Wall Street opens higher as crude rises
Taking its lead from markets elsewhere, Wall Street has opened sharply higher as commodity prices - oil in particular - gained ground.
The Dow Jones Industrial Average is up 133 points or 0.7% in early trading, while the S&P 500 is up 0.37% and Nasdaq is 0.49% better.
European markets had already surged ahead on the last full trading day before Christmas. Commodity companies are leading the way after iron ore prices rose in Australia and copper prices moved higher.
Hopes for further stimulus measures from China to boost its economy have played a major part in the increases, while a report that the country’s steel industry planned to cut excess capacity has also helped.
Oil prices have also benefitted, with Brent crude currently up nearly 2% at $36.82.
The FTSE 100 is 2.2% higher, while Germany’s Dax has added 1.7% and France’s Cac has climbed 2%. Italy’s FTSE MIB is up 1.2% while Spain’s Ibex - which has recovered well after the initial falls in the wake of the weekend’s inconclusive election - is up 2.1%.
On that note, it’s time to close for the day. Thanks for all your comments and we’ll be back tomorrow.
Back with the UK GDP figures, and here is economics correspondent Phillip Inman’s analysis of what the data means for the chancellor:
George Osborne’s year has ended with a bump. Like a Strictly Come Dancing finalist drunk on high marks for his paso doble and tango, he has come unstuck on the last foxtrot.
Official growth figures have been downgraded for the third quarter, undermining boasts that the UK was marching hand in hand with the US as one of the best-performing economies in the western world.
Only last month the chancellor was still feeling the afterglow of the Conservatives’ election victory in May. His autumn statement mini-budget was considered a triumph of political manoeuvring that set the government fair for re-election in 2020.
Many of those judging Osborne’s high kicks and fancy footwork held up perfect scores at the time.
A series of revisions by the Office for Budget Responsibility had upgraded the UK’s growth forecasts while maintaining the steady path of deficit reduction. With the economy expanding at a rate our European neighbours could only dream of, and the annual deficit predicted to reach zero by the end of the parliament, Osborne’s chances of becoming the next prime minister seemed on track.
Now that the Office for National Statistics has told us that growth in the third quarter was lower than previously forecast, the rate for the whole year is likely to be around 2.2%, compared to 2.9% in 2014.
It comes on top of the news from the ONS that the government’s borrowing was higher in November than in the same month last year, when this period was supposed to be one when borrowing fell considerably.
These twin blows illustrate how the UK needs strong growth to improve the public finances. Without stellar growth it is much harder to reduce the still large gap between government spending and income.
More here:
US capital goods orders fall
Business investment in the US slowed last month as orders for capital goods (excluding defence and aircraft) fell 0.4%, more than double the decline expected.
This compares to a rise of 0.6% in October, itself down from an initial reading of a 1.3% increase.
Manufacturers have been hit by a strong dollar and falling crude price, leading to spending cuts in the energy sector.
Overall orders for durable goods - products such as equipment and aircraft designed to last longer than three years - were flat compared to expectations of a 0.7% fall.
Meanwhile personal incomes rose for an eighth straight month, up 0.3% in November after a 0.4% increase the previous month. Consumer spending rose 0.3% after being unchanged in October.
Greece has received €1bn from the EU bailout fund, the European Stability Mechanism after completing a second set of reform milestones.
The money will be used for debt service, budget financing and co-financing projects funded by EU structural funds. The ESM has also handed over €5.4bn for bank recapitalistation. In a statement the ESM said:
ESM Managing Director Klaus Regling said: “With the disbursement of €1 billion, the ESM is supporting the Greek government in its reform process. The reforms cover a wide array of policy fields that are important to modernise the Greek economy. Notable examples include measures to stimulate competition in the energy sector, which should bring down prices, as well as a new law to help banks manage their exposure to non-performing assets, which will free liquidity and boost economic activity.
Mr Regling added: “I hope the good cooperation with our Greek partners will continue, so that the first review of the ESM programme can be completed in early 2016. Only a successful conclusion of this review can lead to discussions on further debt relief for Greece, as the Eurogroup has said before.”
