European markets end lower
Worries about the global economy, disappointment with the Japanese stimulus package, a continuing slide in the oil price and further falls for banks have all combined to help push stock markets lower. Investors are also nervous about this week’s Bank of England rate-setting meeting.
Commerzbank fell sharply after warning its earnings would fall this year, leading the whole sector lower. Banks had been under pressure following the results of the European stress tests on Friday, while UK banks were additionally hit by news that the deadline for consumers to claim missold PPI had been extended.
In the US, investors were unsettled by a host of car makers reporting disappointing sales figures for July.
Meanwhile West Texas Intermediate - the US oil benchmark - dropped below $40 a barrel again, and is currently down 1.57% at $39.43 on further concerns about a supply glut amid weakening demand. The final scores in Europe showed:
- The FTSE 100 finished down 48.55 points or 0.73% at 6645.40
- Germany’s Dax dropped 1.8% at 10,144.34
- France’s Cac closed down 1.84% at 4327.99
- Italy’s FTSE MIB fell 2.76% to 16,098.37
- Spain’s Ibex ended 2.77% lower at 8277.3
- In Greece the Athens market lost 3.15% to 551.64
On Wall Street, the Dow Jones Industrial Average is currently down 99 points or 0.54%.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Here’s the view on Japan - which earlier launched its new stimulus programme - from the International Monetary Fund:
5 priorities for Japan https://t.co/cTOObMrUf4 pic.twitter.com/H7glNF9eE7
— IMF (@IMFNews) August 2, 2016
Back with the UK and the Bank of England, and Richard Woolnough of M&G Investments believes there is no need for Carney & Co to rush things:
The market is assuming that the Bank of England now has to act to prevent the severe crisis risk it outlined in previous press conferences. However as the UK is currently around two and a half years from departing the European community, the BoE has time on its side: half a year of pondering the implications of Brexit, and then two years of full membership to consider post-Brexit...
[At the moment] we have a healthy economy, operating at near full capacity, that is about to be given a shot in the arm from a fiscal, monetary, and exchange rate perspective. On the negative side, the UK economy is going to experience some potential slowdown in two and a half years’ time, as barriers to trade with our neighbours are likely to be implemented. With some associated falls in potential capital expenditure and consumer confidence before this.
The tailwinds look capable of more than matching the headwinds over the next two years. Indeed, if you are a business and have any spare capacity that needs to be used ahead of the Brexit deadline (for example a UK based car manufacturer), the logic should be to produce at full speed before the trade barriers are increased, especially given the fall in sterling. It looks like UK exporters are in a great position until the spring of 2019.
The BoE’s own forecasts pre-Brexit show inflation returning to or above target over the next couple of years. The problem the BoE now faces is that the benefits of Brexit (looser fiscal policy, looser monetary policy, and the lower exchange rate) will occur well before the potential headwinds in 2019. The monetary authorities like to work in a counter cyclical fashion, however the economic damage that could occur from the decision to leave could well be delayed.
In fact acting aggressively early could well result in a mini boom, which will make the eventual delayed event of Brexit appear even more severe. For these reasons, the BoE should not be too aggressive in easing monetary policy on Thursday.
The chances of a recession and deflation in 2019 will depend on how the UK economy adjusts to its new role in the world. Or just maybe, in two and a half years’ time market mechanisms such as the exchange rate and the fact the UK has had time to prepare for leaving the EU will mean the market will be focused on new issues and not an event that could seem like a distant memory.
The full comment is here.
Updated
US car sales for July have come in below expectations so far:
US Auto Sales (Jul):
— Sigma Squawk (@SigmaSquawk) August 2, 2016
• Ford -3.0% v -0.5% exp
• GM -1.9% v -1.0% exp
• Chrysler +0.3% v +1.9% exp
• Nissan +1.2% v +3.0% exp
A positive survey from New York, as businesses shrug off any effects of the UK Brexit vote.
The ISM New York business activity index came in at 60.7 in July, up from 45.4 in the previous month. The report said:
New York City business activity returned to cautious optimism after the short term pre-Brexit negativity seen in May and June....While nearly all of the June responses came in before the Brexit vote, July results revealed no initial ill effects from the UK’s decision to leave the EU.
