European shares end higher
A tumultuous week, which started with markets continuing their post-Brexit slump, has ended on a positive note as investors regained their nerve. All the leading European indices have finished the week with a positive performance, while Wall Street had also moved higher by the time London closed. The final scores showed:
- The FTSE 100 finished 73.5 points or 1.13% higher at 6577.83
- Germany’s Dax added 0.99% to 9776.12
- France’s Cac climbed 0.86% to 4273.96
- Italy’s FTSE MIB rose 0.61% to 16,295.78
- Spain’s Ibex ended 1.29% higher at 8268.9
- In Greece, the Athens market added 0.49% to 544.76
In the US, the Dow Jones Industrial Average is currently 36 points or 0.2% higher.
On the currency markets, the pound continues to fall following the Bank of England’s latest hints at interest rate cuts. It is down 0.35% at $1.326 and 0.38% down against the euro at €1.19.
And on that note it’s time to close for the evening and indeed the week. Thanks for all your comments, and we’ll be back next week.
FTSE 100 records best weekly rise since December 2011
The FTSE 100 has finished up 1.13% at 6577.83, to its best level since 11 August last year.
Its weekly rise of 7.21% is the best since the start of December 2011. Despite an initial fall in the first two trading days after last week’s shock referendum result, the leading index has been boosted by hopes of cheaper money after the Bank of England hinted at summer rate cuts, and the prospect of the process for actually leaving the EU being delayed for months.
Back with Brexit, and a majority of US companies believe it will have a neglible impact.
The Institute of Supply Management, which earlier released a positive update on US manufacturing, said 61% of the businesses it surveyed saw little impact compared to just 6% who thought it would have a negative effect.
European banks should not automatically have to cut dividends even if they reveal capital shortfalls in this year’s stress tests, according to the banking watchdog. Reuters reports:
The announcement aims to help restore investor confidence in Europe’s banking sector, where valuations lag those in the United States, partly due to uncertainty over capital requirements.
The European Banking Authority (EBA) is coordinating a stress test of 51 lenders from across the 28-country bloc with the results due on July 29.
For the first time, there will be no pass or fail mark.
The EBA sought on Friday to clear up confusion over how the tests’ findings will feed into broader “SREP” reviews of bank capital by supervisors such as the European Central Bank.
The ECB supervises the eurozone’s top lenders and is looking at whether banks need extra capital under a supervisory review and evaluation process, or SREP.
It considers how much extra capital a bank should hold on top of its mandatory minimum requirements, and helps to formulate “capital guidance” for each bank.
The EBA said on Friday that this capital guidance should be set above the combined level of mandatory minimums and add-ons.
However, capital guidance does not constitute any form of binding capital requirements, and therefore is not expected to trigger automatic restrictions on payouts to investors, it added.
This makes clear that it is up to the supervisor to decide if dividends should be suspended.
Two members of the US Federal Reserve seem to have differing views on Brexit and the US economy, however:
FISCHER: BREXIT COULD HAVE EFFECTS ON U.S. ECONOMY
— zerohedge (@zerohedge) July 1, 2016
BULLARD: SEES LITTLE IMPACT OF BREXIT ON U.S. ECONOMY
Brexit will hit US GDP and raise recession risk - S&P Global
The UK decision to leave the European Union will be a drag on US GDP, according to S&P Global Ratings, but the size and diversity of the world’s biggest economy will limit its exposure. The agency said:
S&P Global now expects U.S. real GDP to grow by 2.0% in 2016 (was 2.3% in March) and 2.4% in 2017 (was 2.5%).
The risk of recession over the next 12 months is now between 20% to 25%, up from 15% to 20% in March.
The Fed will now likely stay on the sidelines until the December Federal Open Markets Committee meeting then will likely raise rates by 25 basis points to a 0.5% to 0.75% range. It will gradually raise rates next year, with now only three increases expected for 2017 and three more for 2018. The Fed will likely reach its new “neutral” rate by 2019.
“All told, we expect the repercussions from Brexit to weigh somewhat on U.S. GDP,” says US chief economist Beth Ann Bovino. “Combining this with lower-than-expected first quarter growth leads to the lowering of our forecast for growth this year and next.”
The ISM report raises the prospect of a better than expected US non-farm payrolls number, said economist Rob Carnell at ING Bank:
The US Manufacturing ISM index picked up from 51.3 to 53.2 in June - consistent with a decent, but not amazing pace of manufacturing growth. As well as a good headline index, there were encouraging signs from new orders, including new export orders. 72% of manufacturing industries now report overall growth, up from 67% in May.
