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Graeme Wearden (until 2pm) and Nick Fletcher

Santander rescues Spain's failing Banco Popular, oil prices slide - as it happened

People walk past a Banco Popular branch in Madrid, Spain, yesterday.
People walk past a Banco Popular branch in Madrid, Spain, yesterday. Photograph: Juan Medina/Reuters

European markets slip

It was a down day for European shares ahead of Thursdays key events, the UK election, the European Central Bank meeting and ex-FBI director James Comey’s testimony. A slide in the euro unnerved European stocks while conversely, a strong pound helped push the FTSE 100 lower. Energy and commodity companies were also under pressure after a slide in the oil price following a surprise jump in US crude stocks. The final scores showed:

  • The FTSE 100 finished down 46.33 points or 0.62% at 7478.62
  • Germany’s Dax dipped 0.14% to 12,672.49
  • France’s Cac closed 0.07% lower at 5265.53
  • Italy’s FTSE MIB fell 0.1% to 20,739.91
  • Spain’s Ibex ended down 0.07% at 10,871.7
  • In Greece, the Athens market slipped 0.42% to 774.29

On Wall Street, the Dow Jones Industrial Average is currently down 7 points or 0.04%.

On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.

Back with the oil price reaction to the surprise rise in US crude stocks:

The pound rose to a two week high against the dollar, as investors became more convinced that the Conservatives would win Thursday’s UK election despite their poll lead narrowing.

Sterling touched $1.2967 against the dollar, before slipping back to its current level of $1.2936, still up 0.22%. Against the euro, it is up 0.6% at €1.1513.

Connor Campbell, financial analyst at Spreadex, said there were also other factors at work in sterling’s favour:

The pound found some extra energy this afternoon, though it’s not quite clear whether the currency is being driven higher by home-grown news or events elsewhere.

Against both the dollar and the euro sterling jumped half a percent, suggesting that the election-jitters that have bothered the pound for the last fortnight or so have subsided. However, there are potentially other explanations for its growth. The euro has been hit by reports that the ECB is preparing to cut its inflation forecasts, something that would further kick the rate hike can down the road. In the US, meanwhile, the dollar is gearing up for tomorrow’s testimony from former FBI chief James Comey, an event that could destabilise an already shaky White House.

Here’s Reuters on the rise in US crude stocks:

Oil prices slid more than 3 percent on Wednesday after the U.S. government reported an unexpected increase in inventories of crude and gasoline, fanning fears that output cuts by major world oil producers have not drained the global crude glut very much.

Crude stocks in the United States grew 3.3 million barrels to 513 million barrels, according to the U.S. Energy Information Administration (EIA). That confounded forecasters who had predicted a drop of 3.5 million barrels, especially a day after preliminary data from the American Petroleum Institute indicated an even bigger drop.

Gasoline inventories also unexpectedly rose, imports increased, and exports dropped, the EIA data showed...

“Flagging gasoline demand continues to bedevil the market. With gasoline currently the seasonal leader of the complex, its weakness is dragging everything down,” said John Kilduff, partner at Again Capital in New York.

Prices slid even as some in the market remained concerned about the move by OPEC members Saudi Arabia and the United Arab Emirates to cut diplomatic and transport ties with Qatar, an OPEC member that had agreed to cut only about 30,000 barrels a day as part of Organization of the Petroleum Exporting Countries agreement to reduce output.

However, analysts saw a risk that rivalries between OPEC members could weaken the production cut agreement. Some were already concerned about rising production from Libya and Nigeria, which are exempt from the agreement.

OPEC has pledged to cut almost 1.8 million barrels per day (bpd) to help reduce global inventories.

More on the US inventory figures:

The drop in the oil price following the unexpected increase in US crude stocks has also had an impact on stock markets.

The FTSE 100, which had been just marginally lower, is now down 41 points or 0.56% while Germany’s Dax has dipped into the red. In the US the Dow Jones Industrial Average is now virtually unchanged after its earlier gains, up just 1.2 points.