The €1 billion will be the third and final disbursement of the initial loan sub-tranche of €16 billion agreed in August 2015. The ESM has also disbursed €5.4 billion to Greece for bank recapitalisation. Following the disbursement approved today, the total amount of ESM financial assistance for Greece will thus reach €21.4 billion, which is around 25% of the initial programme volume of up to €86 billion approved by the ESM Board of Governors on 19 August 2015.
Despite the weak GDP figures, a rate rise from the Bank of England is still expected next year, even if not in the immediate future. Calum Bennie, savings expert at Scottish Friendly said:
Growth may be fragile but it is continuing and so attention will turn to an interest rate rise at some point in 2016. This is yet another sign that the party could be over for cheap borrowing. The guests may still be in the room but the music has stopped and with interest rate rises on the horizon borrowers have to prepare now for the very real possibility of larger debt repayments in 2016. People need to turn their attention to putting money aside to reduce any risks to their financial future as there is a degree of uncertainty ahead.
Here’s our take on the UK GDP figures by economics editor Larry Elliott:
The chances of the government hitting its growth forecast for 2015 has receded after official figures showed the economy performing less well than originally thought in the first three-quarters of the year.
In a second pre-Christmas setback for George Osborne, the Office for National Statistics on Wednesday cut its estimates for expansion in both the second and third quarters.
The ONS originally said growth in the three months to September was 0.5%, but said new data showing a sharper slowdown in the UK’s dominant service sector had resulted in the estimate being cut to 0.4%.
With growth in the second quarter also revised down – from 0.7% to 0.5% – the annual rise in GDP in the year to the end of September has been trimmed from 2.3% to 2.1%.
The Office for Budget Responsibility – the body that produces forecasts for the Treasury – said in last month’s autumn statement that the economy would grow by 2.4% in 2015 as a whole. City economists said that now looked unlikely.
The full report is here:
UK productivity, measured by output per hour, grew by 0.5% from the second to third quarter. The ONS said this was the highest level recorded for the series, but since it only began in 2008, it is 13% below a trend extrapolated before the financial downturn in that year.
(ABDE refers to Agriculture, Forestry and Fishing, Mining and Quarrying, Electricity, Gas, Steam and Air Conditioning Supply and Water Supply, Sewerage, Waste Management and Remediation Activities)
Better news for the UK government, with the current account deficit stable at £17.5bn in the third quarter compared to expectations of a figure of £21.5bn.
That accounts for 3.7% of GDP and is down from the peak figure of £28.5bn in the fourth quarter of last year. IHS Global Insight economist Howard Archer said:
The UK current account deficit was unexpectedly stable in the third quarter at the lowest level since the third quarter of 2013 as a reduced shortfall in investment income countered a renewed widening in the total trade deficit.
It is of some relief that the UK current account deficit was stable at a reduced level in the third quarter. While the markets have so far taken a relatively relaxed view of the UK’s elevated current account deficit, it could become an increasing problem if the markets lose confidence in the UK economy for any reason.
The GDP figures show the problem of the UK economy relying on domestic demand, says economist Nina Skero at the Centre for Economics and Business Research:
Today’s release only adds fuel to the existing concerns that economic growth is overly reliant on household consumption. Given continued subdued performance in key markets and the relative strength of sterling (which may get even stronger as interest rates begin to rise), boosting trade prospects will require constant government encouragement. Programmes such as Exporting is Great, which offer advice and access to export opportunities for firms, are a step in the right direction. We still expect relatively robust GDP growth of 2.0% in 2016, but much of this relies on the boost to consumption arising from low inflation and higher wages. While this is fine in the short term, it is not sustainable formula for economic growth in the long run.
More from the UK GDP report.
First, the dominance of the service sector:
And the fall in the savings rate:
Back with the UK GDP figures and David Kern, British Chambers of Commerce chief economist said:
It is not hugely surprising to see GDP growth downgraded slightly, as it is in line with the revisions in our own forecast earlier this month. However it is concerning that it weaker growth in our dominant services sector has played a part.
Given the slump in our manufacturing sector, our services sector will still be expected to drive economic growth as we enter 2016.