But the real focus of this release is probably the employment index, with the US jobs report less than a week away. This index rose to 50.4, its highest since November 2015, though admittedly, manufacturing jobs make only a small contribution to the overall employment total. Nonetheless, this is a small crumb of confidence for our above-consensus 200,000 payrolls forecast (consensus 175,000) and we will be watching the non-mfg ISM employment index and ADP surveys carefully next week for further corroboration of a return to labour market strength.
With markets pricing in virtually no Fed tightening in 2016 or 2017, an above consensus number could see bond yields, which have fallen heavily since Brexit, to push higher, if only for a while in these times of heightened uncertainty.
Confirmation of growth in US manufacturing in June has come in the latest ISM survey.
Its manufacturing activity index came in at 53.2 in June, better than the consensus forecast of 51.4 and May’s figure of 51.3. This is the highest level since February 2015.
But in a separate report, US construction spending dropped unexpectedly in May, the second monthly decline in a row. According to the Commerce department spending dropped by 0.8% in May, following a revised 2% fall in April. The April drop was the largest since January 2011.
Economists had expected a 0.6% rise in spending after an initial 1.8% decline in April.
US manufacturing climbs in June
US manufacturing moved up in June, according to the first of the day’s two surveys, but the uncertainty over Brexit could dampen growth in the coming months.
The final Markit manufacturing PMI index came in at 51.3, better than the expected 51.2 but lower than the initial reading of 51.4. But it was higher than May’s final level of 50.7 and hit a three month high. Markit said:
U.S. manufacturers indicated a slight rebound in production volumes during June, helped by the fastest rise in new work since March. However, the latest survey signalled that growth momentum remained relatively subdued in comparison to its post-crisis trend, which contributed to cautious job hiring and further efforts to reduce inventories in June.
Chris Williamson, chief economist at Markit added:
Although the manufacturing PMI ticked higher in June, the latest reading rounds off the worst quarter for goods producers for six years.
The lacklustre performance of the manufacturing economy adds to signs from the flash services PMI surveys that the underlying pace of economic growth in the second quarter remained subdued Manufacturing output after a disappointing start to the year.
The upturn in the employment index suggests that firms may be expecting the recent bout of weak demand to be temporary, though hiring clearly remains subdued amid fragile business confidence.
Producers are struggling in the face of the strong dollar, the energy sector decline and presidential election jitters. With companies craving certainty, heightened tensions between the UK and the European Union are likely to unsettle the global business environment further in coming months, and therefore risk dampening growth in the US and export markets. The data flow in the next two months will therefore be critical to policymakers in gauging the appropriate outlook for interest rates.
Updated
Wall Street opens higher
American markets have edged ahead in early trading, but after recent rises the rally is not convincing. The Dow Jones Industrial Average, up nearly 800 points in the past three days, has opened around 19 points or 0.1% higher ahead of the latest US manufacturing surveys, due shortly.
Business organisation the CBI has called for “calm and decisive leadership, a clear plan for the UK’s future outside the EU and a framework for business and the government to work together and deliver that plan are businesses’ immediate priorities as the country navigates its exit from the EU.”
Speaking at the Evening Standard business awards, CBI director general Carolyn Fairbairn also said the government must confirm that workers from the EU who are already in the UK can stay in the country.
More reaction to UK chancellor George Osborne abandoning his target to restore the public finances to surplus by 2020. Michael Izza, chief executive of chartered accountants organisation ICAEW, said:
It was always going to be a struggle to meet the deficit target and in the light of the EU Referendum that job became much harder. In these uncertain times for business, it is imperative that Government devises a comprehensive strategy that minimises uncertainty and weathers any looming economic storm.
Taking the global economy into account, the UK electorate knows that we still have a public finance problem as we can’t continue to borrow. The challenge of the public finances remains a three-Parliament problem.
Earlier the European Central Bank’s chief economist Peter Praet said Brexit was a “new shock” and Europe rapidly needed a roadmap on Britain’s plans to leave.
Speaking at a Financial Times event he said it was vital to bring clarity to the political and economic uncertainty created by the UK referendum and that an “orderly process” was laid out for Brexit negotiations. He said red tape for firms was likely to increase as a result of the UK decision, and could weaken potential growth.
He added that the challenges to the eurozone remained immense but the ECB was ready to provide liquidity.
[Quotes courtesy Reuters]
The pound is roughly flat against the dollar, at $1.3304, and is down 0.4% against the euro at €1.1942.
Sterling has fallen almost 11% against the dollar since Britain went to the polls on 23 June to vote on EU membership. Against the euro, it is down almost 9% over the same period.