Updated

Brent crude is now down more than 3% at $48.46 a barrel while West Texas Intermediate - the US benchmark - has dropped 4.6% to $45.95.

The surprise rise in US crude stocks contradicts Tuesday’s report from the API showing a decline in inventories.

Oil prices lose more ground on surprise rise in US crude stocks

Oil prices were already on the slide after the blockade imposed on Qatar by its neighbours, with analysts concerned the rift could impede Opec’s agreement to curb production.

Now they have come under more pressure following a surprise rise in US crude stocks. According to the Energy Information Administration, US crude inventories rose by 3.3m barrels last week to 513.21m, compared to forecasts of a 3.46m decline.

Gasoline stocks rose 3.32m, well ahead of the expected 0.58m increase.

Brent crude has fallen to its lowest level since early May following the EIA report.

Meanwhile the pound is now up 0.2% against the dollar at $1.2933, while the dip in the euro on reports that the European Central Bank might cut its inflation outlook on Thursday has helped the pound gain 0.59% to €1.1512 against the single currency.

Updated

Wall Street edges higher

US markets have opened in positive territory, but investors remain cautious ahead of Thursday’s triple whammy of the UK election, the European Central Bank meeting and - of more concern to Wall Street - the testimony of ex-FBI boss James Comey.

The Dow Jones Industrial Average is currently up 24 points or 0.12%, while the S&P 500 opened up 0.13% and the Nasdaq Composite 0.27%.

WPP, whose boss Sir Martin Sorrell earlier received a rough ride from shareholders over his pay packet and his own future at the company, is the biggest faller in the FTSE 100.

That’s less to do with the annual meeting outcome and more to do with the trading statement issued alongside it. This showed a slightly slowdown in like for like sales growth of 0.7% in the first four months of the year (January to April), down from 0.8% in the first quarter (January to March). Analysts at Jefferies said:

One month is not a trend, but these numbers are in focus given the concern around FMCG [fast moving consumer group] spending, US growth in light of the account losses (VW and AT&T) and the weaker start to the year that WPP had in Asia.

Later come the latest weekly US oil stocks figures from the Energy Information Administration, a day after an industry survey showed a bigger than expected fall. But the worries over the Middle East after the rift between Qatar and other Gulf states has continued to see oil prices slide, and a positive EIA report may have little impact. Craig Erlam, market analyst at Oanda, said:

The only notable data to come today is EIA crude oil inventories which follow an API release on Tuesday that reported a drawdown of 4.62 million barrels. With oil already under pressure as traders appear to question the suitability of the output deal and the latest geopolitical issues in the region weigh, it will be interesting to see whether another large drawdown will offer any support. Having broken below $50 though, Brent continues to look vulnerable to further downside.

Manuel Lopez, regulation partner at law firm Ashurst in Madrid, has declared that Santander’s rescue of Banco Popular is a “landmark moment”.

It shows that the Single Resolution Board is determined to resolve failing banks, without involving state money, he says.

This signals that SRB and other EU regulators will take major steps to ensure that taxpayers don’t bear the cost of bank failures – and that they won’t wait until the situation deteriorates too far before doing so.

The shareholders of Popular have seen, overnight, the results of the lessons learned in 2008. This will not be the last such case, and investors will certainly study the result and the financial consequences of this important decision.”

Updated

Sir Martin Sorrell.

Britain’s top advertising magnate, Sir Martin Sorrell, received a rough ride from shareholders today over his pay package, and his own future.

One fifth of WPP shareholders refused to back Sorrell’s latest bumper pay deal, worth £48m, even though the company has tightened its remuneration policy after earlier protests.

Investors also demanded more action on a succession plan for life after Sorrell, who is 76, especially as either side can end his contract with no notice.