The sharp widening of the trade deficit will provide little festive cheer. Our exporters will need all the help they can get in order to redress this – and improved access to finance for those looking to export would be a good first step.
On the oil price, Opec assumes it will average $55 a barrel during 2015 (at the moment Brent crude is $36.48) and will reach $70 (in 2014 prices) by 2020 and $95 by 2040:
[This reflects] a gradual improvement in market conditions as growing demand and slower than previously expected non-Opec supply growth eliminate the existing oversupply and lead to a more balanced market. This, in turn, will provide support to prices.
Opec also predicts that $10trn of investment is needed by 2040 to cover future needs:
The increase in the overall requirement for OPEC crude between 2015 and 2040 is almost 10 mb/d, while for non-OPEC liquids it is just over 3 mb/d.
It all means that investments remain huge. Oil-related investment requirements are estimated to be around $10 trillion between now and 2040. In the current market environment what this underlines is the delicate balance between prices, the cost of the marginal barrel and future supplies.
This balance is essential in making sure the necessary future investments are made. If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices.
Updated
Opec expects its market share to shrink by 2020
Demand for Opec’s crude oil will be lower in 2020 than next year, with supply from rivals proving stronger than expected, according to the oil producing organistation’s latest outlook report.
The prediction raises questions about how successful Opec’s strategy of not cutting production to keep crude prices low has been at hurting other producers. Reuters reports:
Opec... which a year ago refused to cut supply to retain market share against higher-cost rivals, in its 2015 World Oil Outlook raised its global supply forecasts for tight oil, which includes shale, despite a collapse in prices.
Demand for Opec crude will reach 30.70 million barrels per day (bpd) in 2020, OPEC said, lower than 30.90 million bpd next year. The expected demand from OPEC in 2020 is about 1 million bpd less than it is currently producing.
Oil has more than halved its price in 18 months [which] has helped to boost oil’s medium-term use, although OPEC said the demand stimulus of low crude prices will fade over time.
“The impact of the recent oil price decline on demand is most visible in the short term,” Opec Secretary-General Abdullah al-Badri wrote in the foreword to the report. “It then drops away over the medium term.”
Opec is increasingly divided over the merits of the 2014 shift to a market-share strategy, which was led by Saudi Arabia and its Gulf allies, and at a Dec. 4 meeting failed to agree a production ceiling for the first time in decades.
Nonetheless, the report shows that the medium-term outlook - from Opec’s point of view as the supplier of a third of the world’s oil - has improved. In the 2014 edition, demand for Opec crude was expected to fall to 29.0 million bpd by 2020.
Updated
The UK’s economy is now expected to grow by 2.2% in 2015, rather than 2.4%, according to IHS Global Insight economist Howard Archer. In the wake of the disappointing third quarter GDP figures and the lower numbers for the previous quarter, he said:
GDP growth was disappointingly revised down to 0.4% quarter-on-quarter and 2.1% year-on-year from the previously reported 0.5% quarter-on-quarter and 2.3% year-on-year. In addition, second quarter GDP growth was revised down to 0.5% quarter-on-quarter from 0.7% quarter-on-quarter.
Growth was held back in the third quarter by net trade which knocked 1.0 percentage points off growth. This fuels concern that UK growth is far too reliant on domestic demand, even allowing for the fact that the third quarter trade performance was partly a payback for a strong second quarter.
We expect GDP growth to improve to 0.6% quarter-on-quarter in the fourth quarter
However, because of the downward revisions to GDP growth in the second and third quarters, we will need to trim our projection of overall GDP growth in the 2015 from 2.4% to 2.2%.
The UK Treasury is of course putting a brave face on the disappointing GDP figures, reminding everyone that the IMF praised the UK economy but warning that risks remain:
Read our spokesperson quote in response to today’s @ONS quarterly national accounts release #GDP pic.twitter.com/lYHtAbYueg
— HM Treasury (@hmtreasury) December 23, 2015
However, GDP growth per head is now back above the level seen during the financial crisis in 2008:
Nearly 8 years later, UK GDP per head is finally back above pre-crisis levels. pic.twitter.com/dpijCNN2l1
— Jamie McGeever (@ReutersJamie) December 23, 2015
The weaker than expected UK GDP figures come a day after disappointing borrowing data of course:
So, no pressure on the Bank of England to raise interest rates in the immediate future.
