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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden (until 2.15) and Nick Fletcher

Shares and oil rally ahead of crunch central bank meetings – as it happened

Storm clouds over the City of London.
Storm clouds over the City of London. Photograph: Guy Bell/REX/Shutterstock

Over in Greece the government is once again in a race against the clock to implement reforms that will unlock further bailout funds. After the tense restart of talks with visiting inspectors last week, officials are promising to placate creditors with an omnibus bill detailing new measures this week. Helena Smith reports from Athens:

With its popularity plummeting in the polls, Greece’s leftist-led government is keen to use the resumption of talks with lenders to good effect. Long and short, that means debt relief and putting discussion of it on the table. To get there Athens needs to complete the current round of prior actions, or milestone reforms, it failed to deal with over the summer. Upon them not only rests the next installment of bailout aid – at €2.8bn critical for the debt-wracked economy - but the onset of official debate over what to do about Greece’s unsustainable debt load, at 180% of national output by far the highest in the eurozone. “The idea is to push the multi-bill with all these measures through parliament this week,” said one well-placed source.

Greece’s prime minister Alexis Tsipras at last wek’s informal EU summit in Bratislava.
Greece’s prime minister Alexis Tsipras at last wek’s informal EU summit in Bratislava. Photograph: STRINGER/AFP/Getty Images

Among the measures will be the appointment of a supervisory board for the country’s new privatisation fund - an issue Athens has rowed about vociferously with creditors – and the formal inclusion of several loss-making public entities in the body.

With Greece’s debt-repayment timetable far from pressing, creditors - though peaved with the slow pace of reforms - are not piling on the pressure. Instead it is the government, that feeling the pinch of public hostility, is now keen to move on to the next step of passing the reforms so the Euro Working Group can agree to disburse the aid when it next meets on September 29. If that goal is achieved, the hope is the next bailout review will begin on October 17 – and with it the much anticipated issue of debt forgiveness.

Addressing his Syriza party’s central committee over the weekend, prime minister Alexis Tsipras insisted “there will be developments on the debt issue soon.”

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

European markets jump ahead of Fed meeting

With a recovery in oil prices and hopes that the US Federal Reserve will keep interest rates on hold on Wednesday, stock markets have begun the week on an upbeat note.

A weaker dollar helped lift commodity companies, with mining companies making up five on the top ten riser on the FTSE 100 index. The final scores showed:

  • The FTSE 100 finished up 103.27 points or 1.54% at 6813.55
  • Germany’s Dax jumped 0.95% to 10,373.87
  • France’s Cac closed 1.43% higher at 4394.19
  • Italy’s FTSE MIB added 1.28% to 16,399.26
  • Spain’s Ibex ended up 0.95% at 8715.5
  • But in Greece, the Athens market edged 0.36% lower to 557.47

On Wall Street, the Dow Jones Industrial Average is currently up 75 points or 0.4%.

Analysts are wondering whether the markets can build on today’s gains ahead of the Bank of Japan and Federal Reserve meetings, or whether we are in for more volatility until the outcome of the latest central bank deliberations is known.

Chris Beauchamp, chief market analyst at IG, said:

Monday has seen stock markets march higher in lockstep, with healthy gains across the board. The FTSE’s mining and oil firms have taken the space afforded by a weaker dollar to move strongly higher, and while the index appears to be slipping back as the session winds down, it looks like buyers are returning in large numbers. Today of course is the calm before the storm, as everyone gears up for the BoJ and Fed decisions on Wednesday, so we can expect to see risk appetite more severely tested in the coming 48 hours, but for now bearish thoughts have been banished.

Connor Campbell, financial analyst at Spreadex, said:

There was little new to work with this afternoon, the markets continuing to climb on the hopes of Fed inaction on Wednesday.

While not quite as excited as its European peers, the Dow Jones nevertheless posted some solid growth this Monday... The dollar, on the other hand, spent the day falling from the levels it struck last Friday; against the pound it lost more than half a percent, while it shed 0.3% against the euro.

