Global economy

So far, 2016 has seen some dramatic falls already, but Bank of Japan’s negative interest rates put some hope back into the global economy. The yen fell and markets reacted positively to the news of more support from a major central bank…

Powered by Guardian.co.ukThis article titled “Global markets end tumultuous month on a high” was written by Justin McCurry, Dominic Rushe and Katie Allen, for The Guardian on Friday 29th January 2016 20.24 UTC

Global markets have ended a difficult month on a stronger note after the Bank of Japan stepped in to boost its economy with negative interest rates.

However, weak economic growth figures in the US underscored the scale of a global slowdown that has rattled investors.

Policymakers at Japan’s central bank stunned markets with a narrow vote to impose a 0.1% fee on deposits left with the Bank of Japan (BoJ) – in effect a negative interest rate. The central bank was spurred into action as volatile markets, flagging global growth and a downturn in China threatened major economies around the world.

In the US, news that the economy barely grew in the final three months of 2015 prompted speculation that its central bank would rein in plans to raise interest rates this year, having tightened borrowing costs for the first time in almost a decade in December. GDP rose at an anaemic annual rate of 0.7% as consumers and businesses cut back on spending, while US exports were hurt by weaker overseas markets.

Rob Carnell, economist at ING Financial Markets, said: “All in all, these GDP data support the sense given by recent monthly numbers that the US economy lost momentum into the end of 2015. We are struggling to see how this story is reversed in the coming quarters.”

Stock market investors were cheered by the prospect of US interest rates rising at a slower pace and by the Japanese move, which followed the similarly aggressive precedent set by the European Central Bank (ECB) in June 2014. The negative rate is designed to encourage commercial banks to use excess reserves – which they normally keep with the central bank – to lend to businesses instead.

The radical intervention provided an immediate boost to stock markets around the world after a dramatic start to the year that saw trillions of dollars wiped off their value in a matter of days. On Friday, the FTSE 100 in London closed up 2.6% at 6,084, to be back within a whisker of its starting level for 2016 of 6,242. That rise was mirrored around European bourses and followed a rally in Asian stock markets, where Japan’s Nikkei jumped 2.8% to a two-week high. At the time of the London close, Wall Street was also higher, with the Dow Jones industrial average up 1.7%.

Chinese shares also rallied following the Japanese rate move but still suffered their biggest monthly fall for seven years. The Shanghai Composite Index has lost 22.6% since the start of the year.

The surprise negative rates decision came just days after the BoJ’s governor, Haruhiko Kuroda, suggested he had dismissed any drastic easing measures to boost business confidence.

On Friday, the bank said it had not ruled out a further cut. “The BoJ will cut the interest rate further into negative territory if judged as necessary,” it said in a statement.

It said the move was intended to lessen the risk to Japanese business confidence from turbulence in the global economy, a week after data showed the Chinese economy had grown at its slowest pace for a quarter of a century in 2015.

The ECB held back from injecting more electronic cash into markets at its meeting this month but it too fired up share prices with a promise to consider more action in March.

The prospect of central banks pumping more stimulus into a struggling global economy has also helped stabilise oil prices. Brent crude, which earlier in January hit a 13-year low below $28 a barrel, stood at about $33.86 on Friday. It is still down 30% from a year ago.

Highlighting global unease about the global outlook following China’s slowdown, gold prices have gained almost 5% in January.

Friday’s estimate of US GDP from the Commerce Department was less than half the 2% annual growth rate in the third quarter and was the weakest showing since a severe winter reduced growth to a 0.6% annual rate in the first quarter of 2015.

Economists cautioned that this early estimate could yet be revised but said it still pointed to global headwinds buffeting the world’s biggest economy and suggested the US Federal Reserve would not go ahead with all four interest rate rises slated for this year. Some said the latest signs of a US slowdown left the US central bank looking unwise after December’s rate rise.

“The GDP growth slowdown sheds a rather critical light on the Fed’s decision to raise interest rates in December,” said Nina Skero, economist at the Centre for Economics and Business Research.

“For the sake of credibility, it is unlikely that the Fed will reverse its December decision, but rates are likely to stay at their current level until 2017.”

