back in Dublin, crash barriers have been erected to prevent any surge of protestors demonstration over today’s Irish budget 2017.

So far there has been little sign of many demonstrators unlike in the days of the last recession when thousands congregated in Molesworth Street over austerity cuts and deals to recapitalise Ireland’s busted banking system.

.
. Photograph: Keela Sweeney

(via US student Keela Sweeney)

Neil Wilson of ETX Capital agrees that the weak pound is the main factor driving the FTSE 100 to an all-time high today.

Brexiters might point to the FTSE’s rise as a sign of strength but this is very much a story of sterling weakness boosting foreign earnings – which account for around two-thirds to three-quarters of FTSE 100 company revenues.

Having said that today’s gains largely come from UK-focused stocks like Next, Whitbread, Marks & Spencer, Travis Perkins and Taylor Wimpey.

He also believes that Bank of England policymaker Michael Saunders may have helped push shares higher, during his testimony to MPs (highlights are here)

We also got comments today from one Bank of England policymaker that the MPC would not be too fussed if inflation overshoots – the market seems to have taken this as a clear indication that rates are staying on the floor for a while yet. A weak pound and lower-for-longer interest rates is generally good for equities.

Duncan Weldon, head of research at City firm Resolution Group, points out that the FTSE 100 isn’t a great barometer of the UK economy.

The index’s 10 biggest companies are (in order), Royal Dutch Shell, HSBC, Unilever, BP, British American Tobacco, GlaxoSmithKline, BHP Billiton, AstraZeneca, Vodafone and Diageo.

That’s two oil giants, two pharmaceuticals firms, a global bank, a tobacco firm, a consumer goods titan, a major mining company, an international drinks business and a major telecoms group.

Ben Chu of the Independent is tweeting some interesting graphs about the FTSE:

We’re calling it a record high... but The Telegraph’s Tara Cunningham points out that the Footsie is 6% down this year, when priced in US dollars.

That means UK shares are attractive for American investors, another factor that has driven the market up since the Brexit vote.

Boomberg’s newsflash
Boomberg’s newsflash Photograph: Bloomberg TV

FTSE 100 hits record high

Boom! The pound is falling further as lunchtime approaches in the City, driving shares in London up to their highest ever level.

The FTSE 100 index has just smashed through to a new all-time intraday high, up 30 points at 7129. That breaks the previous record set in April 2015.

The FTSE 100 since the 1990s
The FTSE 100 since the 1990s Photograph: Thomson Reuters

It’s being driven by retailers such as Next (+4.2%) and Marks & Spencer (+3.1%), plus building companies.

The smaller FTSE 250 index, which contains more UK focused companies, has gained 0.7% - close to the record high struck last week.

But there is a proviso.... share prices are partly being driven up by the weakness of the pound (which makes overseas earnings more valuable).

And the pound is continuing to slide today, now down another cent at $1.225.

This graph, from Bloomberg, shows how the FTSE 100 has pushed higher as the pound has weakened since June:

The FTSE (white line) has recovered since the Brexit vote, as the pound (blue) has fallen
The FTSE (white line) has recovered since the Brexit vote, as the pound (blue) has fallen Photograph: Bloomberg TV

Chris Beauchamp, Chief Market Analyst at IG, says the weak pound is “working its magic” on share prices again.

UK investors will once again be cheering the impact of a falling pound, as the drop in sterling once again works its magic on the FTSE 100.

The index has hit its all-time high, although this will doubtless bring out the legions armed with their charts of the FTSE rebased into a variety of currencies to paint the index in a less flattering light.

Of course, most UK investors will simply be pleased to see their portfolios rise, and will worry about the currency later. Good numbers from luxury firm LVMH have helped Burberry to rise steadily this morning, with the stock touching its highest level since August 2015.