The impact of the Brexit vote on the pound versus dollar:
The impact of the Brexit vote on the pound versus euro:
Updated
Samuel Tombs, chief economist at Pantheon Economics, makes the point that the George Osborne’s target of hitting a surplus by 2020 wasn’t very realistic in the first place.
Even without Brexit, it was highly unlikely that the Chancellor would ever have met his goal. Last year, the structural budget deficit amounted to nearly 4% of gross domestic product.
Moreover, the fiscal forecasts were based on very optimistic assumptions for the impact of fiscal tightening on growth, the likely revenues from tax avoidance measures, and the government’s ability to reduce spending after six prior years of austerity.
Some reaction to Osborne’s speech...
John McDonnell, Labour’s shadow chancellor, welcomed the chancellor’s decision to drop his targets:
I welcome the Chancellor’s decision to finally listen to the calls made by myself and Jeremy Corbyn over the last nine months to drop his failed surplus target. It is only a shame he was not realistic sooner, as under Jeremy Corbyn, Labour has been unequivocal in its opposition to failed Tory austerity.
Lee Hopley, chief economist at manufacturing trade body EEF, also welcomed the move:
This move will be viewed as a much-needed pick-me-up after a week of turmoil and bad news.
The chancellor is right to scrap the government’s hitherto relentless push on deficit reduction. The uncertainty that businesses are currently grappling with should be helped by politicians galvanising around the actions that can reasonably be taken to offer some policy stability - easing up on deficit reduction is one such measure.
The Chancellor has been tweeting following his speech in Manchester, where he announced that he is abandoning his target of returning the public finances to surplus by 2020.
He is stressing the “flexible” nature of his fiscal rules...
We must provide fiscal credibility by continuing to be tough on deficit while being realistic about achieving surplus by end of the decade.
— George Osborne (@George_Osborne) July 1, 2016
Our fiscal rules explicitly provide flexibility in face of what Charter calls 'significant negative shock to UK'
— George Osborne (@George_Osborne) July 1, 2016
We can best address business uncertainty by moving quickly to define new relationship we want with EU
— George Osborne (@George_Osborne) July 1, 2016
FTSE 100 rallies
Investors are feeling chirpier in afternoon trading.
The FTSE 100 is now up 82 points or 1.3% at 6,586. The FTSE 250 - down earlier in the day - is now up 0.6% at 16,361.
All major European indices are up:
- Germany’s DAX: +0.7% at 9,745
- France’s CAC: +0.8% at 4,269
- Italy’s FTSE MIB: +0.4% at 16,266
- Spain’s IBEX: +1.4% at 8,275
Here is our story on George Osborne’s comments in Manchester.
Quite extraordinary stuff as he essentially admits defeat on one of the central pillars of his economic policy as chancellor.
A budget surplus in 2020 is no longer realistic in a post Brexit world, he suggests.
The chancellor was speaking at the Greater Manchester Chambers of Commerce. Here is what he said:
Now, as the governor of the Bank of England said yesterday, the referendum result is as expected likely to lead to a significant negative shock for the British economy.
How we respond will determine the impact on people’s jobs and on economic growth. The Bank of England can support demand.
The government must provide fiscal credibility, so we will continue to be tough on the deficit but we must be realistic about achieving a surplus by the end of this decade.
This is precisely the flexibility that our rules provide for. And we need to reduce uncertainty by moving as quickly as possible to a new relationship with Europe and being super competitive, open for business and free trading. That’s the plan and we must set to it.
Breaking: chancellor abandons fiscal target
George Osborne is going to abandon his target to restore the public finances to surplus by 2020, the BBC is reporting. He has been speaking in Manchester.
This is what they are reporting:
Chancellor George Osborne has abandoned his target to restore government finances to a surplus by 2020, the BBC has learned.
It had been the chancellor’s most prized goal and had been driving austerity measures in previous budgets.
However, the Chancellor said the UK must be “realistic about achieving a surplus by the end of the decade”.
The UK economy is showing “clear signs” of shock in the aftermath of the vote to leave the European Union, he said.
Even before that vote, there were questions over whether Mr Osborne would be able to balance the budget by 2020.
George Osborne "to abandon 2020 budget surplus target", BBC learnshttps://t.co/HH4qKx0Bo5
— BBC Breaking News (@BBCBreaking) July 1, 2016
Breaking: George Osborne - UK must be "realistic about achieving a surplus by the end of decade". Am told Chx to abandon 2020 surplus plan
— Kamal Ahmed (@bbckamal) July 1, 2016
Updated
Time for a market update.