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USA 

U.S. dollar strengthens along with emerging market currencies, euro and pound fall, and Wall Street extends gains following better-than-expected U.S. consumer confidence numbers, as markets reopen after the Christmas holiday break…

Powered by Guardian.co.ukThis article titled “Global markets climb on rising US confidence and higher oil prices – live” was written by Katie Allen and Julia Kollewe (now), for theguardian.com on Tuesday 29th December 2015 16.17 UTC

On Monday, the rouble hit its lowest level this year, pressured by sliding oil prices. The Russian economy is heavily reliant on crude and natural gas, which together account for almost half of state revenue.

But today, the Russian currency has recovered, boosted by higher oil prices and a Bloomberg report that former Russian finance minister and investor favourite Alexei Kudrin is in talks with Vladimir Putin about returning to a senior post to help deal with the country’s worsening economic troubles.

Let’s take a look at currency markets. The US dollar is up against the euro and other major currencies, but has slipped against the Russian rouble, which has been been lifted by higher oil prices. Brent crude is nearly 3% higher on the day.

Investors are snapping up riskier assets, including stocks and emerging market currencies, on the back of the rally in oil prices. This has hurt the euro, which is regarded as a safer currency, given its low yield.

Away from the markets, here’s some good news for UK consumers. Companies that plague householders with nuisance phone calls and texts face fines totalling more than £1m this year and next, a government watchdog has warned after tripling the financial punishment for rogue callers in 2015, our consumer affairs correspondent Rebecca Smithers writes.

The information commissioner’s office received about 170,000 complaints in 2015 from people who had received nuisance calls and texts – a slight decline on last year, when the total was 175,330.

You can read our full story here.

Nuisance call firms

Nuisance call firms Photograph: Richard Pohle/The Times/PA

The most recent fine came earlier this month when the ICO fined the Telegraph Media Group £30,000 for sending hundreds of thousands of emails on the day of the general election urging readers to vote Conservative, breaking the rules around direct marketing.

Here is a list of other fines imposed this year:

  • A record £200,000 fine in September to Home Energy & Lifestyle Management Ltd (Helms), a solar panels company that made 6m nuisance calls to householders.
  • A £130,000 fine in October to Pharmacy 2U Ltd, a company that was selling customer details to postal marketing companies. Buyers of the details included a health supplements company cautioned for misleading advertising.
  • A £90,000 fine in November to Nuisance Call Blocker Ltd for making unsolicited marketing calls to sell cold-call-blocking devices. The Poole-based company was telephoning people to sell a call-blocking service and device to stop the same type of calls the company itself was making.
  • A £80,000 fine to UKMS Money Solutions Ltd, a PPI claims firm that sent 1.3m spam text messages to mobile phone numbers it had bought from list brokers.

Updated

Gold has benefited from the rally in oil prices, but gains were limited by a stronger dollar. Spot gold edged up 0.1% to $1,070.05 an ounce in thin trading.

The precious metal is still on course for its third year of losses, pressured by the prospect for more rate hikes in the US. It is likely to end the year nearly 10% lower from the previous year, mainly due to expectations that higher US interest rates will hit demand for gold.

ABN Amro analyst Georgette Boele said:

Gold’s down trend is likely to continue throughout 2016…. there are going to be more US rate hikes than the market is anticipating the next year.”

Brent crude is nearly 3% higher, rising more than a dollar to $37.70, after hitting 11-year lows.

Here is Connor Campbell again, financial analyst at Spreadex:

A slightly better than expected goods trade deficit (at $60.5bn against the $60.9bn anticipated, but still greater than last month’s $58.4bn) and a much better than forecast CB consumer confidence figure helped the Dow Jones open at, and maintain, a 170 point jump this Tuesday. That leaves the US index at a 12 day high, and with a slim chance of edging into the green in terms of year-long growth before the end of trading on Thursday.

This has given a further boost to eurozone stocks, already buoyant on the rising oil price. Germany’s Dax is nearly 180 points, or 1.66%, ahead, while France’s CAC has gained almost 70 points, or 1.45%.