Updated

There are also protesters outside government buildings in Ireland today, ahead of the budget:

.
Thanks to Michael Joyce and Stephen Kierans Photograph: Michael Joyce

Updated

A local entrepreneur and founder of a Irish startup company called Parkio has welcomed Dublin’s decision to halve capital gains tax for entrepreneurs, to 10%, to help cushion the impact of the Brexit vote.

His accountant had estimated he was going to be paying approximately 33%.

(thanks to journalism student Lucas Nolan)

Back in Ireland, the government’s new budget is now expected to contain some measures to counteract and indeed exploit the impact of Brexit.

There will be additional funding for the Republic’s Industrial Development Authority, which over four decades has attracted multi-national corporations from Dell to Apple, Microsoft to Google to the country.

The extra money for the IDA will enable it to try and woo even more global hi-tech giants to low corporation tax Ireland (12.5%) especially those companies who are worried that the UK out of Europe means Britain is no longer a beachhead into the EU single market.

It is part of moves to portray Ireland globally as the only English-speaking country still in the the EU and mainly for the benefit of American hi-tech multi nationals in particular.

One potential ‘Brexit shock absorber’ in this year’s budget is the dramatic halving of capital gains tax for home-grown entrepreneurs from 20% to just 10%. This is another move designed to boost indigenous Irish firms to cope with any potential collateral damage Brexit could cause to the Republic’s economy.

Updated

Bank policymaker: Hard Brexit could create budget black hole

Anil Kashyap refuses to say whether he thinks the pound is likely to suffer further falls over the next few years.

I’d have to resign from the University of Chicago if I started forecasting currency moves, Kashyap tells the Treasury committee -- we’re known for our position that the market sets these prices.

The newest member of the Bank of England’s Financial Policy Committee adds:

Until we see what the relations are between the UK and the EU, it’s very hard to know where any of this is going to settle

Q: But what about if we knew we were getting a hard Brexit?

Then the pound would probably weaken further, Kashyap. But it still depends exactly what ‘hard Brexit means’.

Q: Hard Brexit is taken to mean a swift exit from the EU, and a fallback to WTO rules.....

Kashyap replies that this could have serious consequences for the Treasury:

If you lose a bunch of financial services jobs... then the fiscal consequences of that is non-trivial, as those jobs are so high paying, and [generate] so much tax.

3.7% of total UK employment is in financial services, and 11.5% of fiscal revenues come from financial services, he adds.

You don’t have to lose lots of that before you have a hole in the budget that could be meaningful.

And that could have some knock-on effects for the exchange rate.

Reminder: A leaked Treasury paper has predicted that the UK could eventually lose £66bn of tax revenues after Brexit:

Updated

Anil Kashyap
Anil Kashyap Photograph: Parliament Live

The Treasury Committee is now questioning Anil Kashyap, a US academic who is joining the Bank of England’s Financial Stability Committee.

They’re not best pleased that Kashyap is planning to miss one FPC meeting due to teaching commitments at the University of Chicago (but to be fair, he’s squeezing his teaching commitments into just 10 weeks).

Kashyap is also being quizzed about the huge fine hanging over Deutsche Bank. Is that a threat to financial stability?

Kashyap argues that letting banks get away with malpractice would be a bigger threat to stability.

And he denies that the problems in the European banking system start with US fines. He blames low growth, and badly capitalised banks -- such as in Italy.

If the size of the problem in Italy was as small as some people have claimed, they’d have fixed it by now, Kashyap adds.

BoE policymaker: Pound could fall further

And that’s the end of Michael Saunders’ session at parliament, to rubberstamp his appointment to set interest rates on the Monetary Policy Committee.

The big news is that Saunders thinks the pound could extend its recent losses since the Brexit vote. He told MPs that:

“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely.”

Also:

Saunders said:

I think the economy will do better over the next few quarters. I don’t think that tells you about the long run effects. It’s important not to make judgements on the long run based on the short run view. What the economy does in the next few years is crucial.

Updated

Q: Is the Bank of England now ‘out of ammunition’ to stimulate the economy?

