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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound hits five-week high as no-deal Brexit fears ebb - as it happened

Traders work at the offices of CMC Markets in the City of London
Traders work at the offices of CMC Markets in the City of London Photograph: Daniel Sorabji/AFP/Getty Images

Summary

Time for a recap

Andrew Gwynne MP has summed up Boris Johnson’s week -- with a list of events that have generally pushed the pound higher.

Ouch! Growth across America’s service sector companies has slowed to a three-year low.

Data firm Markit says there was “a loss of momentum across the U.S service sector” last month,” with new orders slowing and demand from overseas falling.

This dragged its services PMI down to 50.7, showing the slowest expansion in business activity since March 2016.

Chris Williamson, Chief Business Economist at IHS Markit, has the slump in US factories is now spreading across the economy.

“US businesses reported one of the toughest months since the global financial crisis in August, with growth of output, order books and hiring all slowing amid steep falls in both export and business confidence.

“Only on two occasions since the global financial crisis have the US PMI surveys recorded a weaker monthly expansion, and these were months in which business was hit by the government shutdown and bad weather in 2013 and 2016 respectively. This time, trade wars and falling exports appear to be the main drivers of weakness, exacerbating fears of a broader economic slowdown both at home and globally.

The strength of the pound has dragged down the London stock market today.

The FTSE 100 has lost 50 points, or 0.7%, to 7261. A stronger sterling hits the value of multinational companies with large earnings in foreign currencies.

This chart from IG shows how the pound is likely to rally if a no-deal Brexit is averted, pushing the Footsie lower.

Brexit forecasts
Brexit forecasts Photograph: IG

Rabobank analyst Jane Foley says the pound acting like a “tidy barometer” for the odds of a no-deal Brexit.

She told AFP:

“Just as fears of a no-deal Brexit pushed the pound below $1.20 earlier this week, expectations that MPs will succeed in delaying Brexit beyond October 31 have resulting in a relief rally back to $1.23.

“The pound is clearly not out of the woods with political uncertainty still at very elevated levels - but the risk of a disorderly Brexit next month at least looks set to be pushed off the table.”

Just in: America’s companies created more jobs than expected last month - a good sign for the global economy.

The private sector payroll rose by 195,000 last month, stronger than the 140,000 which Wall Street expected.

That suggests US companies aren’t being dragged down by issues such as the trade war.

Sterling’s travails isn’t doing much for the Conservative Party’s reputation for economic competence.

John Gapper of the FT speculates that a Tory win at the next election could trigger a sterling crisis (as it would allow them to drive through a no-deal Brexit).

Economists: Pound's recovery may not last

Some City experts are warning that the pound’s recovery may not last.

Dutch bank ING says:

“A UK election now looks inevitable - the only question now is ‘when’. However, the chances of a ‘no deal’ Brexit on 31 October appear to have receded, but there are still ways it could happen, and given the outcome of an election looks deeply uncertain, despite the Conservatives’ lead in the polls, the rebound in sterling is unlikely to have legs.”

John Hardy of Saxo Bank also warns that No Deal is still a significant possibility, depending how an election played out.

Sterling continued its strong recovery into today as the immediate threat of a No Deal Brexit has been removed by the latest parliamentary maneuvers, as parliament will likely get its delay to avoid an October 31 No Deal (key question: what will the EU terms be for that delay?) and Boris Johnson’s attempt to call for snap elections in mid-October was defeated.

There are still too many scenarios from here to signal the all clear – an election scenario that serves as a referendum on Brexit still presents the risk of an eventual No Deal.

The pound is the best-performing major currency against the US dollar this week, the eagle-eyed Financial Times points out

The FT says:

Sterling rose above $1.23 on Thursday, notching up more than 3 per cent of gains against the dollar from the start of the week as investors cheered repeated blows to Boris Johnson’s attempts to push through a no-deal Brexit.