Current Business Conditions rose to a 7 month high of 60.7 in July after contracting for two consecutive months for the first time since the Great Recession.
US ISM New York Jul: 60.7 (prev 45.4)
— Livesquawk (@Livesquawk) August 2, 2016
Wall Street opens lower
US markets have joined in the global declines, as concerns about the state of the economy combine with the continuing weakness in the oil price to unsettle investors.
The Dow Jones Industrial Average is currently down 29 points or 0.16% while the S&P 500 opened down 0.17% and Nasdaq 0.21% lower.
European markets continue to lose ground, with banking shares under pressure again in the wake of Friday’s stress test results and, in the UK, the latest developments with PPI.
Updated
Back with the UK, and the prospect of the Bank of England cutting interest rates on Thursday. Larry Hatheway, group chief economist at asset management firm GAM, said:
The Bank of England is widely expected to ease monetary policy this week in response to concerns that ‘Brexit’ has further weakened an already slowing UK economy, making it less likely that inflation will hit the Bank’s target over its two-year time horizon.
Among the factors likely to underpin an easing are surveys showing weaker investor and consumer confidence, softer PMI and industrial production figures and anecdotal evidence regarding weak investment spending intentions.
A more competitive sterling exchange rate and signs of resilient exports are positives, but are unlikely to prove decisive for the MPC. Nor is some expected easing of fiscal policy, given lags in implementation and uncertainty about its scope and timing.
The market anticipates at least a quarter point cut in the base rate, but an expansion of asset purchases and a ‘bias to ease’ would not be surprises.
But Michael Hewson, chief market analyst at CMC Markets, believes the Bank of England would do well to hold fire on a rate cut:
Act in haste, repent at leisure, these are words the Bank of England MPC would do well to consider this week when they are widely expected to meet and move on interest rates for the first time in 87 months, only rather than raising them as was expected to be the case two years ago, expectations are pretty much nailed on that we could well see a 0.25% cut to the headline rate and potentially an announcement of more asset purchases.
That the market is pricing this in as a 100% certainty is largely as a result of the expectations that have been built up in the aftermath of June’s historic Brexit vote.
In essence the central bank has boxed itself into a corner, and despite recent data should really be asking itself whether it would be wise to act at all this week...
Quite frankly it remains far too early to establish what damage has been done to the UK economy as a result of recent uncertainty irrespective of what recent PMI and confidence data tells us. Proponents of stimulus this week will no doubt argue that this week’s awful manufacturing and construction numbers mean that the bank has to act, but just because we’ve seen a knee jerk plunge in consumer and business confidence doesn’t mean that we’ll continue to head lower.
As it is with rates already at record lows it is not immediately apparent what a further rate cut now would achieve, apart from reinforce the negativity surrounding the UK economy, which in turn could see any further measures backfire.
Last week’s Q2 GDP numbers show that the UK economy potentially has more scope to adopt a “wait and see” policy with respect to further measures given interest rates are already at record lows, and credit is freely available.
If the new government sees fit to wait until its autumn statement to deliver new fiscal measures, surely it makes sense for the Bank of England to also wait to see what new Chancellor Philip Hammond delivers later this year and supplement policy that way.
Acting now in the absence of hard data runs the risk of the market tail wagging the policy maker’s dog, and could see any further action backfire in the same way the Bank of Japan’s recent policy measures backfired.
Oil bounces back, but concerns over glut remain
Oil prices have bounced back, after WTI crude in the US fell below $40 a barrel earlier today – but concerns about oversupply remain, and could push prices lower again soon.
Brent crude, the global benchmark, is up 75 cents at $42.89 a barrel, a 1.8% gain on the day. US West Texas Intermediate (WTI) crude is trading 55 cents higher, a 1.37% rise, after briefly dipping below $40.
The outlook is for lower demand, coupled with record-high crude production from Opec members this month, as top exporter Saudi Arabia is pumping close to record levels.