A picture shows a financial graph on a television screen showing the movement of the foreign exchange rate of the British pound against the US dollar in realtime on the trading floor of ETX Capital in London on January 17, 2017 as British Prime Minister Theresa May delivers a speech on Brexit.

Businesses who are fretting about the election could consider protecting themselves against the pound suffering wild swings when the results come in.

Roy Williams, managing director at supply chain firm, Vendigital, explains why sterling volatility could be a problem.

“It’s never too late for businesses to hedge against unpleasant currency-related post-Election surprises.

“The currency markets appear to be banking on a Tory win but the polls are more ambivalent. Businesses operating on low margins with significant imports or exports should consider a late hedge to protect their trading position from exchange rate volatility in the immediate aftermath of the General Election.

“Prior to deciding what to do, businesses need to understand if they are a net importer or exporter to each of their various markets. For manufacturers that are net exporters for example, it would be worth considering locking in their exchange rate for a fixed period of time as part of a bank agreement. This will at least allow them a period of financial certainty to plan against.

Another option is to line up suppliers in different regions, to give flexibility depending how the foreign exchange markets move, Williams adds.

A ballot box.

UBS Wealth Management have fired over some analysis of how the financial markets will respond to the result of tomorrow’s general election:

None of their scenarios sound particularly appealing, frankly, but here goes....

Conservative enhanced majority

  • Back to business as usual for government.
  • Established trends of rising inflation and weak growth in household incomes unlikely to change, weighing on growth in coming quarters.

Conservative majority, in the case of less than stellar performance

  • Prime Minister beholden to backbenchers in her party who favour a swift exit and hard Brexit.
  • Less likely to see a transition deal.
  • This results in sharp slowdown in growth as trade falters.
  • Firms shift investment from the UK into the EU.

Labour-led minority government

  • Complete change of economic programme for the UK. Domestic policy takes a backseat amid Brexit negotiations, with lack of clarity over which aspects of Labour’s proposals will be implemented.
  • Sharp drop in business and consumer confidence amid prospect of unstable coalition, muddled Brexit stance, and higher corporate and business taxes.
  • Downside risks to already below-consensus estimates of 1.4% GDP growth for this year and 0.7% for next.

Sterling subdued ahead of election storm

The pound has done its best impression of a somnolent sloth this morning.

Sterling is unchanged on the day, at $1.2907, on the final trading session before Britons trudge to the polls to elect our next government.

Traders are eager to find out which (if any) of the rival opinion polls have actually predicted the result correctly. The pound could rally if Theresa May gets an increased majority, but likely slide if the PM manages to actually lose seats.

Paresh Davdra of RationalFX says:

“The pound has remained steady on the eve of the general election. As campaigning reaches its climax, the pound has retreated slightly from the two-week highs seen yesterday but remains stable, as analysts await the election results.

The markets are positive about the prospects of Prime Minster Theresa May emerging the winner of tomorrow’s vote, as current polls indicate a secure lead for the Conservatives. However, there is still caution over the remote possibility of a hung parliament or a Labour victory, which investors fear would sink the pound in the aftermath of the election.

Most European stock markets have crept a little high this morning, as traders enjoy a quiet day ahead of tomorrow’s excitement.

Spain’s IBEX is lagging behind, with Banco Santander down 2% following its plan to raise €7bn in new capital to cover Banco Popular’s non-performing assets.

European stock markets
European stock markets Photograph: Thomson Reuters

Thursday will include Britain’s general election, a European Central Bank meeting, and ex-FBI chief James Comey testifying to Congress.

Craig Erlam, senior market analyst at OANDA, says:

We’re seeing mild gains in the FTSE in what is otherwise a mixed European session this morning. US futures are pointing a little higher ahead of the open, with little direction coming from across the pond.

The UK index has stabilised in the weeks leading up to the election, with the sudden uncertainty around the outcome appearing to be contributing to the moves.

There’s suddenly some drama in the markets, as the euro slides to a four-day low.