Updated
UK GDP growth of 2.1% in Q3 was the lowest in 2 years, below every forecast from 30 economists polled by Reuters. pic.twitter.com/KLs2Vw4fN0
— Jamie McGeever (@ReutersJamie) December 23, 2015
Updated
Here is a chart from the ONS showing the breakdown of GDP, and the changes between this reading and the last:
Weaker growth in the service sector was behind the lower growth figure, according to the Office for National Statistics.
As well as third quarter growth being revised downwards, annual growth was also cut from the previous reading of 2.3% to 2.1%.
The second quarter was also weaker than initially thought. The ONS has revised down growth for April to June from 0.7% to 0.5% in quarterly terms and from 2.4% to 2.3% annually.
The disappointment has so far had little effect on shares, with the FTSE 100 up 84 points or 1.3%.
Updated
UK GDP growth lower than expected
Breaking news:
The UK economy grew less strongly than previously thought in the third quarter, up 0.4% compared to initial estimates of 0.5%.
Updated
Here’s our report on Game Digital from Sean Farrell:
Game Digital shares plunged after the retailer warned that profit would fall sharply after sales of games since the start of the Christmas holidays were worse than expected.
The seller of video games and consoles said UK sales for the 21 weeks to 19 December fell 11.4% to £353.4m as gamers failed to buy enough games for new consoles to make up for a steep fall in demand for older formats.
As a result, margins were squeezed and earnings before interest, tax and other items for the six months to 23 January will fall by about 30% to £30m, Game said in an unscheduled trading update. Sales in the wider video game market are down 13.5%, Game said.
Game’s shares fell as much as 40% and were down 35% to 135p as trading settled. The shares, which floated at 200p in June 2014, are down by more than 60% this year.
Sales of games for the Xbox One and PlayStation 4 consoles rose by 20%, or £19m, but sales of products for the old Xbox 360 and PlayStation 3 dropped by 57%, or £31m.
Full story here:
Updated
More on the French economy:
Sharp drop in #French consumer goods spending in Nov. suggests total household spending will be a drag on GDP in Q4. pic.twitter.com/u3SeOgIXix
— Capital Economics (@CapEconEurope) December 23, 2015
Mining shares are among the gainers in London, points out Tony Cross, market analyst at Trustnet Direct. He said:
London’s FTSE-100 has surged higher at the open with thin volumes ahead of the Christmas break arguably exaggerating the move. Hopes that Chinese stimulus measures could buoy the fortunes of natural resources stocks, combined with some elements of a short squeeze, have driven miners to the top of the board. These gains may well look a little more sustainable after iron ore prices rose in Australian trade.
Markets open higher
European stock markets, as forecast, have made some strong opening gains.
The FTSE 100 is up 68 points or 1.1% in early trading, while Germany’s Dax has added 1.2%, France’s Cac and Spain’s Ibex have both climbed 1%, and Italy’s FTSE MIB is 0.8% higher.
One exception is Game Digital, down 39% after its profit warning.
Taxing times
Company tax affairs are in the spotlight at the moment.
Amazon and eBay are facing action over VAT, as Simon Bowers reports:
Top tax officials are exploring whether Amazon and eBay can be forced to foot the bill for ballooning VAT fraud associated with an army of small overseas sellers who are rapidly coming to dominate sales of many popular items on Britain’s leading shopping websites.
The full story is here:
Meanwhile a new survey shows many investment banks in the City of London paid little or no corporation tax:
French GDP grows in third quarter
The French economy grew by 0.3% in the third quarter, confirming earlier readings after showing no growth in the previous three months.
Meanwhile French consumer spending fell unexpectedly by 1.1% in November, compared to expectations of a 0.1% increase.
French consumer spending on goods disappointingly fell back 1.1% m/m in Nov in blow for Q4 growth hopes. We currently expect 0.2% q/q growth
— Howard Archer (@HowardArcherUK) December 23, 2015
Game Digital profit warning
And an early Christmas profit warning. Computer games retailer Game Digital said it had seen challenging trading conditions and disappointing sales since the start of the festive school holidays.