The FTSE 100 index in London is some 33 points ahead, or 0.5%.

Campbell says:

The FTSE likely would have been higher if wasn’t for the gains made by its housing sector being effectively negated by the Scrooge-like commodity stocks and a renewed slide from the supermarket sector. News that the sale of its pharmacy business to Celesio would be undergoing an in-depth investigation, as ordered by the CMA, caused a specific headache for Sainsbury’s [down 1.2%].

More generally, news that Amazon intends to substantially expand its grocery delivery service Pantry in the New Year caused the likes of Tesco and Morrisons to tumble, with the online-only Ocado Group [plunging more than 4%] especially spooked by the announcement.”

Here is our story on Amazon.

Adam Button, currency analyst at Forex Live, says about the rise in US consumer confidence:

It’s strong but still well below where it was in September. The revision to the November reading meant it was the worst since July, not the worst since Sept 2014.”

Stocks on Wall Street are extending gains on the better-than-expected US confidence numbers, with the Nasdaq and the Dow Jones up around 1% and the S&P 500 0.8% ahead.

Lynn Franco, director of economic indicators at the Conference Board, said:

Consumer confidence improved in December, following a moderate decrease in November. As 2015 draws to a close, consumers’ assessment of the current state of the economy remains positive, particularly their assessment of the job market.

Looking ahead to 2016, consumers are expecting little change in both business conditions and the labor market. Expectations regarding their financial outlook are mixed, but the optimists continue to outweigh the pessimists.”

The monthly survey is conducted for the Conference Board by Nielsen. The cutoff date for the preliminary results was 15 December.

You can read the full consumer confidence report here.

US confidence improves

The latest US consumer confidence numbers are out. The Conference Board consumer confidence index improved to 96.5 in December, from a revised 92.6 in November, beating expectations of a reading of 93.5.

Updated

Barclays Capital agrees $13.75m US settlement over mutual funds

Staying on the other side of the Atlantic for the moment, the US regulator FINRA has settled with Barclays Capital over mutual funds. The Financial Industry Regulatory Authority has ordered Barclays Capital to pay $13.75m for unsuitable mutual fund transactions and related supervisory failures.

The British bank’s investment banking arm will have to pay more than $10m in compensation, including interest, to affected customers, and has been fined a further $3.75m by the regulator. It said in a statement:

FINRA found that from January 2010 through June 2015, Barclays’ supervisory systems were not sufficient to prevent unsuitable switching or to meet certain of the firm’s obligations regarding the sale of mutual funds to retail brokerage customers….

In concluding this settlement, Barclays neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.”

You can read the statement in full here.

Updated

Wall Street opens higher

Shortly after the opening bell on Wall Street, shares are higher, mirroring a rally in oil prices.

The tech-heavy Nasdaq index is up 0.7%, the Dow Jones industrial average is up 0.9% and the S&P 500 has added 0.8%.

In the UK, the FTSE 100 is up 0.6% while Brent crude is up 2% at $37.4, creeping further asway from an 11-year low hit last week.

US house price inflation edges up

Homes for sale

Figures just out in the US suggest home prices there rose at a slightly faster pace in October compared with September and a touch above economists’ forecasts.

The S&P/Case Shiller index of 20 metropolitan areas rose 5.5% on a year earlier in October. That was faster than 5.4% inflation for single-family home prices in September and beat the forecast for 5.4% in a Reuters poll of economists.

The survey authors said San Francisco, Denver and Portland continue to report the highest year-over-year gains among the 20 cities with another month of double-digit price increases of 10.9% for all three.

Commenting on the latest report [PDF], David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices says:

“Generally good economic conditions continue to support gains in home prices.

“Among the positive factors are consumers’ expectations of low inflation and further economic growth as well as recent increases in residential construction including single family housing starts.”