Saunders says not.

Interest rates could be cut again (although they’re already only 0.25%), and the Bank could also boost its asset purchase scheme (buying bonds with newly created money).

We’ve still got tools, if needed, he insists.

Michael Saunders say the UK economy will probably perform better than expected over the next few quarters (echoing a point he made in a speech last week).

But that doesn’t tell us much about the long-term effects of Brexit.

Q: Were the Bank of England’s warnings before the EU referendum justified?

Saunders only joined the Bank of England this summer, so he was still working in the City during the Brexit vote.

He says most City experts expected a Brexit vote to lead to a weaker currency and lower growth, but no-one knew if this would lead to financial instability.

So as a player in the market, Saunders was reassured by Mark Carney’s comments -- as it showed the Bank would act to stabilise the markets.

The Brexit vote isn’t the only thing pushing the pound down, Michael Saunders adds.

The UK’s current account deficit (around 6% of GDP) is also weighing on sterling.

And Saunders admits that he wouldn’t be surprised to see the pound fall further!

He also explains that a 20% drop in the pound (slightly more than what we’ve seen since June) would probably push import prices up by 12-13%, which would add 4 percentage points to inflation over a few years.

That could mean inflation is 1.5 percentage points higher than otherwise at its peak (so 3.5% rather than 2%, for example). And Saunders thinks the Bank of England could ‘look through’ this, rather than raise borrowing costs to squeeze it out.

Saunders: Pound's decline may not be a problem

Q: Are you worried about the recent volatility in the pound?

Michael Saunders says sterling is adjusting to the reality that Britain is leaving the European Union, and the likely impact on growth.

If the speed at which the currency falls creates ripples in other asset markets, then that is a problem.

But...if we are just adjusting to a new equilibrium, then the speed of the adjustment is not a problem.

Saunders also insists that the Bank does not have any target for the pound, or a level where it would intervene to support sterling.

The Bank has “long ago learned its lesson” here, he smiles (a reference to Black Wednesday in 1992 when speculator George Soros forced the pound out of the European Exchange Rate Mechanism).

Bank of England's Saunders quizzed by MPs

Michael Saunders at parliament today
Michael Saunders at parliament today Photograph: Parliament Live

Over in parliament, new Bank of England policymaker Michael Saunders is being questioned by the Treasury Committee.

It’s being streamed live here.

Saunders has been asked about Theresa May’s recent criticism of the BoE’s stimulus policies, for making people who own assets richer, but penalising savers and the poor.

He defends the current policy of record low interest rates, plus a quantitative easing programme.

I don’t think we at the Bank of England can tackle the distributional effects of monetary policy. We can’t set interest rates for different groups.

If the Bank raised interest rates to support savers, then the economy would be weaker, unemployment would be higher, asset prices over time would be weaker, and over time, interest rates would eventually be lower too, Saunders claims.

Q: So should you set QE and monetary policy blind to the distributional effects?

Yes, Saunders replies, unless those distributional effects obstruct the impact of monetary policy.

Big news out of South Korea: Samsung is “permanently halting production of its Galaxy Note 7.

Killing off the smartphone is a “drastic step”, says Bloomberg, after several customers reported that replacement devices have caught fire.

Bloomberg explains:

After halting sales of the new versions of the large-screen smartphone that failed to fix exploding batteries, Samsung finally pulled the plug on a key product that was supposed to compete with Apple Inc.’s iPhones and other high-end smartphones during the U.S. holiday shopping season.

Production will stop, Samsung said in a statement Tuesday.

At $1.229, the pound has shed almost seven cents against the US dollar since Theresa May announced she’d trigger article 50 by next March.

That’s a fall of around 5%, in less than seven trading days, and means the pound is now 17% lower than on referendum day.

The pound vs the US dollar
The pound vs the US dollar over the last month Photograph: Thomson Reuters

Reuters reckons the pound is suffering its worst four-day run since immediately after the Brexit vote.