In a remarkably stable showing the European indices didn’t veer from their opening growth this Monday. The FTSE [trickled] over the 6800 mark as the index benefited from both the lack of rate hike likelihood in the US and the gains made by Brent Crude following this morning’s rumours of an OPEC/non-OPEC deal. The Eurozone indices saw similar performances for most of the same reasons as the UK index, the DAX and CAC seeing 1% and 1.5% increases respectively

It will be interesting to see if this momentum can continue to build tomorrow, or whether a) any pre-Fed jitters will set in as September’s meeting grows ever closer or, related, b) the lack of data on Tuesday will cause investors with too much time on their hands to doubt the decisions they made this Monday.

Elsewhere gold remains a haven in troubled times, not least for central banks. Phillip Inman writes:

Central banks have boosted their gold stocks by almost 10% since the financial crash, reflecting its renewed attractiveness as a safe haven in an environment of uncertainty and low or negative interest rates.

China and Russia have led the switch to gold away from foreign currencies, especially the US dollar, to shore up their reserves. Western nations, including the UK, have halted several decades of mass sell-offs.

According to the Official Monetary and Financial Institutions Forum (OMFIF), central banks have swooped on the gold markets every year since 2008 to become net bullion buyers, adding more than 2,800 tonnes, or 9.4%, to reserves.

Royal Mint refinery 1000g gold bars.
Royal Mint refinery 1000g gold bars. Photograph: Royal Mint

Britain has one of the smallest holdings of gold in the G7 at 0.9% in 2016 while the US has the largest after increasing its share from 24.5% to 24.8% between 2000 and 2016. In 1980, the US had 44.1% of all gold stocks and 75.7% in 1940.

“Developed countries [accounting for the lion’s share of total official holdings] have been conserving stocks, while developing countries led by China and Russia have been building them up.

“This is the longest protracted spell of gold accruals since 1950-65, when central banks and treasuries acquired a net total of more than 7,000 tonnes during the economic recovery after the second world war,” said David Marsh, the director of OMFIF.

The full story is here:

Meanwhile, here are the odds on the US Federal Reserve raising rates on Wednesday:

Ahead of the Federal Reserve meeting come stronger than expected US housing figures.

The National Association of Home Builders/Wells Fargo housing market index came in at 65 in September compared to forecasts of a level of 60. August’s figure of 60 was revised downwards marginally to 59. NAHB chairman Ed Brady said:

As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers, a positive sign that the housing market continues to move forward. The single-family market continues to make gradual gains and we expect this upward momentum will build throughout the remainder of the year and into 2017.

US housing
US housing Photograph: National Association of Home Builders

Wall Street opens higher

The rise in global markets continues in the US, ahead of the latest interest rate decisions from the Federal Reserve and the Bank of Japan.

A recovery in the oil price after Venezuela suggested that producers meeting at the end of the month might agree action to curb the slump in crude has also helped lift shares.

So the Dow Jones Industrial Average is currently up 90 points or 0.5%, while the S&P 500 and Nasdaq 100 both opened up around 0.3%.

The dollar continues to weaken, on the growing expectation that the US Federal Reserve may not raise interest rates this week.

The euro has hit a day’s high of $1.1176 against the US currency while the pound is up 0.62% at $1.3078.

As it’s quiet, let’s trawl through some of the charts doing the rounds in the City today.

This one shows how imposing negative interest rates can backfire, as it forces investors to take their money overseas:

A new report from Bank of International Settlements (the “central banks’ main organisation) has also got chart-fans excited.

BIS is very worried that China is on the brink of a banking crisis, as its credit boom has soared to new heights. China’s “credit to GDP gap” is now 30.1 – a level that has historically proved to be bad news (as in the 1997 Asian Financial Crisis)

BIS also flag up that inflation is looking rare, despite the huge expansion in central bank balance sheets and record low interest rates.

And UK banks are a particular concern, after spending years dealing with bad debts and paying fines for misconduct.

The US stock market is expected to open a little higher in an hour’s time, following the solid rally in Europe.