Analysts at Commerzbank said:
Financial investors are increasingly betting on a continuing price slide and are thereby generating additional selling pressure.
WTI’s dip below $40 took it into a bear market, with prices down more than 20% from its peak in June.
FXTM Research analyst Lukman Otunuga said:
Sentiment remains bearish towards the commodity and the mounting anxiety towards its incessant declines could provide an additional foundation for bears to install another round of selling.
Dollar weakness did little to quell the selloff and further losses could be expected as the horrible mixture of oversupply fears and depressed demand attract sellers to attack.
US consumer spending stronger than expected in June
Just out in the US: consumer spending has gone up more than expected in June, as households bought a range of goods and services. The Commerce Department said consumer spending rose 0.4%, following a similar gain May. When adjusted for inflation, spending increased 0.3%, compared with 0.2% in May.
The data was included in last week’s second-quarter GDP release, which showed consumer spending increased at a 4.2% annual rate, the fastest in almost two years. The jump accounted fro almost the entire 1.2% economic growth in the second quarter – which was an unexpectedly weak GDP reading.
Turning to UK interest rates, JPMorgan economist Allan Monks said the Bank of England should go ahead and cut rates on Thursday, as expected.
Ex-MPC member Kate Barker wrote an article in today’s Times arguing against a cut in rates, with the belief it would do more harm than good. As a well-respected former MPC member, Barker’s views are noteworthy at a time when the BoE faces a big decision. We do not find Barker’s argument wholly persuasive, however. The BOE is well positioned to provide at least some timely support during what increasingly appears to be a material demand shock.
Barker’s argument is not about the appropriate timing of monetary easing, the need for a policy response or even the prospect of a rise in inflation. Instead, she argues that lower rates would be costly - through adversely affecting bank profits and inducing savers to cut spending - and ineffective, as easier policy would not resolve the uncertainty at the heart of the demand slowdown and would raise import prices through further weakening the currency.
Bank deposit rates are still positive, which will help to cushion the adverse impact on profits. The BoE also has the option of offering banks cheaper funding to reduce the burden on savers. While Barker argues that half of mortgages are fixed rate products, this means there are half that are not. Few doubted that higher rates would have affected spending through this mechanism. It is also hard to square a view that there would be “little impact on the mortgage market” with the simultaneous concern that easier monetary policy would threaten longer term economic stability by “encouraging borrowing against inflated asset prices”.
It is clear that easier monetary policy does not remove Brexit uncertainty. But it is not supposed to. Rather, looser monetary policy can help to limit the extent of demand weakness and leave the economy in a better position in the future. Indeed, more policy action now might reduce the need for further action in the future. And any subsidy the BoE offers banks could then be removed more quickly. A lower policy rate right now might also be a necessary response to further declines in the global risk-free interest rate. This partly determines where the BoE’s current equilibrium policy rate is, which the MPC has no control over. Failing to ease in this environment – especially given expectations for the BoE to do so – would amount to a de facto tightening in monetary policy.
Monks added that there is no doubt that fiscal policy would be a more effective response for the UK – as Barker argues.
But the BoE sets policy on the basis of current government policy and has been criticised in the past for expressing explicit views on fiscal policy. It will take at least a few months for a change in fiscal policy to be announced, let alone to start affecting demand. The BoE has the ability to offer some support upfront before handing over the baton to fiscal policy.
Indeed, if fiscal policy is altered significantly, as the BoE may be anticipating, the MPC would be free in the future to reverse any temporary monetary stimulus package it implements this week. It is ironic that while some on the monetary side of the fence are arguing for a fiscal response, one of the first statements the new UK Chancellor made on appointment was that “the initial response to this kind of a [Brexit] shock must be a monetary response delivered by the Bank of England”. Both policymakers should stop dithering and support a slowing economy, in our view.
Eurozone bond yields rising
Bond yields in the eurozone are rising along with those in Japan, a sign of investor concerns about Tokyo’s apparent shift from monetary easing towards fiscal stimulus.