That’s bad for import prices, and Brits heading abroad.

But Peter Rosenstreich, head of market strategy at Swissquote Bank, believes exporters should soon benefit.

A Brexit is definitely not the end of the world. Moreover, the devalued pound will see exports gain momentum within the next few month.

Over in Germany, investor confidence has risen this month:

Shadow Chancellor John McDonnell.

John McDonnell MP, Labour’s Shadow Chancellor, has responded to the warning that a “hard Brexit” could cost the Treasury £66bn a year in tax revenues.

“Losing access to the single market would be devastating for jobs, livelihoods and our public services yet the Tory government are prepared to take this desperate step, despite being warned by their own experts of the consequences.

The British people voted to leave the European Union and all sides must respect that decision, but what they certainly didn’t vote for was economic misery and the loss of jobs.”

After coming tantalisingly close to a new alltime high, the FTSE 100 has now shed all those early gains.

Despite today’s selloff, sterling isn’t the worst-performing currency today.

That honour has been grabbed by the South African rand, which just tumbled by 3% against the US dollar.

There are reports that finance minister Pravin Gordhan has been issued with a summons for fraud, over a surveillance unit which was set up when he led the national tax agency.

South African government bonds, and bank shares, are also falling in value.

Updated

Over in parliament, MPs on the Business Committee are holding a session on Britain’s industrial strategy.

They’ll hear from former chancellor George Osborne, former deputy PM Lord Heseltine and Sir Vince Cable, who ran the BIS department before the last election.

Our Politics Live blog is tracking the action:

Vacancies for job.

The UK jobs market is also suffering from the Brexit vote, according to recruitment firm PageGroup.

Gross profits at its UK division fell by 4.7% in the last three month, it told the City today.

PageGroup blames on “fragile market conditions” following June’s referendum, particularly in the financial services sector.

Steve Ingham, PageGroup’s CEO, says:

In the UK, confidence levels remained fragile and below levels seen earlier in the year....

With the prevailing uncertainty in the UK, the challenges in some of our other larger markets and the unpredictable nature of the current cycle, we remain cautious in our short-term outlook.

The official unemployment data since the Brexit vote has been quite encouraging, with the jobless rate still just 4.9%. But the claimant count did rise in August, suggesting some weakness.

It’s been a while since we last had a full-blown currency crisis, everyone panicking because the pound is falling through the floor. Well, we’re having one now.

So says John Humphrys, Today Programme presenter, with a certain amount of relish.

But is it really a crisis?

Gerard Lyons, former chief economic advisor to Boris Johnson, says it’s not. He believes we should welcome the cheaper pound.

Sterling has been seen as overvalued for some time - and the scale of the current account deficit, at 7%, is huge.

In an era of low inflation and low growth, a weaker pound is a good thing, Lyons adds.

But Ngaire Woods, professor of Global Economic Governance at the University of Oxford, is much more concerned.

The cost of importing machines, or medical equipment for the NHS, from the US has immediately gone up, she says, and that will hurt the economy down the road.

Firms also face new uncertainties --over the future of foreign workers, and the UK’s future trade links – says Woods, adding:

Here at Oxford University we have top international professors saying they might not move to Oxford....

Irish budget preview

.

It’s budget day in Ireland and the first for the new coalition led by Fine Gael but propped up by Independent members of the Dail, and supported for the first time in terms of the national financial plans by the main opposition party Fianna Fail.

Irish budgets of recent past have been cost-cutting austerity driven events as the last Fine Gael-Labour government sought to restore the black hole in Irish public finances caused by the banking crash and the collapse of the Celtic Tiger economy.

In recent years Ireland has been the leading country in the EU in terms of growth but the state is still borrowing heavily on international markets to pay for its public services.