The FTSE 100 is holding on to gains, up 23 points, but it’s a mixed bag in Europe now and the FTSE 250 is down.
- FTSE 100: +0.4% at 6,527
- FTSE 250: -0.2% at 16,244
- Germany’s DAX: +0.04% at 9,684
- French CAC: -0.1% at 4,235
- Italy’s FTSE MIB: -0.5% at 16,124
- Spain’s IBEX: +0.2% at 8,183
The Leave camp were not the biggest fans of Mark Carney in the run-up to the EU referendum.
The Bank of England governor was met with hostility from some members of the camp when he warned the UK economy could fall into recession in the event of a Brexit decision.
Now the vote is over, Michael Gove - a leading Brexit campaigner and a rival candidate for the Tory leadership - has been singing the governor’s praises, paying tribute to Carney for stabilising the economy.
Updated
George Osborne: clear signs of economic shock since Brexit vote
Meanwhile George Osborne says there are “clear signs of economic shock” since Britain voted to leave the EU last week.
The chancellor has been in Manchester, addressing business leaders.
Clear signs of economic shock in aftermath of Leave vote. Will require supreme national effort but we can come through this challenge
— George Osborne (@George_Osborne) July 1, 2016
Speaking today to business leaders in Manchester to reassure: UK has one of world's most flexible economies and is open for business
— George Osborne (@George_Osborne) July 1, 2016
Breaking: EasyJet starts talks to relocate HQ from UK
Sky News is reporting that EasyJet has opened talks with regulators in the EU about relocating its headquarters from the UK.
The budget airline is currently based in Luton, where it employs about 1,000 people.
Brexit fallout begins...
It begins: @MarkKleinmanSky
— Emily Purser (@EmilyPurser) July 1, 2016
reports Easyjet opens talks to relocate HQ to Europe https://t.co/BHQuOZKFsu
Updated
Michael Hewson, chief market analyst at CMC Markets UK, has a good take on the market volatility we’ve seen seen Britain voted to leave the EU.
European markets have started the day in a fairly positive fashion as we come to the end of what has been a turbulent and historic week.
Having traded as low as 5,938 in the wake of last week’s surprising Brexit vote the FTSE 100 looks on course to post its best week since 2011 as the weaker pound helped pull the index back above its pre Brexit vote highs by the middle of the week.
While it is no doubt true that on a currency basis the FTSE100 is still down in euro and US dollar terms, the fact that it is one of the highest yielding blue chip benchmarks at over 4% could well be providing a pull factor in an era of ever decreasing interest rates.
While the FTSE 100 is managing to hold its own the FTSE 250 is finding it a little more difficult slipping back 1% over concerns about the outlook for the UK economy over the rest of the year.
James Bullard, president of the Federal Reserve Bank of St Louis, tells Bloomberg TV that Brexit shouldn’t have too much of an impact on the US economy:
U.S. growth will continue at 2% with no big #Brexit impact, James Bullard says - watch live https://t.co/otlPc1JS85 https://t.co/BOBNryuho5
— Bloomberg TV (@BloombergTV) July 1, 2016
UK manufacturing hits five-month high - before Brexit vote
Britain’s manufacturing sector performed much better than expected in June.
Activity in UK factories grew at the fastest pace in five months according to the Markit/CIPS PMI. Crucially though, the survey was conducted almost entirely before last weeks referendum on EU membership.
What impact the decision to quit the EU will have on the sector - and the wider economy - remains to be seen.
The headline index on the PMI - combining output, orders and employment - rose to 52.1 in June from 50.4 in May. Anything above 50 is growth territory, and economists were forecasting 49.9 - a contraction in activity.
Rob Dobson, senior economist at Markit:
With 99% of survey responses received before the end of 23rd June, the latest PMI signalled that the manufacturing sector had started to move out of its early year sluggishness in the lead up to the UK’s EU referendum.
Whether this growth recovery can be sustained will depend heavily on whether the current financial and political volatility spills over to the real economy.
While the Bank of England remains poised to act if needed and the UK’s trading relationships are unchanged during the two-year negotiation period, there’s a clear risk that ongoing uncertainty will have at least some short term impact on manufacturing during the coming quarters.
The big question is whether any negative impact from uncertainty can be partly offset by a boost to exports resulting from the fall in the pound.
Eurozone manufacturing growth hits six-month high
Activity in factories in most of the eurozone’s biggest economies grew in June.
Both output and new orders grew at a faster pace, driving the headline index on the Markit eurozone manufacturing PMI up to 52.8 from 51.5 in May. Anything above 50 signals growth.