As the Japanese government approved 13.5tn yen ($132bn) in fiscal measures, markets fretted that this could mean that the Bank of Japan eases its aggressive bond buying programme. On Friday, the central bank disappointed markets by keeping the programme steady, and announcing it would review policy in September.
BOJ governor Haruhiko Kuroda sought to calm nerves today by saying that the planned review of monetary policy would not weaken the central bank’s stimulus.
Rabobank strategist Matt Cairns told Reuters:
The concern is that they are clutching at straws as they run out of firepower. Both in Japan and Europe, we are at a bit of a crossroads in that policy has now run for a considerable period without any material gains.
Japan’s 10-year bond yields rose more than 10 basis points to a 4 1/2 month high of -0.03%. Benchmark German yields rose 4 bps to -0.12%. Most other eurozone yields were up 3-4 bps.
Another factor are expectations that the European Central Bank will slow its asset purchases in August.
And here is more on the UK construction survey data – see the full story here.
There is some confusion as to the size of Japan’s fiscal stimulus package (it depends on what is included, obviously). We went with the Reuters figure of $132bn.
That aside, Martin Gilbert, chief executive of fund manager Aberdeen Asset Management, tweeted:
Abe's stimulus package could be just the start. Central banks have little firepower left; gov'ts need to shoulder some of the policy burden
— Martin Gilbert (@MartinGilbert83) August 2, 2016
History of Japan stimulus packages pic.twitter.com/IbRp7N7FWv
— Grégoire Favet (@GregoireFavet) August 2, 2016
Updated
Gold, a popular safe haven in times of turmoil, is climbing towards $1,360 an ounce as expectations of US interest rate hikes receded following weaker economic data last week. Spot gold was up 0.5% at $1,359.17 an ounce.
The euro has risen above $1.12 for the first time in more than a month. The dollar is being sold after the unexpectedly poor US second-quarter GDP numbers last Friday (the annualised growth rate came in at 1.2%).
Updated
The FTSE 100 index has touched a two-week low, in its second day of declines. It has lost 0.55% to 6657.63, down nearly 37 points.
Direct Line, the UK’s biggest motor insurer, is bucking the trend, jumping 8.1% 383.9p after first-half profits beat analysts’ forecasts. Rival Admiral has also benefited, with its shares rising 2.3% to £21.98.
The Dax in Frankfurt lost nearly 150 points, a fall of more than 1.3%, following Commerzbank’s profit warning, while the CAC in Paris has shed 1.4%.
Updated
Market round-up
European shares are still lower this morning, with banks and oil companies among the biggest fallers.
Jasper Lawler, market analyst at CMC Markets, summed up developments:
Scepticism at the rigour of recent stress tests has sent bank shares plummeting for a second day. Oil prices in bear market territory is weighing on the energy sector.
In London, builders’ merchant Travis Perkins, which today warned of the impact of the Brexit vote on business, is leading the FTSE 100 index lower, with its shares down nearly 3% at £14.98. RBS and Barclays are close behind, with losses of 2.9% and 2.8% respectively. Housebuilder Berkeley Group is down 2.6% while Lloyds Banking Group shares have lost 2.3%.
Elsewhere, Germany’s Commerzbank was among the worst performing banks after its profit warning. Lawler said:
The share price decline this year in Deutsche Bank and Credit Suisse has been so severe that both banks have been demoted from the Euro Stoxx 50 index. If regulators had hope for a confidence booster from the stress tests results, they’ve had a rude awakening. Monte dei Paschi’s rescue deal was a step in the right direction but the funds involved are too small and there are too many banks with too many non performing loans to repeat the same model across the sector.
Safe havens including the Japanese yen and gold were higher, as Japan’s fiscal stimulus package caused some disappointment, he said. The Australian dollar erased early losses to gain on the day after the Reserve Bank of Australia cut interest rates to a record low of 1.5%, in another sign of investors questioning the efficacy of central bank stimulus.
Stocks had been gaining in the past two-months as Brexit fears eased, despite oil peaking in June. But the slide below $45 per barrel in Brent crude appears to have been the price point at which stock markets have sat up and paid attention. Oil prices have slumped into bear market territory with a 20% decline from this year’s peak, with WTI crude now below $40 per barrel. Brent at $40 per barrel would mark a 50% retracement of the gains from the low this year and could be a target for short-sellers.