There are some small give-away measures in this year’s budget and they include:

  • An extra €5 per week for the nation’s pensioners.
  • An additional €900 per year to each child if he or she is in 40 hours of childcare per week.
  • Extra spending for an additional 1,000 nurses and 800 more garda officers.
  • A 50 eurocent hike in the price of cigarettes. <corrected>
  • A reduction of €5 in the cost of prescription charges for the over 70s.

All in all they are modest adjustments and extra spending indicating the cautious approach taken by Finance Minister Michael Noonan. He presents his budget to the Dail at 1pm and it will be interesting to see if he introduces any other measures aimed at absorbing future shocks to the economy caused by Britain’s planned exit from the European Union.

With the UK still Ireland’s largest trading one commentator in Dublin yesterday even called for the creation of an Irish Minister in charge of Brexit-affairs given the impact the British leaving the UK may have on the Republic’s economy.

Updated

Neil Wilson of City firm ETX Capital is alarmed by the “sharp moves” in the value of the pound this morning.

He fears that Brexit angst could drive sterling down to $1.20.

GBP/USD crashed through the $1.23 handle to around 1.2284, its lowest level since last week’s gyrations. It’s not unreasonable to think that ferocious flash crash was just a very tentative toe in the water and the pound is now plunging headlong into the abyss.

Sterling seems to be looking for a level and it’s really unclear where that could be and so bargain hunting is a risky game to play at the moment. The $1.20 handle earmarked by many before the referendum is definitely in play as everyone seems to be short sterling at present.

The weak pound is helping to drive the London stock market close to record highs.

The FTSE 100 index of top blue-chip shares has risen by almost 20 points, or 0.25%, to 7118 points.

That would be a record closing high, and is only 6 points away from the all-time intraday high.

Exporters, such as fashion firm Burberry, are benefitting from the cheapness of sterling. It’s also good for mining companies, who earn their money in dollars.

The top risers on the FTSE 100 this morning
The top risers on the FTSE 100 this morning Photograph: Thomson Reuters

Trade-weighted sterling hits eight-year low

Sterling is now at its weakest level since the financial crisis broke out, when measured against a basket of other top currencies.

Reuters has the details:

Trade-weighted sterling hit a nearly-eight-year low of 74.0 at the Bank of England’s first morning print of the index, which measures the pound’s broader strength. It was also half a percent weaker at 90.51 pence per euro.

Some traders cited a Financial Times report that Russian bank VTB may move its European hub to Frankfurt, Paris or Vienna as having added to worries of financial sector cutbacks inLondon due to Brexit.

“There is nothing to go on on the data front today, but concerns surrounding our ever increasing current account deficit have reignited discussion around the widespread impact such a hole can create,” said Tobias Davis, head of corporate treasury sales at Western Union in London.

Kit Juckes, currency expert at Societe Generale, fears that the weakness of the pound could spread to other assets, such as government bonds and shares.

In real effective terms, sterling is 10% lower than it was in 1992 after leaving the ERM and is now weaker than it was after Lehman.

Press comment is now shifting to embracing the positive effects of a weak pound and in due course that’ll be true but any further weakness from here might simply reflect loss of confidence and be bad for UK assets (gilts, equities, house prices, you name it...) in general.

Although a weak pound means Britain is poorer, it could also help the economy ride out the Brexit storm.

Ashoka Mody, the IMF’s former deputy-director for Europe, has told the Daily Telegraph that we should be celebrating sterling’s slump.

Mody argues that the pound was overvalued before June’s vote, and has simply dropped to a more suitable level.

“It is desirable from every point of view. The idea that Britain is in crisis or is on its knees before the exchange rate vigilantes is ludicrous.

“The UK economy is rebalancing amazingly well. It is a stunning achievement that a once-in-fifty-year event should have gone to smoothly.”

More here.

House Speaker Paul Ryan, who says he’ll no longer defend Donald Trump.
House Speaker Paul Ryan, who says he’ll no longer defend Donald Trump. Photograph: Mandel Ngan/AFP/Getty Images

The pound’s weakness is being exacerbated by traders piling into the US dollar.