He also highlights the impact on sentiment among potential homebuyers from the US central bank’s move to raise interest rates earlier this month – the first increase for almost a decade:

“The recent action by the Federal Reserve raising the Fed funds target rate by 25 basis points and spreading expectations of further increases during 2016 are leading some to wonder if mortgage interest rate might rise. Typically, increases in short term interest rates lead to smaller increases in long term interest rates … From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25%; over the same period, the mortgage rate rose from about 6% to 6.75% during a sustained tightening effort by the Federal Reserve. The latest economic projections published by the Fed following the recent rate increase suggest that the Fed funds rate will be around 2.6% in September 2017 compared to a current rate of about 0.5%. These data suggest that potential home buyers need not fear runaway mortgage interest rates.”

US mortgage rates and the Fed funds rate

Competition watchdog to probe Sainsbury’s pharmacy sale

Tablets

The Competition and Markets Authority (CMA) in the UK has confirmed it is referring the sale of Sainsbury’s pharmacy business for an in-depth investigation.

In a statement, the CMA says the proposed acquistion of the business by Celesio, the owner of Lloyds Pharmacy, will be probed further after Celesio had failed to address the watchdog’s concerns about competition being affected.

The CMA says:

The CMA’s initial investigation identified 78 local areas where customers may be affected by a loss of competition between Lloyds Pharmacy (a Celesio subsidiary) and Sainsbury’s pharmacies. The CMA also indicated that in other local areas it had been unable to reach a positive conclusion on whether the merger gives rise to a realistic prospect of a substantial lessening of competition.

Celesio has not offered any undertakings in lieu and the CMA will therefore now refer the merger.

A decision on the merger will be made by a group of independent panel members supported by a case team of CMA staff. The deadline for the final report will be 13 June 2016.

Sainsbury’s announced back in July that it had sold its 281-store pharmacy business to Celesio for £125m.

Under the deal, Lloyds will rent out and run Sainsbury’s 277 in-store pharmacies and take over four located in hospitals.

More pressure on Britain’s big supermarkets

Groceries

The focus will be firmly on retailers’ shares in coming days as the trading updates from the crucial Christmas season roll in.

We already know Britain’s supermarkets have been struggling as shopping habits change and as discounters like Lidl and Aldi take market share and intensify a fierce price war. Now Amazon is preparing to crank up the pressure on grocers by dramatically expanding the range of food products it sells.

My colleague Graham Ruddick has been talking to Christopher North, UK boss of the online retailer. North says Amazon plans to expand its Pantry service rapidly in the new year.

Here’s the full story:

Markets edge up, Wall St looks to open higher

On Wall Street the US futures market is pointing to a higher open, helped by a modest rise in oil prices, traders say.

In the UK, the FTSE 100 is up 0.4%, or 24 points, at 6278. Housebuilders are among the biggest risers while the miners again feature among the biggest fallers as aluminium and copper prices head lower.

Connor Campbell, analyst at spread betting company Spreadex highlights that the FTSE is underperforming its European peers:

“Whilst thin(ish) trading volumes appear to be enhancing whatever nascent positive sentiment there is in the eurozone, allowing the DAX and CAC to stretch out their legs to hit fresh 20-day highs, the FTSE hasn’t been so lucky this Tuesday morning.

“Despite a strong set of housing stocks (Persimmon and Berkeley Group leading the charge), lifted by both news of record high UK prices and the potential windfall from the cost of rebuilding and repairing the numerous homes damaged in the northern floods, and a stable oil price, the UK index is struggling to match its Eurozone peers, hampered by a still grumpy mining sector. There are no real signs that the latter issue could turn around this afternoon… As ever those same commodity stocks that have plagued the FTSE throughout 2015 are trying to ensure it ends the year not with a bang but a whimper.”

Saudi stocks hit after oil plunge swells deficit

Aramco Oil Refinery in Saudi Arabia.

Aramco Oil Refinery in Saudi Arabia. Photograph: MyLoupe/UIG via Getty Images

The plunge in oil prices this year has taken its toll on Saudi Arabia’s state coffers and today the fallout is being fell in its stock market.

Late on Monday, Saudi Arabia announced plans to cut government spending and reform its finances after the drop in oil prices resulted in a record annual budget deficit of nearly $98bn (£66bn).

The the world’s top crude exporter ran a deficit of 367bn riyals ($97.9bn) in 2015, or 15% of gross domestic product, officials said.