US stocks look set for a lower open, following in the footsteps of European and Asian markets, ahead of earnings from Pfizer, Procter & Gamble and AIG.
Back to the PPI story. uSwitch.com is advising people who think they’ve been mis-sold a PPI policy to complain to their bank. If they are still unhappy, they can take their complaint to the Financial Ombudsman Service for free.
Tashema Jackson, money expert at uSwitch.com, said:
By proposing to set a deadline the Financial Conduct Authority is sending a signal that consumers impacted by PPI mis-selling should get their skates on to seek payback.
However, as PPI is still the biggest cause for complaints to the Financial Ombudsman Service, there’s still a lot of work to do before the industry can finally draw a line under this scandal.
It’s now important that the banks, regulator and Ombudsman work together to raise awareness of the new deadline, so that those yet to claim do so – without having to pay fees charged by claims management companies.
Germany’s second-biggest bank, Commerzbank, has warned earnings will fall this year, sending its shares to a record low. It blamed businesses borrowing less and the drag on revenues from negative interest rates.
In April, the German bank had warned that it would be “more challenging” to match 2015’s net profit of €1.06bn. Its shares plunged 8.5% at one stage to a record low of €5.27 this morning, giving the company a market value of just €6.6bn. They are now trading 7.8% lower.
Most European banks showed themselves resilient in the latest EU-wide stress tests last Friday. Banks from Italy, Ireland, Spain and Austria fared worst in the tests, which were conducted by the European Banking Authority, the pan-European regulator.
Commerzbank was near the bottom in the stress tests. Low or negative interest rates are an issue for all banks, depressing their profits. Ingo Frommen, analyst at LBBW (Landesbank Baden-Württemberg), said:
Commerzbank has two issues. Concerns about its capital are big. In the EBA simulation, Commerzbank showed one of the lowest readings, and that was based on the higher capital ratio of end-2015.
Separately, there is a vastly more sober view about the future development in the low interest rate environment, which is causing a €100m annual hit on Commerzbank.
Updated
Producer prices in the eurozone rose more than expected in June for the second month in a row, due to soaring energy prices.
The European Union’s statistics office Eurostat said prices at factory gates in the 19 countries sharing the euro climbed 0.7% on the month, following a 0.6% gain in May. Compared with June 2015, prices were down 3.5%.
The pick-up in monthly price pressures will be welcomed by the European Central Bank, which has been fighting ultra-low inflation (and the spectre of deflation) in the eurozone for some time.
Updated
Here is our full story on the extension of the PPI claims deadline. Our banking editor, Jill Treanor, reported in April that persistent misconduct and an aggressive sales culture had cost the UK’s banks and building societies £53bn in fines, compensation and legal fees over the past 15 years. The PPI scandal alone has cost them £37bn so far, while they have paid £24bn in compensation to consumers.
Updated
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, agreed.
The much healthier condition of the banks in this crisis suggests that the construction sector’s developing downturn will be much milder than the collapse in 2008/09, which saw a peak-to-trough fall in output of 17%.
Still, the likelihood that Brexit negotiations will be protracted suggests that businesses will remain reluctant to commit to major capital expenditure for a long time to come. Meanwhile, the public investment plans won’t be reviewed until the Autumn Statement at the end of the year and most major construction projects have long lead times. So its hard to see the construction sector escaping its recession within the next year.
Returning to the UK construction numbers, Mike Chappell, global corporates managing director for construction at Lloyds Bank commercial banking, has some interesting insight into how the sector works.
For many construction firms, Brexit is an unwelcome distraction when their primary focus has been on recovering after the lean years following the last recession. This data will not lift their mood.
That said, while many will fear recession, the sector is more robust today than it was back in 2008.
He said construction firms were used to dealing with contract delays. Today’s contractors are also on the whole more rigorous in their bidding than in previous years, reducing firms’ exposure to costly over-runs. More of the largest businesses are getting a significant chunk of their income from service contracts, providing some insulation from the potential of delayed or cancelled projects.