The pound hit a day’s high at $1.2332 in European trading hours after Conservative MP and brother of the UK prime minister Jo Johnson quit his party, in the wake of Wednesday night’s vote in parliament that aims to thwart the prime minister’s promise to leave the EU on October 31 “do or die”.

The gains have made the pound the best performing major currency against the US dollar over the past two days. The currency’s bounce comes after a negative start to the week when the risks of the UK leaving the EU with no deal rose as high as 40 per cent, based on prices in the options market.

UBS: Brexit delay would send pound soaring

UBS Wealth Management predict sterling could surge back to $1.30 if Brexit is delayed beyond October.

Their chief economist, Dean Turner, told clients that the ‘Benn bill’ blocking a no-deal Brexit is likely to be approved soon. saying:

Sterling has been buffeted by the frenetic pace of events in Parliament over the last couple of days. Removing the immediate threat of a no-deal Brexit has helped the pound recover some of its recent weakness.

If, as we expect, Brexit is delayed until January 2020 and an election is held after October, we would expect this recovery to continue.

A Brexit delay would push the pound over $1.30, he suspects, a level last seen in May.

And if Britain left the EU with a deal, the pound could strengthen to $1.35, which would be a 16-month high.

UBS also expects an election soon, even though the Labour Party refused to trigger one last night.

Turner says:

We have long been of the view that the UK faces an election at some point before the final decision on Brexit is made. We stick to this view now.

When the election does come, it is only then that will we have greater clarity on how the Brexit saga will end.

Sterling has been moving inversely to Boris Johnson’s authority this week.

It fell on Monday as government sources revealed the PM was planning an election on October 14, hitting a three-year low below $1.20 on Tuesday morning.

But it then began to recover sharply, as the government dramatically lost its majority on Tuesday afternoon (when Phillip Lee joined the Liberal Democrats). It kept rallying as MPs voted to debate legislation to block No Deal.

Sterling picked up the pace on Wednesday as MPs backed this bill, and failed to give Johnson the two-thirds majority needed for a snap election.

This morning has seen fresh gains, as pressure continues to mount on the government.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

The pound has also rallied against the euro, to a one-month high.

Sterling is trading at €1.117, its highest level since 26 July (a few days after Boris Johnson won the Conservative leadership battle)

Some City investors are confident that Brexit will delayed until next year.

Bloomberg reports:

The pound is rallying after Parliament tore up U.K. Prime Minister Boris Johnson’s Brexit strategy and denied his request for a snap election, tempering fears of further political turmoil, reports Bloomberg.

“My expectation is Brexit is delayed until Jan. 31 with an election after the initial deadline and before the end of January,” said Neil Jones, head of currency sales for financial institutions at Mizuho Bank Ltd.

“A delay for both Brexit and a general election will continue to send the pound higher.”

The pound hit its highest level in five weeks after Boris Johnson’s own brother announced he is stepping down as a minister and an MP.

In a jaw-dropping tweet, Jo Johnson says he has been wrestling with the tension between family loyalty and the national interest!

Andy Sparrow’s Politics Live blog has all the action on another astonishing day:

Expert: Markets want no-deal Brexit off the table

The pound is moving inversely to Boris Johnson’s grip on power.

The weaker his government looks, the strong sterling becomes.

Fiona Cincotta of City Index says:

It is all about politics in the markets at the moment. As the Boris Johnson government has progressively lost control of the situation, so sterling has rallied.

It now looks more likely that a coalition of rebel Conservative MPs and opposition parties will take a no deal Brexit off the table with legislation, which was what the market was hoping for.

Sterling has now surged by 2% since the start of trading on Wednesday, Reuters reports.

That’s its best two-day performance in 10 months!

Update: The pound has just hit $1.2318, its highest level against the US dollar in five weeks.

Pound bursts back through $1.23

Sterling is bouncing back from its slump earlier this week, as efforts to prevent a no-deal Brexit next month gather pace.

The pound has just smashed through $1.23, up half a cent today. That’s the joint-highest level in five weeks.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

That’s more than three cents higher than on Tuesday morning, before Boris Johnson lost his majority and MPs seized control of Commons business.

