December 11 2015

Lagarde says she wants Britain to stay in the EU as IMF publishes upbeat assessment of UK economy. Stock markets are down for seventh trading day, with oil prices near seven-year lows. All eyes on the Fed interest rate decision in the week ahead…

 

Powered by Guardian.co.ukThis article titled “Markets tumble as oil falls; IMF chief Lagarde highlights Brexit risk – live” was written by Julia Kollewe (until 2.00) and Nick Fletcher, for theguardian.com on Friday 11th December 2015 16.11 UTC

There is a chance the current market slump could persuade the US Federal Reserve not to raise rates next week, suggests Chris Beauchamp, senior market analyst at IG, but this would undoubtedly damage the central bank’s credibility. He said:

Once again China concerns have spiked just as a Fed rate decision looms. Continued yuan devaluation has been the main driver this time, but it has combined with the ongoing rout in oil and other commodity prices to produce a week of losses for equities.

Just a week ago the situation had seemed relatively calm, but it now appears that many investors have been trying to put a brave face on the situation. Now that mask has slipped.

It goes without saying that the Fed is not meant to take notice of market turmoil in its decisions, but if it feels that the international situation once again calls for it to stay its hand next week, then we could be witnessing a re-run of September. Leaving aside the damage that this will do to the Fed’s credibility (potentially putting Janet Yellen into the ‘unreliable partner’ category currently only occupied by Mark Carney), it will be hard for the central bank to put a positive spin on any decision not to increase rates.

Seasonality suggests the Santa rally will finally start to kick in from next week, but the strength and duration of that depends largely on Janet Yellen. She has a big week ahead of her.

Here’s our economics editor Larry Elliott’s report on the market declines:

A week of turmoil on the world’s financial markets has ended on a downbeat note after a fresh plunge in oil prices triggered sharp stock market falls.

Amid fears that a glut in crude oil will persist for another 12 months, the cost of a barrel of benchmark Brent crude slid by more than 2% on Friday to trade at just under $39 a barrel – its lowest for almost seven years.

In London, the FTSE 100 index crashed through the 6,000 barrier, and was down by more than 100 points in early afternoon trading.

The gloomy mood in the City was echoed on Wall Street, where the Dow Jones industrial average opened more than 250 points lower. Mining shares were among the hardest hit as stock exchanges fell for the seventh day in a row.

Stock markets have been affected by renewed weakness in the price of oil caused by fears that global demand is insufficient to soak up the supply of crude from oil producing countries.

The International Energy Agency, which advises developed states on energy policies, said the glut was likely to continue. “World oil markets will remain oversupplied at least until late 2016 … although the pace of global stock builds should roughly halve next year, ” the IEA said in its monthly report.

Full story here:

Updated

The rout on stock markets could get worse, certainly as far as the FTSE 100 is concerned, says analyst Connor Campbell at Spreadex:

[This is] the first time the UK index has been below 6000 since the end of September and marks the end of one of the worst weeks for the commodity-laden index in an already trouble-filled 2015. What is worrying is that this weekend brings with it the latest Chinese industrial production data, the kind of figure that, if it underperforms expectations, may only help escalate this current commodity collapse.

US consumer confidence has come in slightly lower than expected in the preliminary data for December, but still increased from last month’s figure.

The University of Michigan consumer sentiment index rose from 91.3 in November to 91.8 so far this month. This was below the 92 figure expected by economists.

Wall Street opens sharply lower

US shares have followed other global markets lower in early trading on Wall Street, and the commodity crunch continues to unnerve investors.

With oil tumbling again – Brent crude is currently down nearly 2% to $38.99 a barrel after the International Energy Agency warned of oversupply until at least the end of next shares – shares are following suit.

The Dow Jones Industrial Average is down 223 points or 1.27% while the FTSE 100 has fallen 1.9% to 5972, its lowest since late September. Shares with connections to South Africa are among the fallers in London following the departure of the country’s finance minister earlier in the week, while mining shares continue to be weak amid concerns about falling demand from China.

Investors are also remaining cautious ahead of the probable US interest rate hike next week

VW sales down 4.5% on a year so

The effects of the emissions scandal on Volkswagen sales are shown by new sales figures from the company.

So far this year – from January to November – the company has sold 5.34m passenger cars, down 4.5% on the same period last year.