The single currency shed half a cent to $1.122 after Bloomberg reported that the ECB is preparing to cut its inflation forecasts.

Government bond prices are also jumping, pushing down the yield (interest rate) on that debt.

Lower inflation forecasts means less chance of the ECB tightening monetary policy soon, and unwinding its huge bond purchase scheme.

The Financial Times also argue that the Banco Popular bailout has bolstered the credibility of Europe’s banking sector.

Their Madrid bureau chief Tobias Buck writes:

Analysts said that the ability of eurozone authorities to decisively step in to wind down Popular and safeguard its assets gives the EU regime new credibility after questions were raised during the tortuous struggle to clean up Italy’s troubled banks.

“It’s essentially a case of the regulation doing exactly what it was created for,” said Laurent Frings, head of credit research at Aberdeen Asset Management. “But it does show that there is real risk in investing in these second tier names in the banking sector.

Updated

The rescue of Banco Popular means that attention will now turn to Italy’s financial sector.

Some analysts are speculating on whether any Italian banks will fall into Europe’s resolution mechanism, as some regional lenders are struggling to raise fresh capital.

Analysts at ABN Amro, though, fear that some Italian banks aren’t as attractive as Popular.

The deal is facilitated by the fact that Banco Popular is actually strong enough to have buyers. Especially their loan book, and diversification to Portugal was of interest. Crucially, the deal could be performed without the need for state assistance. However, in Italy, the banks of Veneto and Vicenza are not in the equivalent balance sheet position as the Banco Popular. It would seem that the large institutions in Italy would be unwilling to take over the banks without the interaction of the Italian state, either via the Atlante fund or another mechanism.

The question now is, if Banco Popular has now been stated as ‘failing or likely to fail’ by the SRB, what does this mean for the arguably weaker banks of Veneto and Vicenza banks

This chart, from M&S’s Bond Vigilantes team, shows how Banco Popular’s risky bonds have been wiped out by today’s deal (the orange line).

But senior debt (which is further down the pecking order when a company fails) is not being ‘bailed-in’ to today’s rescue, so its value has actually risen.

Updated

Markets take Banco Popular rescue in their stride

Once upon a time, a failing eurozone bank would have sparked mayhem in the financial markets.

Not today, though. The news that Banco Popular has been acquired for one shiny euro by Santander has caused a notable lack of drama.

And that’s because Europe’s bank resolution mechanism is acting like it was meant to. Shareholders in a failed bank have been wiped out, and crucially so have the riskier bondholders.

Various Banco Popular debt instruments have been written down, or converted into equity which was then handed to Santander, as part of today’s deal.

That means that bondholders who took a risk by holding this debt (which offered attractive returns) are suffering losses, rather than the taxpayer.

James Mackintosh of the Wall Street Journal has tweeted the details:

The OECD also hiked its growth forecasts for the eurozone and Japan, but didn’t nudge its UK forecasts.

Angel Gurria, head of the OECD, says we shouldn’t get too excited that global growth is heading for a six-year high of 3.5%.

He told Reuters that:

“Everything is relative. What I would not like us to do is celebrate the fact that we’re moving from very bad to mediocre.

It doesn’t mean that we have to get used to it or live with it. We have to continue to strive to do better.”

Something to ponder....

This shows why global growth still isn’t ‘good enough’, in the OECD’s view.

OECD growth forecasts

This chart shows how the OECD expects the global economy to grow faster, but with many of the benefits heading to the richest:

OECD raises global growth forecasts, but sees Brexit pain ahead

The OECD’s latest global economic outlook is just out, and it gives a mixed picture.

On the upside, the Paris-based thinktank has hiked its global growth forecast this year to 3.5%, from 3.3% previously. That would be the best performance in six years.

The OECD sees growth rising further to 3.6% in 2018.

But it is also concerned by persistent inequality in the global economy, lacklustre wage growth, and signs that the public are losing faith in their governments.