France was the only country where the sector shrank last month - with strike action dampening activity - while manufacturing growth in Germany was the strongest in more than two years.
- Germany: 54.5
- Austria: 54.5
- Italy: 53.5
- Ireland: 53
- Spain: 52.2
- Netherlands: 52
- GreeceL 50.4
- France: 48.3
Chris Williamson, chief economist at Markit said it was positive news from the eurozone but issued a Brexit health warning:
The data were collected prior to the UK EU referendum result, so any Brexit impact is yet to be seen in the PMI.
The PMI would have likely been even higher had it not been for strikes in France, which look to have disrupted business activity in many cases.
With Greece enjoying a welcome return to growth, France was the only country to see a deterioration in manufacturing conditions in June. All other countries saw faster rates of expansion except the Netherlands.
Given the uncertainty caused by the prospect of Brexit, it seems likely that business and consumer spending will be adversely affected across the euro area in the short term at least, pulling growth down in coming months.
Updated
UK bond yield turns negative despite Brexit vote
Mark Carney’s speech on Thursday send the yield on one UK gilt - maturing in March 2018 - negative.
It was a first for the UK, with a yield of -0.04% meaning that investors were willing to pay to take on government debt - despite extreme political and economic uncertainty.
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said it was a “landmark” moment for the UK.
Anyone who buys this gilt is paying the UK government for the privilege of lending it money, and this is despite the fact the ratings agencies have downgraded UK government debt in light of the Brexit vote.
The UK now joins Germany, Austria, the Netherlands, Denmark, Switzerland and Japan in the club of countries where gilt yields have turned negative.
The ultra-low interest rate environment paints a depressing picture of our economic prospects, though the gilt market has been so heavily tainted by central bank interference, it’s hard to know how reliable an indicator it is.
Such low interest rates are great for borrowers, but awful for cash savers, and for banks. Cash savers have already suffered 7 years of ultra-low interest rates, and on current expectations it looks like they will comfortably see out a decade without getting a half-decent return on their deposits.
UK 10-year bonds yields:
Updated
UK bond yields hit record low
The yield on benchmark 10-year government bonds has fallen to a record low of 0.831%, putting it on course for its biggest weekly fall since November 2011.
Investors often turn to bonds during times of market volatility as they are considered lower risk compared with other assets.
The lower the yield, the cheaper it is for the government to borrow money.
The latest snapshot of the state of the manufacturing sector across the eurozone, the UK and the US will be delivered today by the PMI surveys for June.
Overnight, an official survey in China showed the manufacturing sector in the world’s largest economy effectively stalled in June.
Output hit a 12-month high, but all other measures showed signs of weakening.
The survey is likely to add to expectations that Beijing will inject more stimulus into the economy.
The pound is little changed this morning, after falling sharply on Thursday afternoon in response to Mark Carney’s suggestion that more stimulus is on the way to try and counter the negative impact of the Brexit vote.
It is down 0.1% against the dollar at $1.3287, and pretty much flat against the euro at €1.1980.
Elsewhere in Europe, markets are seeing stronger gains:
- Germany’s Dax: +0.8% at 9,753
- France’s CAC: +0.7% at 4,266
- Italy’s FTSE MIB: +1.1% at 16,383
- Spain’s IBEX: +1.1% at 8,256
UK markets open higher
Investors are once again shaking off Brexit concerns with shares rising modestly.
In the UK, FTSE 100 is up 4 points or 0.1% at 6,506. The FTSE 250 is up 0.3% at 16,321.
As it stands, the FTSE is on course to post its biggest weekly gain since December 2011.
The agenda: markets boosted by rate cut prospect
Good morning.
This time last week Britain was waking up to the news that it had voted to leave the European Union. The outcome sent shockwaves through global markets, with shares plunging last Friday.
But markets have since bounced back, with the FTSE 100 yesterday hitting its highest level since August.
Investors around the world were cheered by the reassuring words of Mark Carney, Bank of England governor, who indicated the central bank stood ready to pump fresh stimulus into the UK economy as the impact of Brexit weighs on growth and confidence.
Our story on Carney’s speech is here:
Economists believe the Bank might act in August, to coincide with its quarterly inflation report which includes updated economic forecasts.
Options on the table include cutting interest rates to zero from 0.5%, as well as more quantitative easing.
Markets around the world liked the message, with Wall Street closing up and shares rising in Asia.
The Hang Seng rose 1.75% to 20,794.37, while the Nikkei rose 0.7% at 15,6825.48.
European markets have just opened higher.