The fall in November was 2.4% compared to the same month in 2014. Board member Jürgen Stackmann said the current trend was expected to continue for the rest of the year:

Developments in world markets, which are in some cases tense, and their effects on the Volkswagen Passenger Cars brand will continue until the end of the year…

In view of the situation of the brand, which is currently challenging, I do not expect that we will be able to compensate for this fall in the remaining days of the year.

Last VW sold 6.12 million cars across the world.

VW sales
VW sales Photograph: VW

As far as the emissions scandal was concerned, Stackmann said that the main focus was on solutions which were as customer-friendly as possible. The implementation of the measures is to start in January and will probably continue throughout 2016. “For our customers, we want to keep the time needed to implement the technical measures as short as possible. Via our dealers, we will be contacting each of our customers and will do everything in our power to take individual customers’ needs into consideration in the implementation of the technical measures in order to avoid any disadvantages such as possible mobility restrictions.”

On Thursday VW said the scandal was the result of a collection of failures within the company.

Despite the US retail sales making a rate rise from the Federal Reserve next week even more likely, the underlying trend may be weakening, according to Chris Williamson, chief economist at Markit. He said:

Core retail sales, which strip out volatile spending on cars and fuel, as well as building and food services, rose 0.6% to register the largest monthly increase since May. Overall retail sales rose 0.2% in November, missing expectations of a slightly stronger 0.3% rise but nevertheless signalling the best increase since July.

The data will no doubt be seen as further encouragement to policymakers who have already signalled their intent to hike interest rates next week for the first time in nine years. However, the data also suggest that the underlying spending trend could be waning, which adds to the view that spending is not galloping away and the Fed will need to be cautious in timing future hikes, pointing to a gently rate trajectory path.

The 0.7% rise in sales so far on the fourth quarter compares with a 1.1% rise in the third quarter and a 1.2% increase in the second quarter. In fact, barring the weather-torn first quarter, core sales growth is on course to be the weakest for almost two years. Markit’s PMI data also show a deteriorating trend in new orders at factories that produce consumer goods, suggesting retailers are buying few goods from wholesalers, most likely due to weaker than expected sales.

While consumer have benefitted from low inflation and falling fuel prices, the prospect of higher interest rates may be starting to have an impact on people’s propensity to spend.

US retail sales
US retail sales Photograph: Ecowin

ING economist Rob Carnell said the US retail sales numbers were “better than good enough for a December rate hike”.

Markets are already pricing in a very high chance of a hike at next week’s meeting, so we anticipate that impacts on the dollar, and bond yields will be minor, even though the result was on balance a little better than expected.

But it was given an extra nudge in the same direction by slightly stronger November producer price data, perhaps an indicator of what we might expect at next week’s consumer price index release too.”

Producer price figures, also out just now, showed a 0.3% gain in November after a 0.4% decline in October, as the cost of services increased. They were stronger than expected, and the dollar rose on both sets of figures.

Updated

Overall retail sales increased only 0.2%, with automobile sales down and cheaper petrol also having an impact.

Clothing retailers reported 0.8% sales growth, the biggest increase since May, as did sports and hobby stores. Sales at online retailers, and at electronics and appliance chains, were up 0.6%.

US retail sales stronger than expected

The holiday shopping season got off to a good start in the US. Retail sales excluding automobiles, gasoline, building materials and food services rose 0.6% in November from the month before, more than expected. In October, core retail sales rose by 0.2%, according to the Commerce Department.

Consumer spending surprisingly slowed in September and October. The latest figures will bolster expectations of a Fed rate hike next Wednesday.

Shares in the UK and Europe have fallen further.

FTSE 100 index down 1.3% at 6008.18

Dax down 1.9% at 10,398.46

CAC down 1.5% at 4563.56

US retail sales figures are due shortly.

Tesco UK personnel director quits

Tesco has just announced that its UK personnel director Judith Nelson has left the supermarket chain, the second veteran director to resign this week.

Nelson quit after 22 years at the retailer. She will be replaced by Natasha Adams, the business support director. Nelson’s departure comes after the resignation of Jill Easterbrook, the group business transformation director, on Monday.

Tesco’s woes continue to deepen. Its shares hit an 18-year low this week as investors fretted about the strength of its Christmas trading. In October, Britain’s biggest retailer posted a 55% fall in first-half pretax profits.