The Dow Jones industrial average is being called up around 0.6%:

Franck Dixmier, Global Head of Fixed Income at Allianz Global Investors, reckons America’s central bankers won’t be able to keep interest rates on hold for much longer.

With core inflation contained well below the US Federal Reserve’s 2 per cent target level, the Fed has so far felt no sense of urgency to raise interest rates. Nevertheless, given the now almost-full level of employment in the US economy, it will be increasingly difficult for the Fed to maintain the status quo.

With investors’ risk appetites coming back during the summer, the arguments that the Fed used in June and July to do nothing – citing external risks to growth and questionable financial stability linked to Brexit – are no longer valid. From now on, the Fed is much more likely to focus on domestic economic developments, and those indicators have been growing stronger.

Nevertheless, this monetary policy normalization cycle will probably be very different from the ones we have seen in the past. This tells us to expect only very gradual and moderate hikes. The Fed will also be particularly keen to keep its policy decisions from having any negative effect on US economic growth and financial stability.

I suggested earlier that the Bank of Japan was unlikely to cut interest rates deeper into negative territory on Wednesday’s meeting.

Masaaki Kanno of JPMorgan Securities Japan doesn’t agree, saying

“We think that the BOJ will likely cut the rate to negative 30 basis points from negative 10 basis points.”

He also expects the Bank of Japan to boost its quantitative easing programme, and aim to expand the Japanese monetary base even wider.

Other analysts, though, are still plumping for ‘no change’ from the BoJ. As Mike Bird of the WSJ points out, there’s more uncertainty than usual...

Europe’s builders had a cracking July, according to a new report today.

Construction output across the EU jumped by 1,8% during the month, according to Eurostat -- the biggest monthly rise since January.

On an annual basis, construction output was 3.1% higher than a year ago.

Howard Archer of IHS Global Insight says:

Building activity was particularly strong in July, rising 2.2% month-on-month and 3.2% year-on-year. Civil engineering output was up a lesser 0.4% month-on-month, although it was up 2.9% year-on-year.

Economist Rupert Seggins has provided more context too:

Updated

Brexit: What it means for passporting

The City is bracing itself for the possibility that it will lose its prized ‘passporting’ rights if Britain leaves the European single market.

Passporting allows a bank to base itself in one EU country and offer services across the bloc. It’s thus extremely useful for London-based investment banks, asset managers and the like, who don’t need to be licenced in individual European countries.

Now, Germany’s top central banker, Jens Weidmann, has fired a warning shot at London that passporting rights will be lost if Britain goes for a ‘hard’ Brexit.

Weidmann told the Guardian that:

...passporting rights are tied to the single market and would automatically cease to apply if Great Britain is no longer at least part of the European Economic Area” (EEA).

That implies that City firms would have to moves sales offices, trading desks and middle office jobs into another EU country; time-consuming, expensive, and a blow to the UK capital.

Rating agency Moody’s is more optimistic, though. In a new report, it suggests that losing passporting rights would “likely be manageable for most UK-based financial firms”.

That’s because Moody’s believes other legislation would allow London-based firms to sell banking services into the EU even if Britain left the single market.

Simon Ainsworth, Senior Vice President at Moody’s, says:

“In particular, we consider that the third country equivalence provisions contained within the incoming MIFID 2 EU directive may provide firms with an alternative means of accessing the single market. The complexity of (quickly) unwinding the status quo and a desire to minimise the initial impact on European domiciled banks will likely lead to the preservation of most cross-border rights to undertake business.”

But there’s a snag..... that “third country equivalence” relies on a judgement from the European Commission. So there’s no escape from uncertainty on this issue, so some banks may simply decide to play it safe and move over the Channel...

The FTSE 250 index of smaller, largely-UK focused companies isn’t joining in today’s rally.

It’s broadly flat today, dragged down by Mitie’s slump (still down 25%).

Australia’s stock market endured a chaotic day, after a technical glitch scuppered normal trading.

Things got off to a bad start, with the ASX opening 90 minutes late. Once it puffed into life, some stocks weren’t trading -- and after three hours, it crashed again and stayed down for good.