City investors are hopeful that a no-deal Brexit can be avoided next month. Overnight, the House of Lords fast-tracked the latest cross-party attempt to block Britain crashing out of the EU.

Thank to m’Lordships all-nighter, the legislation will return to the Commons today for further debate, and could be passed by Monday.

Prime minister Boris Johnson is continuing to push for a general election to break the deadlock, as he lacks a majority to get anything done. Labour, though, is resisting... at least until a No-Deal is firmly off the table.

Europe’s ‘fear index’, which measures volatility across the markets, has dropped to its lowest point since 1 August.

That shows traders are more optimistic about a trade breakthrough in October -- despite warnings to be cautious, given previous hopes have been dashed.

Germany’s government has blamed the trade war for the slump in factory orders this summer.

Berlin’s economy minister says:

“New orders for industry have overall made a weak start to the third quarter.

“Given still-smouldering international trade conflicts and restrained business expectations, there is no sign of a fundamental improvement in the coming months.”

German factory slump: what the experts say

The slump in German factory orders raises the risk that Europe’s largest economy is in recession.

German GDP fell by 0.1% in April-June, and there’s little sign of a bounce-back in July-September.

Carsten Brzeski, chief economist at ING, blames the US-China trade war.

Foreign orders from outside the eurozone fell by a dramatic 6.7% MoM, showing once again Germany’s exposure and sensitivity to the ongoing trade conflicts and increasing global uncertainty.....

Since the start of the year, domestic orders have actually dropped more than foreign orders, suggesting that global woes have reached the domestic economy.

Oxford Economics warn that problems in Germany’s car industry, and Brexit uncertainty, is also hurting:

German industry is suffering the worst slump since the financial crisis. Ailing global trade and elevated uncertainty have been obvious drags. But the looming no-deal Brexit and especially the car sector’s malaise were the key triggers of German industry’s historic underperformance relative to European peers.

The latest surveys provide no hope of a swift rebound in global trade. Moreover, there’s no clear sign that uncertainty stemming from no-deal Brexit risks and US trade policy will abate, so prospects of a manufacturing rebound are dim.

German factory orders sink again

A trade war breakthrough can’t come soon enough for Germany.

New figures show that German factory orders fell by 2.7% during July, nearly twice as much as economists expected. On an annual basis, orders were an alarming 5.6% lower than a year ago.

That means the slump in German manufacturing has not ended, as the global slowdown and trade tensions hit demand for goods.

German factory orders
German factory orders Photograph: Destatis

Destatis, the German statistics offices, says orders from beyond the eurozone fell sharply in July:

Domestic orders decreased by 0.5% and foreign orders fell by 4.2% in July 2019 on the previous month. New orders from the euro area were up 0.3%, new orders from other countries were down 6.7% compared to June 2019.

The decline was felt across German industry, with capital goods orders down 3% and consumer goods orders down 2.4%.

Updated

China: Call with US went very well

Just in: China’s commerce ministry has told reporters that the overnight phone call with top US officials went “very well”.

Spokesman Gao Feng explained that China opposing escalation in the trade war, and will try to make “real progress” when they visit US in October.

So far so good!

But Gao also said that China hopes the US still stop taking “wrong actions” against Chinese companies (such as Huawei).

Europe hits one-month high

Europe’s stock markets have hit their highest levels in a month, lifted by trade war hopes.

Here’s the early moves:

  • Germany’s DAX: up 96 points at 12,121, up 0.8%
  • French CAC: up 43 points at 5,576, up 0.8%
  • Italy’s FTSE MIB: up 100 points at 21,833, up 0.5%

Technology companies and industrial firms, who are particularly vulnerable to trade conflict, are leading the rally.

Stoxx 600 top risers
The Europe-wide Stoxx 600 index Photograph: Refinitiv

Neil Wilson of Markets.com says the decision to restart trade talks “sent a rocket under equities globally”. But he also advises caution, as we’ve been here before....