Today, the Saudi stock index dropped 3% in early trading and is currently down around 1.5% as traders digest the prospect of spending cuts and tax rises in the biggest shake-up to economic policy there for more than a decade. The finance ministry is also changing subsidies for water, electricity and petroleum products over the next five years.

Saudi Arabia’s stock index:

Saudi Arabia's stock market

Brent crude is still just about eking out some gains today after Monday’s sell-off. It is currently up around 0.3% or 0.1 cents to $36.7 per barrel. It is not far off an 11-year low of $35.98 hit last week.

There are signs that the global glut of oil will deepen in 2016 as a market already awash with oil from the two biggest suppliers – Saudi Arabia and Russia – receives additional supply from the lifting of sanctions against Iran and the ending of a 40-year US export ban.

Time for a quiz?

A turkey sandwich with cranberry sauce.

A turkey sandwich with cranberry sauce. Photograph: Graham Turner for the Guardian

Trading volumes are particularly thin on European markets today and it seems many (sensible) people have taken a few days off between Christmas and the New Year. For those who are in the office today, dare we suggest the holiday lull might offer a chance to take an end of year quiz or two while you tuck into your turkey sandwiches.

We’ll keep it strictly business-related:

There is, of course, our own very broad business quiz covering (almost) everything from Cadbury’s Fruit and Nut bars to Libor-rigging and Greece’s brush with Grexit:

If central banks are your thing, this is from Bank Underground, a blog for Bank of England staff:

Deloitte’s chief economist, Ian Stewart, set the quiz for newspaper City AM. The questions are notably offbeat, including one on the world’s “most sleep-friendly airport”:

The BBC’s business team has put together these 10 questions, including some typically flowery Yanis Varoufakis quotes:

New floods threaten the UK with Storm Frank on the way and as we reported earlier, estimates of the costs so far are already in the billions.

For live coverage of the flooding and its fallout, you can follow our blog here:

While accountants have sought to put a figure on the cost of damage so far, economists note that counting up the economic impact overall is a very tricky task.

Howard Archer, economist at the consultancy IHS Global Insight, sends through these comments explaining that damage from extreme weather can dent some spending in the short term but then boost other areas of spending, notably repair work, further out:

https://twitter.com/HowardArcherUK/status/681082677676621824

“In purely economic/GDP costs, the net overall impact of the floods will be limited. There will be some near-term hit to the economy (but even this will be relatively limited given the overall size of the economy) but this will be offset by some gains further out). But this will not tell the whole story by a long way – especially for the poor individual people and businesses that are affected.

“Looking at the extent of the flooding, it could well shave 0.2-0.25 percentage point off GDP growth in the near term. As the flooding is occurring late on in the fourth quarter, some of this negative impact is likely to occur in the first quarter of 2016.

“This is the consequence of businesses not being able to open, loss of agricultural output, people not being able to get to the shops, travel etc. There is also the cost to insurance companies. There is also the loss of work from those people not actually able to get to work.

“However, damage to personal property does not affect GDP growth, although it is obviously a disaster for the poor people involved. And GDP measures do not capture the stress that the people/businesses affected incur.

“Further out there will be some boost to GDP growth through the construction work that will be generated by major repair work to buildings and infrastructure and replacement buildings. There will also be a positive impact to growth coming from the replacement purchases of furnishings, household goods etc lost or damaged during the flooding.

“The boost to growth from the construction work and replacement purchases will be spread out, but some will likely start occurring in the first quarter of 2016 which will at least partly offset the hit to activity at the start of the quarter.”

New record for UK house prices

  • The prospect of stamp duty changes in April has prompted a rush into the UK property market from buy-to-let investors and helped lift the average UK house price above £230,000 mark for first time, according to one estate agent chain today.
  • Haart, the UK’s largest independent estate agent, says the average UK house price was up 3.7% in a month and 13.4% on the year to reach £231,857 in November.
  • London property prices saw the fastest monthly increase for six months, up 3.4% to £525,780.
  • Overall, the number of new buyers rose 7.5% on a year earlier. There were signs, however, that the buy-to-let rush and related price rises were deterring first-time buyers from the housing market. The number of first-time buyers declined 7% on the month, haart said, using figures from some 100 branches around the UK.