ASX chief executive Dominic Stevens has apologised, and denied that hackers were responsible. He blames a hardware failure that afflicted that ASX database, as

“This had a number of knock-on consequences that affected the operation of the market. The issues were not in any way related to cyber security.”

Traders reckon that volumes were 80% lower than usual, meaning around $3.5bn of business was lost. Fingers crossed that the problems don’t reoccur on Tuesday...

Updated

Zing! The FTSE 100 index has now jumped by 100 points as this morning’s rally sends the index to a 10-day high.

Investors are piling into shares ahead of this week’s central bank meetings, and betting that the Federal Reserve won’t shock us with a rate hike on Wednesday.

Nearly every share is up -- mining stocks continue to be lifted by the weak dollar, while banks and supermarkets are also in demand.

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

Joshua Mahony, market analyst at IG, says the City is getting ready for Wednesday’s “central bank fest”:

European stock markets are starting the foot in a buoyant mood, with the fear of a US rate hike fading with every disappointing data point.

Triple digit gains for the FTSE within an otherwise unremarkable day goes to highlight the fact that we are seeing substantial speculation over future events, with Wednesday’s BoJ, FOMC and RBNZ bonanza a likely driving force behind today’s moves. Once more it has proven prudent to buy the dips in the FTSE, which has shaken off fears of a sharp selloff to push into a 10 day high today.

[that’s the Bank of Japan, the Federal Reserve and the Reserve Bank of New Zealand].

Britain’s financial watchdog, the FCA, is continuing to clean up Britain’s payday lending market.

Today, CFO Lending is in the doghouse for overcharging customers, sending them threatening letters, and not providing help to people who couldn’t repay their loans.

Mitie’s profits warning highlights how the EU referendum prompted some UK companies to slash their spending on outsourced services.

City firm Canaccord Genuity explain:

Mitie’s interim trading update this morning reflects the impact of significant uncertainty around client project spend given economic pressures in the period leading up to and following the result of the EU referendum in the Group’s first half from April to September.

These wider market pressures have served to be an unwelcome additional challenge to spend given the pressures already facing the Group’s clients which have absorbed material labour costs, and as a result, contract cost inflation on the back of working through the impact of the National Living Wage introduction in April.

Mitie shares tumble 25% after profit warning

Shares in outsourcing firm Mitie are tumbling this morning, after it warned that the Brexit vote was hurting its business.

In a statement to the City, Mitie warned that earnings this year will be “materially” below expectations.

It blamed “uncertainty” before and after the EU referendum, along with “lower UK growth rates, changes to labour legislation and further public sector budget constraints”.

This has sent Mitie’s shares down by 25% this morning, to a five-year low.

Mitie’s share price

Mitie offers a wide range of outsourcing services, from facilities management and cleaning services to pest control. It also runs Immigration Removal Centres for the Home Office.

Many clients cut back earlier this year, ahead of the referendum, and that business hasn’t returned since....

Here’s the full story:


Updated

UK business confidence rattled by Brexit

Brexit uncertainty is hurting companies, according to the latest healthcheck on Britain’s business.

Business confidence hit a four-year low, Lloyds Bank reports this morning, amid rising concerns over economic uncertainty and a slowdown in demand following the EU referendum result.

Expectations that sales, orders and profits will grow over the next six months slipped to 12%, down from 38% in January.

Other economic data has been more upbeat recently; unemployment fell in the last quarter, and retail sales have help up well. Businesses, though, are clearly edgy.

Oil pushed up by OPEC rumours

The oil price is on a small charge this morning, helped by the latest rumours of a potential deal between producers.

Brent crude has gained 1.3% this morning to $46.36, after Venezuelan President Nicolas Maduro told reporters that:

“We are close to an agreement between OPEC and non-OPEC countries to stabilize the market.”

State oil company Petroleos de Venezuel tweeted the comments here:

We’ve been here before, of course, only to see deadlock between Saudi Arabia and Iran scupper any deal.