On trade – we’re getting more jaw jaw, but just as much war war as before.

The news of face-to-face high-level talks between the US and China next month has been seen as a positive but needs to be taken with a good dose of salt. It wasn’t that long ago the market was rallying as we thought a deal imminent, now it’s moving on nothing more than confirmation of talks.

It highlights the headline risk that traders must contend with and suggests there is very little by way of a strong trend in the markets right now, just a lot of short-termism and uncertainty. A trade deal is a long way away.

Updated

The chances of a US-China trade deal anytime soon are thin, warns Ipek Ozkardeskaya, senior market analyst at London Capital Group.

She suspects Donald Trump could be tempted to inflame the situation, to encourage US central bankers to cut interest rates.

With only a slim chance of a trade deal, all investors ask is at least the continuation of the trade talks.

It is uncertain whether Trump would attempt to cool down the trade war moving into the presidential election year, or he would continue fanning the flames and using it as a tool to exercise an increased pressure on the Federal Reserve for lower interest rates

Updated

Stocks rally across Asia

Hold onto your hat! A Chinese investor watches stocks rally in Beijing today.
Hold onto your hat! A Chinese investor watches stocks rally in Beijing today. Photograph: Mark Schiefelbein/AP

Japan’s stock market has hit its highest level in a month, on hopes that the US-China trade war could be easing.

In Beijing, every stock market sector rallied - led by technology companies (+2.1%), financial stocks (+1.4%) and consumer stocks (+1%). This lifted the Chinese market by around 1%.

Traders are clearly welcoming the prospects of new face-to-face talks between the US and China soon.

Han Tan, market analyst at FXTM, says “seasoned investors” will be cautious, though. Getting a deal will not be easy, at all.

The lift in risk sentiment appears mitigated by the concern that the latest positive developments surrounding the US-China trade impasse may prove fleeting and do not yet fully nullify the downside risks to the global economy.

In order for risk sentiment to push significantly higher, markets will need to be shown material signs that US and China are indeed drawing closer to a meaningful and lasting trade deal. Existing tariffs need to be dismantled in order to alleviate pressures on the global economy.

Updated

Introduction: US and China to resume trade talks

Stacks of containers in a container terminal at the Yangshan Deepwater Port in Shanghai, China.
Stacks of containers in a container terminal at the Yangshan Deepwater Port in Shanghai, China. Photograph: Costfoto/Barcroft Media

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

The clouds of gloom that have enveloped the markets recently are lifting this morning, as rays of optimism over the trade war break through.

Overnight, America and China have agreed to restart face-to-face negotiations, in an attempt to defuse the trade war that is hurting the global economy.

The breakthrough came following a call between China’s vice-president Liu He and the US trade representative Robert Lighthizer and Treasury secretary Steven Mnuchin.

Lighthizer’s office announced:

“They agreed to hold meetings at the ministerial level in Washington in the coming weeks.

In advance of these discussions, deputy-level meetings will take place in mid-September to lay the ground work for meaningful progress.

Crucially, China also announced the breakthrough, revealing that Beijing will send a delegation to Washington in early October.

This is the first significant breakthrough since June, when Donald Trump and Xi Jinping agreed in principle to restart talks following the collapse of negotiations in May.

Since then, both sides have imposed additional tariffs on their goods, raising concerns about an escalating trade war. Yesterday, Bank of England governor Mark Carney said the dispute was hurting the global economy, so investors will be hoping that October’s talks actually happen, and deliver progress.

Stocks have jumped in Asia overnight, with Japan’s Nikkei gaining 2% and China’s CSI 300 up 1%. European markets are expected to rally too, with the STOXX 600 called up almost 1%.

The agenda

  • 7am BST: German factory orders for July
  • 8.30am BST: German construction PMI for August
  • 1.30pm BST: US weekly jobless figures
  • 3pm BST: US Composite PMI for August

Updated

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