All this is not to say that the industry is completely relaxed. Those with exposure to London will be particularly concerned should the commercial property market suffer a significant slowdown.
“Nevertheless, even if construction firms are nervous in the current climate, the hope is that the sector is robust enough to ride out any short-term disruption in the wider economy.
Ireland manufacturing output falls for first time in 3 years
Ireland has also been affected by the Brexit vote. A separate survey, the Investec manufacturing PMI for Ireland, showed the first decline in factory output in more than three years. The index dropped to 50.2 in July from 53.0 in June, only just above the 50 mark that separates expansion from contraction.
New business stalled in July, ending a three-year period of expansion. A market slowdown and the UK’s decision to leave the EU were mentioned as factors reducing new orders.
collateral damage begins https://t.co/Mv8oBYg9bn
— Kit Juckes (@kitjuckes) August 2, 2016
Chris Williamson, chief economist at Markit, said the survey showed the continued impact of Brexit-related worries on the economy that raises the risk of a recession.
If the construction PMI is combined with the final manufacturing and the flash services PMI, the ‘all sector’ PMI will have sunk to 47.3 from 51.9 in June. As such, the surveys signal the steepest fall in business activity since April 2009; the turnaround in the index (a 4.6 point drop) being the largest ever deterioration recorded since the surveys began in 1997. We await tomorrow’s final services PMI for an updated signal.
While we remain cautious about reading too much into the survey signals from months in which both political and economic uncertainty was so intense, the data raise the prospect of the economy sliding into decline in the third quarter and entering recession.
Employment fell for the first time in just over three years as construction firms scaled back capacity. Use of subcontractors fell the most in nearly three years.
Williamson added:
A ray of hope was provided by the rate of decline of new orders easing slightly compared to June’s three-and-a-half year record, though it was still worryingly steep.
There were mixed signals on inflationary pressures. While prices for materials spiked higher as the weak pound caused import prices to rise, showing the largest monthly rise since March of last year, rates charged by subcontractors showed the smallest rise for just over three years as firms competed for business on price.
Tim Moore, senior economist at Markit, said:
July’s survey is the first construction PMI compiled entirely after the EU referendum result and the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building. Reduced volumes of new work to replace completed projects contributed to a fall in employment for the first time in just over three years.
UK construction firms frequently cited ongoing economic uncertainty as having a material negative impact on their order books. In particular, survey respondents noted heightened risk aversion and lower investment spending among clients, notwithstanding a greater number of speculative enquiries in anticipation of lower charges.
Meanwhile, exchange rate depreciation resulted in sharper input cost inflation and there are concerns that additional supplier price rises for imported materials could be around the corner. “However, it’s not all bad news, at least insofar as the decline in construction output was little-changed from June’s seven-year low. There were also some reports that demand patterns had been more resilient than expected given the uncertain business outlook.
The three main construction sectors all recorded lower output, with commercial activity worst hit. Markit said:
Anecdotal evidence suggested that economic uncertainty following the EU referendum was the main factor weighing on business activity in July, especially in the commercial building sector. However, there were also reports suggesting that demand patterns had been more resilient than expected, and some firms linked new enquiries from international clients to exchange rate depreciation.
New orders fell at a slower pace than in June, offering some hope that the weaker pound could help secure new orders.
Updated
UK construction shrinks at fastest rate since 2009
Britain’s construction industry shrank at the fastest pace in seven years in July following the Brexit vote, according to a closely-watched industry survey. The construction PMI from Markit/CIPS fell to 45.9 from 46.0 in June, marking the lowest reading since June 2009. Any readings above 50 indicate expansion; any readings below point to contraction.
Updated
US crude falls below $40 for first time since April
Oil prices on the New York Mercantile Exchange have fallen below $40 a barrel for the first time since April, as worries over a global oil glut intensified. Light crude for delivery in September lost 11 cents, or 0.3% to $39.95 a barrel, moving deeper into bear territory (a bear market is defined as a fall of 20% from a recent peak).