So it expected half year profits to come in at £30m. Analysts at Liberum said:
UK sales have fallen off sharply in the past few weeks at the most critical time of year for Game. General weakness has been exacerbated by very rapidly slowing sales in old format content, down 57% in the UK, and while sales of new generation content remained strong these were not enough to offset the decline. The Spanish market remains strong with sales up 8%.
While a decline in old format sales was expected the scale has surprised the company while the importance of Christmas trading has hugely magnified the issue. We cut our full year earnings per share forecasts by 60%, 2017 estimates by 42% and 2018 by 30%. There is no updated guidance on the dividend, but we note that current year cover is just 0.5 times.
Updated
Brent crude and West Texas trade at same level
Meanwhile oil prices have edged higher, with Brent crude up 1% to $36.48 a barrel.
But on Tuesday, for the first time in 10 years, Brent had traded below the level of US West Texas Intermediate.
Part of that was that was Brent coming under pressure on oversupply fears, dropping below its 11 year low, but partly it was data from the American Petroleum Industry showing an unexpected drop in stockpiles.
At the moment the two measures - Brent and WTI - are trading at exactly the same level.
Here - from last night - is the comparison:
Brent and WTI move back to parity. $CL_F $BRENT pic.twitter.com/tGHnhbA2mf
— Charlie Bilello, CMT (@MktOutperform) December 22, 2015
There could be further volatilty when OPEC releases the crude oil outlook for 2016 at 10am GMT.
Updated
European markets are expected to open higher after a fairly mixed day on Tuesday:
Our European opening calls: $FTSE 6130 up 47 $DAX 10574 up 85 $CAC 4605 up 37 $IBEX 9486 up 71 $MIB 21190 up 129
— IGSquawk (@IGSquawk) December 23, 2015
Agenda: UK GDP growth expected at 0.5%
Good morning, and welcome to our rolling coverage of the world economy, the financial market, the eurozone and business.
The UK economy is expected to have grown more slowly in the third quarter, as we get the final snapshot of the latest GDP figures, and then to improve again in the final three months. But the data will not be strong enough to prompt the Bank of England to consider an interest rate rise until well until 2016.
Most analysts are forecasting the initial reading of 0.5% growth will be confirmed, showing a slowdown from 0.7% in the previous three months. Howard Archer, chief UK and European economist at IHS Global Insight said:
We expect GDP growth in the third quarter to be confirmed at 0.5% quarter-on-quarter and 2.3% year-on-year. We expect GDP growth to improve to 0.6% quarter-on-quarter in the fourth quarter, resulting in overall GDP growth of 2.4% in 2015. The 1.7%month-on-month jump in retail sales volumes in November suggests that consumer spending will be strong in the fourth quarter, which increases the possibility that growth could surprise on the upside and come in at 0.7% quarter-on-quarter.
Michael Hewson, chief market analyst at CMC Markets UK, also expects a figure of 0.5%:
[UK GDP growth] to some extent has been slightly disappointing in the readings seen thus far in that it has only shown growth of 0.5%. There is an outside expectation that we could see an upward revision to 0.6% as a result of a strong September due to the Rugby World Cup and a buoyant services sector, which in turn should offer some optimism that the fourth quarter will be similarly positive.
As far as rate rise expectations are concerned, it probably won’t move the dial that much in that a UK rate rise still seems some way off into 2016, after further policymaker comments in the last few days regarding the benign inflation outlook, and which has served to push the pound to eight month lows against the US dollar, a rather strange state of affairs for one of the best performing economies in the G7 this year.
External MPC member Martin Weale, who at the end of 2014 had favoured a modest rise in rates, rather surprisingly suggested earlier this week that he was in no rush to nudge borrowing costs up, which for an economy that looks likely to set 12 successive quarters of economic expansion if the fourth quarter is as positive as the rest of 2015, came across as a little bit of a surprise for someone who has always seemed to be more of a hawkish disposition.
Later come US orders for durable goods - higher priced and longer lasting items such as cars, manufacturing equipment and aeroplanes.
Updated