Here is our full story on the IMF.

Osborne was delighted with the IMF’s latest assessment of the UK, saying it “could hardly be more positive”. Using one of his favourite catchphrases, he said:

I take this as an endorsement of our plan to fix the roof while the sun is shining.”

Updated

My colleagues on the economics desk Larry Elliott and Katie Allen, who are at the Treasury, write:

IMF managing director Christine Lagarde said she wanted Britain to stay in the European Union as the Washington-based organisation highlighted a looming Brexit referendum as a risk to the strongly performing UK economy.

In an upbeat assessment, the Fund said the UK was enjoying strong growth, record employment and had largely repaired damage from the global financial crisis.

Presenting the IMF’s annual healthcheck of the UK economy alongside chancellor George Osborne, Lagarde said there were risks to the outlook, including from the housing market, but she was generally positive.

“The UK authorities have managed to repair the damage of the crisis in a way few other countries have been able to do,” she said.

Lagarde said the IMF will work through various scenarios for the EU referendum outcome in its next assessment of the UK due in May 2016. But she added: “On a personal basis… I am very very much hopeful that the UK stays within the EU.”

The fund called on the Bank of England to keep interest rates at their record low of 0.5% until signs of stronger inflationary pressures emerge.

It suggested property tax reform to the government to ease Britain’s chronic housing shortage.

For example, rebalancing taxation away from transactions and towards property values could boost mobility and facilitate more efficient use of the housing stock. Reducing council tax discounts for single-occupant properties could also increase the utilization of these properties.”

The IMF praised George Osborne’s envisaged path to deficit reduction as “smoother” than at this time last year. The fund says:

The autumn statement appropriately targets steady declines in the deficit and the achievement of a small surplus by 2019/20.

However, it warned the chancellor:

In the event of an extended period of sluggish demand growth, the flexibility in the fiscal framework should be used to modify the pace of structural adjustment.

In addition, the envisaged reductions in some categories of expenditure remain sizable, and the government may need to show flexibility in finding alternative fiscal measures if anticipated efficiency gains fail to materialize.”

IMF: UK’s economic performance strong, but highlights risks

Here is the IMF’s latest assessment on the UK economy. The Washington-based fund concludes that

The UK’s recent economic performance has been strong, and considerable progress has been achieved in addressing underlying vulnerabilities.

Steady growth looks likely to continue over the next few years, and inflation should gradually return to target.”

However, the IMF highlights several risks, namely

  • Housing market: It says that while house price growth has eased somewhat over the past year, it remains high. The share of households borrowing at high loan to income multiples has come down, but after initial declines the household debt to income ratio has stabilised at a high level, “leaving some households vulnerable to income and interest rate shocks”
  • The current account deficit is “strikingly large”. “Confidence shocks could reduce external capital flows into the UK, which could adversely affect growth”
  • The 2014/15 fiscal deficit was nearly 5% of GDP, with government debt at 87% of GDP. “While the UK continues to benefit from record low interest rates, maintaining deficits and debts at these levels would constrain the space to respond proactively to future large negative growth shocks.”
  • Productivity growth: the expected pick-up to nearer its historical average rate “may fail to materialise”.
  • Uncertainty over the planned referendum on EU membership

Here’s our full story on Sports Direct. Sports Direct shares have fallen for a second day after the Guardian’s investigation into its pay and working conditions and poor financial results, my colleague Nick Fletcher writes. This has wiped millions of pounds more off the value of the company and founder Mike Ashley’s stake.

Newcastle United owner Mike Ashley is seen at St James’ Park in Newcastle, Britain in this November 24, 2015.
Newcastle United owner Mike Ashley is seen at St James’ Park in Newcastle, Britain in this November 24, 2015. Photograph: Lee Smith/Reuters

Chris Williamson, chief economist at industry survey compiler Markit, says:

The October upturn goes some way to bringing the recent official data more into line with the Markit/CIPS PMI data, which have shown the construction sector enjoying a good year so far in 2015, albeit with the rate of expansion cooling in recent months, led by a slowing of house building.

The official construction data are notoriously volatile and prone to revision, so we treat the numbers with due caution.”