And it says the outlook is “better, but not good enough”.

The OECD has cut its US growth forecasts, but it now more optimistic about China’s economic prospects.

My colleague Katie Allen has read the report, and explains:

The OECD devoted a significant proportion of its latest report to the possible forces behind a backlash against globalisation. That discontent was seen as a key factor behind Donald Trump’s victory in the race for the US presidency, since when he has pledged to put “America first”. Anti-globalisation sentiment also appears to have boosted protectionist politicians in other countries, including France where the far-right candidate Marine Le Pen made it to the final round of the presidential election but lost to the centrist Emmanuel Macron.

The OECD said international trade had been a “powerful engine of global economic growth and convergence in living standards between countries” but that despite those gains, the backlash against it had been rising.

Readers may remember that Santander has a track record on rescuing ailing and troubled banks, including in the UK.

It took over Britain’s Abbey National and Alliance & Leicester before the financial crisis in 2008, and then added Bradford & Bingley savers to its businesses when B&B’s mortgage book was nationalised.

Santander's Botin: This is really great news

Ana Botin

Santander’s chairman, Ana Botin, has insisted that she came under “absolutely no pressure” from regulators to rescue Banco Popular.

Speaking on Bloomberg TV, she says

This is a transaction that is very good for our franchise in Spain and Portugal. It creates the best bank in both markets.

Botin says that an opportunity arose yesterday to present an offer to the Single Resolution Board, to take over Popular, and she’s impressed by how quickly the rescue was handled.

This is really great news for Europe, for the financial system, for Spain, and for Santander’s shareholders.

Botin says that the deal won’t hurt Santander -- it is sticking with all its financial targets for 2017 and 2018, and will be able to improve on its targets from 2019.

The €7bn of fresh capital is coming from a rights issue, she points out, so Santander’s capital reserves won’t be depleted.

There’s no word on any potential job cuts or branch closures. Botin says:

We are fully committed to supporting both the team and the customers from today.

But what about Popular’s non-performing real estate loans - does Santander really know what it’s taking on?

Botin says her staff did have time to do due diligence on Popular’s assets, prior to making its offer. And with Spain’s economy growing strongly, she’s confident this deal will be a success.

SRB: Depositors are being protected

Elke König, chair of Europe’s Single Resolution Board (which triggered Banco Popular’s rescue), says that the deal will protect the bank’s savers.

König also argues that the deal vindicates Europe’s efforts to avoid another financial crisis.

“The decision taken today safeguards the depositors and critical functions of Banco Popular.

This shows that the tools given to resolution authorities after the crisis are effective to protect taxpayers’ money from bailing out banks”.

Here’s the official statement:

The Single Resolution Board adopts resolution decision for Banco Popular

Back in the UK, the Halifax bank building society has reported that house prices rose by 0.4% in May.

That ends a run of four monthly falls in a row, and means prices are 3.3% higher than a year ago.

But prices were still 0.2% lower in the March-to-May quarter than in the previous three months, highlighting how the UK housing market has cooled.

Updated

Luis de Guindos.

Spain’s finance minister, Luis de Guindos, has welcomed Santander’s rescue of Banco Popular.

In a statement, de Guindos says:

“It’s a good outcome for the bank, given the situation it had arrived at in recent weeks, as it implies maximum protection for depositors and continuity of the bank’s operations”

He added that taxpayer money is not involved, and there is no danger of ‘credit risk contagion’ spreading to other banks.

Shares in Santander have dropped by 3% at the start of trading in Madrid.

That’s because investors are reacting to its plan to raise €7bn in new capital to fund its rescue of Banco Popular.

Popular’s shares have been suspended, following their sale to Sandander

Updated

If Banco Popular is in such trouble, why did Santander buy it?

Popular’s attraction is its retail banking division, and its small business customers. They can bolster Santander’s existing business, and give it a larger share of the Spanish banking market.