Its chief executive Paul Smith comments:

“UK house prices rose 13.4% annually and 3.7% on the month to break records again in November. This is the steepest monthly and annual increase on record and follows a surge in registrations from buy-to-let investors since the Autumn Statement in anticipation of the 3% stamp duty surcharge which is effective from the 1st of April 2016. This could mean the stamp duty payable on a property worth £275,000 could rise from £3,750 to £12,000.

“Although first-time buyer house prices have remained relatively stable, up just 1.1% in the last month, I expect these to shoot up over the coming months as first-time buyers face fierce competition from buy-to-let investors. The pressure is already being felt by many with demand among first-time-buyers already down 7% in the last month alone. While first-time buyers may face a tough couple of months, once the stamp duty changes come into effect in April, demand from buy-to-let investors is likely to recede so we should see a recovery in prices at this level.”

Deutsche Bank shares are up this morning after news it is selling its 20% stake in Beijing’s Hua Xia Bank, making it the latest Western business to pare back its links to China.

As Reuters reports, Deutsche is selling the stake to Chinese insurer PICC Property and Casualty Co in a deal worth up to $4bn (£2.69bn).

It is the latest move in the German bank’s drastic restructuring by new chief executive, John Cryan.

Shares in Deutsche are up 2.4% while the wider German Dax index is up 1.6%.

High street banks.

As Britain’s big banks carry on with long task of patching up their reputations, they have new report cards to pore over from the body set up to improve standards in the wake of the Libor-rigging crisis.

Dame Colette Bowe, chair of the Banking Standards Board (BSB), has likened the assessments of the behaviour and culture inside the major banks to the reports delivered by auditors, which are signed off by the partner at the accountancy firm which has assessed their books and is included in their annual reports. The BSB will publish its own annual report in the spring.

The first such set of report cards have been sent to the founder members: Barclays, HSBC, Lloyds Banking Group, Royal Bank of Scotland, Santander and Standard Chartered and Nationwide Building Society.

There is also talk of making bankers swear an hippocratic oath in the way that doctors do but that seems to be some way off.

My colleagues Jill Treanor and Larry Elliott have the full story:

Fitness trackers

Fitness trackers Photograph: Katherine Anne Rose for the Observer

It looks like it was a very merry Christmas for Fitbit, the US-listed maker of wearable health monitors. Reports that its app topped download charts on 25 December suggest plenty of people were unwrapping new gadgets from the firm on Christmas day and that helped lift its shares on Monday. They closed up 3.3%.

Back in November, Fitbit reported a 168% surge in revenues in its third-quarter earnings report.

In the UK, department store chain John Lewis recently highlighted Fitbits as it reported record Black Friday sales. Overall sales of wearable technology such as fitness monitors up 850%. Sales of Fitbit trackers were up 1,200%.

Puts a whole new spin on new year’s healthy living resolutions when your wristband can tell you when you are cheating…

Markets update: Oil steadies, FTSE bobs around unchanged mark

After its little Christmas break the FTSE 100 has re-opened this morning and struggling to find some direction. The bluechip index of London-listed shares is up around 8 points, that’s just 0.1%, at 6263.

That is down around 5% from where the index started 2015 at 6,566. With a sharp sell-off in global commodities, from copper to oil, providing much of the FTSE’s direction this year, it had climbed to a 2015 high of 7122.7 on 27 April but hit a low for 2015 of 5768.2 on 24 August. The index’s average level for the year is 6,592.6, according to Thomson Reuters.

Here’s how the FTSE looks for the year:

The FTSE 100 in 2015

The FTSE 100 in 2015 Photograph: Thomson Reuters

Oil prices meanwhile look set for further falls after already plunging this year. Brent crude shed another 1.3% on Monday but this morning the price per barrel has edged back up 0.5% to $36.8 with traders citing colder temperatures in Europe as boosting demand prospects.