UK construction output
UK construction output Photograph: ONS/Markit

UK construction output weaker than expected

Meanwhile, the official UK construction figures for October were weaker than expected. Output rose by 0.2% from September, far less than the 1% increase City analysts had predicted.

Britain’s construction industry accounts for 6% of total economic output and was a drag on growth in the third quarter, when the economy was powered entirely by the services sector.

The Office for National Statistics revised up its estimate for construction output in the third quarter to show a drop of 1.9% compared with a 2.2% fall previously, but this will have little impact on the overall GDP numbers.

More worryingly, housebuilding has been revised lower to show a quarterly decline of 5.6% in the third quarter – its biggest drop since early 2009.

UK housebuilder Bellway has seen its shares jump 4.3%, making it the best performer on the FTSE 250 index, after the company said it would build 10% more homes in the year to 31 July. Broker Peel Hunt raised its target price on the shares to £28.90 from £28.20. Numis raised its target price to £28.60.

IEA sees oil glut worsening in coming months

Back to oil prices: the International Energy Agency sees the oil glut worsening in coming months as demand growth slows. It is predicting that global oil markets will remain oversupplied until at least the end of next year.

Additional output from Iran when/if western sanctions on the country are removed will put more oil on the market. Oil prices have fallen to near seven-year lows, below $40 a barrel, this week after the oil cartel OPEC failed to cap its output.

The IEA, which advises developed nations on energy policies, said in its monthly report:

World oil markets will remain oversupplied at least until late 2016… although the pace of global stock builds should roughly halve next year.”

Banks including Goldman Sachs believe oil prices could fall to as low as $20 a barrel, as the world might run out of capacity to store unused oil. But the IEA said:

As extra Iranian oil hits the market, inventories are expected to swell by 300m barrels. Concerns about reaching storage capacity appear to be overblown.

Much of the excess oil will be soaked up by 230m barrels of new storage capacity additions, while US inventories are only 70% full. As inventories continue to swell into 2016, there will still be a lot of oil weighing on the market.”

Joint house brokers Citigroup and Goldman Sachs have both cut their target price on Sports Direct shares.

Citigroup cut its target price to 800p from 900p, while Goldman Sachs went to 725p from 850p, as reported earlier.

Sports Direct shares are now down 3.2% at 573.6p, making it the second-biggest faller on the FTSE 100 index, and wiping more than £100m off the company’s market value. Founder Mike Ashley, who owns a 55% stake in the retailer, took a further £54m hit, following his £237m loss on Thursday.

Updated

The stock market as a whole is down in London, by 0.5%. Elsewhere in Europe, shares have fallen near two-month lows on the pan-European FTSEurofirst 300 index, which has lost 0.7%. Stock markets are falling for the seventh day in a row.

Weak commodity prices, in particular oil, are putting pressure on markets ahead of the US Federal Reserve’s meeting next Wednesday when it is widely expected to hike interest rates.

Updated

Bubb added:

When we got to the presentation room [yesterday] there was no sign of Mike Ashley! Last time the great man was himself late arriving, after a late night session with his property adviser, but he did eventually turn up to delight analysts with his views on online retailing and Europe.

This time he seemed to be keeping a low-profile, for perhaps understandable reasons, given the recent bad press, although he apparently was in London for investor meetings later in the day.

In Ashley’s absence, the managing director Dave Forsey, along with the new finance director Matt Pearson, tried to explain the weak first-half sales performance.

Amazingly, he insisted that even though H1 retail sales were only up by 2.5% on a constant currency basis, UK store LFL sales had been “positive”, despite an increase in UK selling space of over 10%…but that could only be true if new UK store space has been remarkably unproductive and Europe has been remarkably weak, notably Austria, and if there has been much slower Online growth (down from +14% to +7%, in fact).

Asked about the success of rival JD Sports, he envied their ability to get the best new ranges from the branded suppliers…Asked about the lack of more acquisitions in the pipeline, he said that it’s hard to do deals because people know that Sports Direct is a buyer and the asking prices are too high…Asked about the disastrous experience in Austria, he refused to break out the performance, but tried to point people to the much more successful Baltics acquisition.”