Brent crude is trading at $42.12 a barrel, down 2 cents or 0.05%.
Looking ahead to the UK construction PMI data, out at 9.30am BST, economists at Daiwa said:
The main European data release today will be the UK’s construction PMI – the first time this survey has been released since the vote to leave the EU. While yesterday’s manufacturing PMI reported the second-steepest monthly drop on record – down more than 4pts to its lowest level since February 2013 – the decline in the equivalent construction PMI is expected to be less marked.
But that’s only because the construction sector had already signaled a significant loss of momentum in the run up to the referendum vote, with the headline PMI having fallen more than 5pts to 46 in June. Indeed, the anticipated further 2pt drop in July would leave the index at its lowest since April 2009.
Brexit is casting a long shadow over housing and construction stocks like Travis Perkins, said Laith Khalaf, senior analyst, Hargreaves Lansdown.
The company’s fortunes are closely attuned the housing market, as home purchases are often followed up by improvement works. Whilst there are doubts hovering over the UK economy, stocks like Travis Perkins could be in for a rough time.
The company also sources products from over 50 countries, so the devaluation of Sterling after Brexit could squeeze margins, unless Travis can push the pain back onto suppliers.
Nonetheless Travis’ results for the first half were positive, with particularly strong sales growth in its consumer division, which includes Wickes and Tool Station.
Cheap borrowing costs and Help to Buy should continue to provide some support for housing transactions, while Travis Perkins’ contracts division could stand to benefit if the government decides to turn the infrastructure spending taps on.
For the time being however, Brexit is casting a long shadow over housing and construction stocks like Travis Perkins.
Updated
Meanwhile, broker Tullett Prebon is cashing in on Brexit. It said the pound’s tumble following the referendum would boost its revenues.
The firm, which has agreed to buy rival ICAP’s hybrid voice broking business, reported an 11% rise in underlying operating profits to £67m for the six months to June.
Chief executive John Phizackerley said:
The outcome of the UK’s referendum on EU membership was a momentous political event. It has already led to a change in leadership of the government and gave rise to exceptional volatility in the financial markets.
Although it is too early to speculate on the long term impact of Brexit, the company has in the immediate aftermath seen little adverse impact and in fact the increase in volatility has resulted in higher levels of activity recently. The company is well positioned to support its clients during this period and we are grateful that they have continued to place their confidence in us as a trusted partner.
From an FX perspective a fall in the value of sterling will result in a positive impact on reported revenue. In the six months to 30 June 2016 over 80% of revenue is in non-sterling currencies of which over 60% is in dollars and over 10% is in euros.
Back in the UK, builders’ merchant Travis Perkins has warned that Britain’s vote to leave the EU has created “considerable uncertainty” in the outlook for the building supplies market, and flagged weaker demand in the run-up to the poll and following the referendum.
The company owns Wickes, BSS, Toolstation and Tile Giant. John Carter, its chief executive, said:
It is clear that the result of the EU referendum has created significant uncertainty in the outlook for our end markets and we did experience weaker demand in the run up to and immediately followingthe referendum.
Our two-year like-for-like sales [compared with the last two years] in July have been below the levels we experienced in the second quarter, however we have seen a gradual improvement through the course of the month. In our view it is too early to precisely predict end market demand and we will continue to monitor the lead indicators we track and will react accordingly.
The company reported a 10.2% rise in adjusted pretax profits to £184m for the six months to June. Its shares were the second-biggest faller on the FTSE 100 in early trading, down 2.6% to £15.04.
Updated
Japan’s fiscal package comes days after the Bank of Japan eased policy again and said it would review its monetary stimulus programme in September, which has boosted expectations for “helicopter money,” printing more money for government debt.
Prime minister Shinzo Abe told a meeting of cabinet ministers and ruling party executives on Tuesday morning:
We compiled today a strong economic package draft aimed at carrying out investment for the future.
With this package, we’ll proceed to not just stimulate demand but also achieve sustainable economic growth led by private demand.