Violence at two ports in Libya have also pushed the oil price higher, as Marketwatch explains:

The Petroleum Facilities Guards, a militia that until this month had controlled Libya’s oil ports for years after the 2011 ouster and death of dictator Moammar Gadhafi, briefly retook two oil ports, Sidra and Ras Lanuf, in the country’s central coast on Saturday night, militia members said.

Shares are rallying in London at the start of trading, sending the blue-chip FTSE 100 up by 66 points to 6776.

Mining shares are leading the way, with Glencore jumping 2.9%, Anglo American gaining 2.7% and BHP Billiton up by 2.5%.

They’re benefitting from a drop in the dollar this morning, which has pushed up commodity prices. A weaker dollar shows that investors expect the Federal Reserve to leave interest rates on hold on Wednesday night.

Most Asian stock markets have gained ground today.

China’s market rose by 0.65%, the Hong Kong market jumped by almost 1%, and South Korea is up by around 0.9%.

Japan, though, was closed for a public holiday, giving Tokyo a break before Wednesday’s BoJ excitement.

Asian stock markets today
Asian stock markets today Photograph: Thomson Reuters

The agenda: Markets await Fed and BoJ

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

There’s an autumnal feel in the City this morning, with the cloudy skies neatly matching the feel in the markets right now.

Investors have a lot to ponder as they arrive at their desks today, with two crucial central bank meetings this week.

Tomorrow, the Bank of Japan begins a two-day policy meeting, where it could make important to changes to its stimulus programme, in yet another attempt to weaken the yen and push up inflation and growth.

BoJ governor Kuroda will also reveal the results of the central bank’s review of its own stimulus programme, amid talk that central banks are running out of firepower.

The BoJ has been on the back food since stunning the markets by imposing negative interest rates earlier this year - a gamble that doesn’t seem to have delivered the goods. They could potentially cut rates again (but this seems unlikely).

Alternatively, they could change their bond-buying programme -- buying less long-dated bonds, to push up the yield curve.

Kit Juckes of Societe Generale explains the BoJ’s plight:

The BOJ has struggled ever since their surprise decision to cut rates into negative territory backfired at the end of January. In that regard, they followed the path of the Chinese authorities whose decision over a year ago to let the yuan weaken backfired equally spectacularly, and the Swiss National Bank, whose decision to remove the EUR/CHF floor at 1.20 did nothing to ease reserve accumulation, nothing to boost capital outflows and nothing to fight deflation. But they’re the lucky ones, as the economy appears to have weathered the strong currency relatively well over the last 18 months....

I think there’s a really good case for the BOJ to grasp the nettle and ease again, to drive real yields down as inflation expectations rise.

Thousands of miles away from Tokyo, the US Federal Reserve will hold its own policy meeting on Wednesday. The issue for the Fed is whether it’s safe to risk raising US interest rates for the first time this year.

The US inflation rate did pick up in August, to 1.1%, giving Fed hawks some reason to hike. But other economic data has been gloomier, with industrial production shrinking last month

So if the American economy is slowing down, a rate hike now might be a serious blunder (although it would give the Fed the wriggle room to cut borrowing costs next year....).

Few in the markets really expect the Fed to raise rates at this month’s meeting, from the near current low of 0.25%-0.5%. But that means that traders can spend the next few days worrying that they’re wrong....

FXTM Chief Market Strategist Hussein Sayed reckons we could get the classic ‘hawkish hold’ -- with the Fed getting investors ready for a hike before Christmas:

The market shares our view with only 12% priced in for a rate hike according to CME FedWatch, suggesting that investors are not well prepared for action, and even a dovish rate hike will create serious headwinds to financial markets.

However, I believe that Janet Yellen will take the opportunity to start building the case for a December rate hike, which could continue sending the dollar higher.

Also coming up this morning...

The oil price is pushing up, thanks to chatter that the OPEC cartel might agree some steps to stabilise the market (more on this shortly).

Investors will also be watching Germany closely, after Angela Merkel’s party lost seats in Berlin elections over the weekend. The anti-euro, anti-migration Alternative for Germany (AfD) party made gains, raising questions over whether the old order in Germany is being rattled.

Updated

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