Sports Direct Derby
Sports Direct Derby Photograph: Alamy

Updated

Independent City analyst Nick Bubb said this morning:

Well, the poor PR about Sports Direct’s corporate ethics and governance isn’t helping their cause, but the main reason for the slump in the share price yesterday was concern about weak UK sales and the problems with the recent acquisition in Austria…”

Sports Direct shares fall 3.1% after Goldman Sachs target price cut

Shares in Sports Direct, the retail chain controlled by the billionaire Mike Ashley, have fallen another 3.1% this morning, after Goldman Sachs cut its target price on the stock.

The shares tumbled 11% on Thursday, wiping more than £400m off the market value of Britain’s biggest sportswear retailer. City investors and MPs turned on the company following disappointing financial results and revelations over pay and working conditions unearthed by a Guardian investigation.

Updated

UK transport secretary Patrick McLoughlin has been on BBC Radio 4 defending the government’s postponement of its decision on whether to allow a third runway at Heathrow airport until next summer, over environmental concerns.

Pressed why the government wasn’t making a decision by the end of the year as promised, McLoughlin said that a decision had been made – of sorts.

We’ve come to the conclusion that extra airport capacity is needed.”

He said the Airports Commission had looked at 52 different options and three were deemed workable. While the commission’s report recommended a third runway at Heathrow, “it said all three options are viable options,” he noted.

The transport secretary said that with regard to air quality, the changes since the report was published needed to be taken into account.

Gatwick is still on the table. There could be a second runway at Gatwick.”

He added that a decision would be made “hopefully in the summer of next year” and this “would still allow us to get extra capacity by 2030.”

An aircraft flies over residential houses in Hounslow as it prepares to land at London Heathrow airport.
An aircraft flies over residential houses in Hounslow as it prepares to land at London Heathrow airport. Photograph: Leon Neal/AFP/Getty Images

Our political correspondent Rowena Mason wrote:

Although the delay was widely expected, Cameron immediately faced fury from business groups and accusations from Labour that he had ducked a difficult decision on infrastructure to help the chances of Zac Goldsmith, the Tory London mayoral candidate, who is a fierce opponent of Heathrow expansion.

Updated

UK and European stocks have opened lower, as expected:

  • FTSE 100 index down 0.2% to 6073.1
  • Germany’s Dax down 0.2%
  • France’s CAC down 0.5%
  • Italy’s FTSE MiB down 0.3%
  • Spain’s Ibex down 0.2%

Crude oil prices are hovering near levels not seen since early 2009, with Brent crude at $39.65 a barrel (after falling to $39.38 earlier) and US crude at $36.65 a barrel.

Richard Gorry, director of consultancy JBC Energy Asia, told Reuters:

Can you rule out $20 per barrel? No, you can’t.”

An oil pump works at sunset Monday, Dec.7, 2015, in the desert oil fields of Sakhir, Bahrain.
An oil pump works at sunset Monday, Dec.7, 2015, in the desert oil fields of Sakhir, Bahrain. Photograph: Hasan Jamali/AP

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

The head of the International Monetary Fund, Christine Lagarde, is in London and due to meet the UK chancellor, George Osborne, to present the fund’s latest assessment of the British economy (the concluding statement of the regular Article IV consultation). It will be released at 11.30 GMT.

Stock markets in the UK and Europe are set for another weak start to the day, with oil prices still weak and the Chinese yuan at four and a half year lows.

OPEC’s monthly report published on Thursday predicted a fall in oil supply from non-OPEC countries next year coupled with an increase in global demand that should underpin prices. The market however was more focused on the short term fact that oil production from OPEC itself hit the highest level in three years in November.

Jasper Lawler, market analyst at CMC Markets UK, says

The near-term outlook for the stock market looks a lot less rosy while oil prices are tanking. Oil prices fell 40% after OPEC’s meeting in November last year, a similar decline this time would mean Brent crude at $25 per barrel.

An additional cause for concern over the drop in crude this time is that it may cause a policy error by the Federal Reserve. The Fed looks set to raise interest rates at a time when a fall in the oil prices means inflation could be about to take another leg lower. The Bank of England just highlighted exactly this same risk factor in its meeting minutes.”

The main data releases today are UK construction figures at 9.30am GMT and US retail sales at 1.30pm GMT.

Lawler says

The US retail sales report is the penultimate piece of data that could derail a Fed rate hike with CPI [inflation] released next week. Expectations are for a rise of 0.2% in November up from 0.1% in October with sales ex-autos to rise 0.3%, up from 0.2%.

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