Bloomberg reporter Rodrigo Orihuela says:

On the one hand, Popular has a very strong SME business and a very strong retail business, which is what Santander wants.

The real estate business is the big big question....Everyone will have to wonder whether Sandander can solve it. They probably have a plan.

Here’s a video clip of Orihuela explaining the situation:

Banco Popular’s shares have badly underperformed the rest of the sector in the last year
Banco Popular’s shares have badly underperformed the rest of the sector in the last year Photograph: Bloomberg

Why Banco Popular failed

Banco Popular’s collapse into the arms of Santander today was primarily due to ‘toxic’ real estate loans on its books, and its failure to raise fresh capital.

The bank made some seriously bad loans before the financial crisis triggered a major Spanish housing crash, and its management have been unable to fix the damage.

Back in February, Popular posted a €3.5bn annual loss due to bad debts, restructuring costs and various writedowns. Then in May it admitted that it was setting aside even more money to cover real estate losses.

Its new chairman, Emilio Saracho, has been trying to sell assets and issue more shares to raise capital, but the market has proved unreceptive to his efforts.

The crisis escalated in recent days, as a series of potential buyers dropped out of an auction to buy Banco Popular. With capital levels running dangerously low, and its shares in freefall, the ECB was forced to step in and trigger today’s rescue, to Sandander.

Karen Tso of CNBC points out that today’s rescue isn’t costing the taxpayer anything, because Santander will raise €7bn of new capital from the markets.

Nick Leeson, the rogue trader who broke Barings Bank in the 1990s, is struck by the symbolic price of today’s deal:

Banco Popular rescued from collapse by Santander

Breaking news from Spain: Banco Santander has bought Banco Popular for €1, rescuing its fellow Spanish lender from from the brink of collapse.

Santander said it would raise €7bn to cover the capital shortfall and strengthen the balance sheet of Popular, after the European Central Bank deemed it to be “failing or likely to fail”.

The ECB (which supervises the eurozone’s largest banks) triggered the move after concluding yesterday that Banco Popular was running out of cash.

It says:

“The significant deterioration of the liquidity situation of the bank in recent days led to a determination that the entity would have, in the near future, been unable to pay its debts or other liabilities as they fell due.

Santander said it was making the purchase after “a competitive sale process” to rescue the ailing bank.

Popular lost more than half of its market value in recent days as investors grew increasingly fearful over its ability to deal with its capital shortfall. Moody’s downgraded the lender on Tuesday.

Details and reaction to follow....

The agenda: OECD growth forecasts and Halifax house prices

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

You have to take your hat off to Australia. Despite the economic challenges of the last decade, it has just racked up its 103rd successive quarter of growth - dating all the way back to 1991.

However, these latest growth figures aren’t too impressive. Australia’s economy grew by 0.3% in the first three months of this year, a little faster than Britain but slower than France or Germany.

That means annual growth is now just 1.7%; the weakest since 2009.

Bad weather is partly to blame, with some economists pointing to the disruption caused by Cyclone Debbie in Match.

But others are concerned. Michael Workman, a Commonwealth Bank senior economist, says:

“The Australian economy began 2017 with a whimper following a decent pace of expansion in the final quarter of 2016.”

“The weakness in today’s data extends beyond the weather, and the slowdown in the domestic economy has occurred at a time when the global economic backdrop has improved.

Here’s more details:

That sets the scene for this morning’s main economic event, the OECD’s latest assessment of the global economy. The Paris-based thinktank will update its growth forecasts, and highlight the key threats it sees ahead.

We’re not expecting much drama in the London markets today. The pound is hovering around the $1.29 mark, and the FTSE 100 is forecast to open unchanged.

Oil remains volatile, though, as the diplomatic crisis in the region rumbles on.

Here’s the agenda:

8.30am BST: Halifax’s UK house price index for May

9.30am BST: OECD releases its global economic outlook

Updated

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