Japan cabinet approves $130bn stimulus package
In Japan, prime minister Shinzo Abe’s cabinet has approved a 13.5tn yen ($132bn) stimulus package, which includes cash payouts to low-income earners and boosts infrastructure spending.
The package includes 7.5tn yen of spending by the national and local governments, and earmarks 6tn yen from the Fiscal Investment and Loan Programme, which is not included in the government’s general budget.
It comes amid mounting concerns that the Bank of Japan has run out of ammunition, with its policy triggering the worst sell-off of government bonds in three years.
European stock markets open lower
European stock markets are bathed in red at the open.
- FTSE 100 index in London down more than 30 points, or 0.5%, at 6,659.46
- Dax in Frankfurt down 0.6% at 10,308.53
- CAC in Frankfurt down 0.5% at 4,387.97
- Spain’s Ibex down 0.6% at 8,463.10
- Italy’s FTSE MiB down 1.5% at 16,300.23
The new PPI complaint deadline is a year later than expected, and analysts said this could well mean more payouts for banks. Shore Capital analyst Gary Greenwood said:
For example, in its 2015 full year results, Lloyds set aside additional provisions to cover claims until mid-2018, so it is possible that an extra year’s worth of provisioning may now be required.
We would not be surprised to see top-ups of a few hundred million pounds, and perhaps as high as £1bn, for each of the large UK banks, with Lloyds being the worst affected.
Updated
FCA sets mid-2019 deadline for PPI complaints
Over here, Britain’s financial watchdog has extended the deadline for complaints about payment protection insurance to mid-2019. Consumers who believe they have been missold the controversial insurance now have until the end of June 2019 to make a claim.
Banks have paid out £24bn in compensation in customers over the past five years for misselling PPI – Britain’s costliest scandal in financial services. It has cost them even more, £37bn in total.
The Financial Conduct Authority’s decision to extend the deadline is bad news for banks, which were hoping to draw a line under the scandal. Lloyds Banking Group has borne the brunt of customer complaints and paid out the most compensation.
UK banking shares are down this morning and are among the top fallers on the FTSE 100 index. Royal Bank of Scotland has lost 2.2% while Lloyds is down 1.5% and Barclays has lost 1.4%.
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More on the Australian rate cut. The Commonwealth Bank quickly passed on a cut of 0.13 percentage points to home loan borrowers, but the RBA insisted that the housing market would not catch fire.
The governor of Australia’s central bank, Glenn Stevens, said supervisory measures had strengthened lending standards, and banks were being more cautious about who they lent money to.
The most recent information suggests that dwelling prices have been rising only moderately over the course of this year, with considerable supply of apartments scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.
Growth in lending for housing purposes has slowed a little this year. All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished.
Reserve Bank of Australia cuts cash rate to 1.5%
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
We’ve woken up to news that the Reserve Bank of Australia has cut interest rates to a record low. It lowered the cash rate by a quarter point to 1.5%, amid low inflation and a slowing housing market. More details here. New Zealand’s central bank could well follow suit next week.
Before that, we will get the Bank of England’s monthly decision on Thursday. The latest dire manufacturing survey data piled pressure on the Bank to cut rates this week (it could also take other action, such as more quantitative easing – bond-buying – to stimulate the economy).
Yesterday’s UK manufacturing PMI showed factory activity shrank at the fastest pace in more than three years in July, following the Brexit vote. The uncertainty created by the referendum hit domestic orders while the weaker pound drove up the cost of imported materials for manufacturers. French and Chinese data also disappointed, while Germany’s manufacturing sector is growing again.
Today, we are getting the latest snaspshot on how Britain’s construction sector performed in July. It is not expected to have fared any better than manufacturing, with another slide in activity likely. The construction PMI is out at 9.30am BST.
Hong Kong markets have shut after typhoon Nida swept through the city with gale-force winds. More than 150 flights have been cancelled, leaving thousands of passengers stranded at the airport.
The Australian dollar fell sharply on the rate cut announcement, but later recovered. The Australian stock market rose slightly before falling back 0.7%, while Japan’s Nikkei closed down 1.5%.
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