The dollar is in demand, as Donald Trump is seen as increasingly unlikely to become US president in November.

Tape recordings of Trump boasting about groping women have dealt another blow to his campaign, prompting more top Republicans to withdraw their endorsements:

Kathleen Brooks of City Index says Trump’s “crash and burn” is boosting the dollar,

The latest election polls in the US suggest that Hillary Clinton is extending her lead over Donald Trump, which is considered dollar positive.

The most senior Republican in Congress, Paul Ryan, has abandoned Trump after the latest debate against Clinton, further signs that his campaign is losing momentum at this crucial stage of the election race.

Pound falls through $1.23

It’s looking like another bad morning for sterling, as the British currency continues to weaken in the face of Brexit worries.

The pound has dropped by over half a cent this morning to $1.229 -- which would be a 31-year low, if you ignored the flash crash that sent sterling tumbling on Friday.

The pound vs the US dollar
The pound vs the US dollar Photograph: Thomson Reuters

Sterling has also lost fresh ground against the euro, down 0.33% to €1.106.

This latest selloff follows reports that Britain could lose £66bn of tax revenues each year if the UK takes the plunge with a ‘hard Brexit’

Here’s the story:

Leaked government papers suggest that leaving the single market and switching to World Trade Organisation (WTO) rules would cause GDP to fall by up to 9.5% compared with staying in the EU.

The draft cabinet committee paper seen by the Times is based on forecasts from the controversial study into the predicted impact of quitting the EU published by George Osborne in April during the referendum campaign. Although the then chancellor faced widespread criticism over the report, the Treasury stands by its calculations, according to the Times.

The documents says: “The Treasury estimates that UK GDP would be between 5.4% and 9.5% of GDP lower after 15 years if we left the EU with no successor arrangement, with a central estimate of 7.5%.

Some pro-Brexit ministers have dismissed the report, saying the Treasury is being unduly pessimistic and going over the top.

Sam Coates, the Times journalist who broke the story, explains that the report uses the same Treasury forecasts produced in April.

This may heighten concerns among businesses that they could be locked out of the single market by March 2019....

Updated

The agenda: No escape from Brexit worries

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

Coming up today....

Brexit fears continues to swirl around the City this morning, as the pound continues to be buffered by concerns over Britain’s exit strategy from the EU.

Overnight, Russia’s VTB Bank has become the first big lender to publicly say it will move its European headquarters out of the UK.

Herbert Moos, deputy chairman, told the Financial Times that VTB is now eying up Frankfurt, Vienna and Paris as alternative sites for its European hub.

Moos says:

“We did have bigger plans for the London office, but after Brexit we are scaling them down and building them up elsewhere.

“Our board will decide where by the end of the year.”

More here: Brexit pushes VTB’s Europe HQ out of London

That kind of talk is likely to weigh on UK assets, as all the major banks plan their own strategies...

Brexit will also be on the minds of MPs on the the Treasury Select Committee. They will be questioning Michael Saunders, the new member of the Bank of England’s monetary policy committee, from 10am.

They’ll then hear from Anil Kashyap, who is joining the Bank’s Financial Policy Committee.

Saunders has already said that the UK economy has performed better than the Bank expected, since the Brexit vote.

Also coming up....

Tech giant Samsung is in a full-blown crisis, after pulling all its Galaxy Note 7 smartphones from sale around the globe. Several customers have reported that replacement devices have overheated, or caught fire:

The oil price has hit a one-year high overnight, after Russia backed the output curbs proposed by the Opec cartel.

Oil ministers are gathering in Istanbul this week for the World Energy Conference, so further developments are possible.

Ireland’s government is presenting its budget today; the first since Britain voted to leave the EU.

And European stock markets are expected to dip in early trading, after London’s FTSE 100 closed at a 15-month high last night.

We’ll be tracking all the main events through the day....

Updated

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