Brent crude in 2015:

Brent crude in 2015

Brent crude in 2015 Photograph: Thomson Reuters

Elsewhere, Asian stock markets edged up overnight on the steadier oil price, there is a small boost to European stock markets from firmer financial stocks this morning and copper prices are falling again.

Introduction: Floods impact, FTSE re-opens

Good morning and welcome back to our live blog covering financial markets and business and economics news from around the UK and the world.

As the north of England and Scotland brace for the arrival of yet another storm later, towns, households and businesses are counting the cost of the flood damage so far.

The morning newspapers put varying figures on the devastation, citing estimates from insurers, accountants and economists.

Here is our own main story overnight that the cost of the winter floods across the UK will breach £5bn, with about a fifth of the bill falling on those with inadequate or non-existent insurance policies.

That’s according to accountants at KPMG, who warn the insurance policies of many of the worst hit would not cover the full losses. Here’s the full story:

As pressure mounts on the UK government over its spending on flood defences, the Mirror condemns a “£6bn Floods Shambles”:

The i newspaper goes with the £5bn figure and like others, highlights pressure on prime minister David Cameron:

We’ll be following updates on the expected economic impact of the storms throughout the day.

Also on the agenda, the FTSE 100 re-opens after the Christmas break and it is looking like the bluechip index will end the year pretty close to where it started it, after gains in the first half were wiped out by losses for heavyweight commodity-related stocks since the summer. The FTSE 100 has just opened up 0.1%.

After some choppy trading sessions for global oil prices, Brent Crude is fairly flat this morning, at $36.7, and its movements today will again be providing some direction to stock markets. It’s worth keeping in mind that thin holiday trading could make for some volatile moves.

We will also be keeping an eye out for updates from retailers as they tot up takings from the all-important Christmas shopping and sales season.

In the US later there are a handful economic releases: November’s trade balance (at 1.30pm GMT), October home prices from Standard & Poor’s/Case-Shiller (at 2pm GMT) and consumer confidence figures from the Conference Board (at 3pm GMT).

Updated

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World markets rise as investors welcome boost from cheaper credit in China and prospects for further delay to Federal Reserve rate hike in US. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%…

 

Powered by Guardian.co.ukThis article titled “China interest rate cut fuels fears over ailing economy” was written by Phillip Inman Economics correspondent, for The Guardian on Friday 23rd October 2015 13.24 UTC

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points.

The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%.

The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan.

The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year.

The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%.

The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging.

Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis. The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg.

World trade has already contracted this year with analysts forecasting weaker trade next year. The International Monetary Fund (IMF) in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation.

At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

Sanjiv Shah, chief investment Officer of Sun Global Investments, said: “The Chinese decision indicates that the authorities are clearly worried about the slowdown in the pace of economic growth and have decide to engage in more pre-emptive action. The [People’s Bank of China] has cut benchmark rates and reduced banks’ reserve requirements as well as scrapping deposit controls.”

But Mark Williams, chief Asia economist at Capital Economics, remained upbeat about the prospects for China’s sustained growth, arguing that the cut in interest rates was part of a longer-term strategy and not a reaction to deteriorating growth.

“The key point is that we shouldn’t take today’s announcement as evidence that policymakers have grown more concerned about the economy. Instead, this is a controlled easing cycle that underlines how China’s policymakers, unlike many of their peers elsewhere, still have room for policy manoeuvre,” he said.

“Admittedly, we’re still waiting for clear evidence of an economic turnaround – September’s activity data still don’t show any great improvement. Nonetheless, with more stimulus in the pipeline, we still believe the economy will look stronger soon.”

Corporations considered bellwethers of the global economy have also warned of a sharp slowdown. Caterpillar, the industrial equipment manufacturer, has seen profits slide over the last year. AP Moller-Maersk, the shipping firm cut its 2015 profit forecast by 15% on Friday, blaming a slowdown in the container shipping market.

The Danish conglomerate operates Maersk Line, the world’s largest container shipping company which transports roughly 20% of all goods on the busiest routes between Asia and Europe.

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Kristin Forbes, a member of the Bank of England Monetary Policy Committee, signals she may vote for an interest rate hike on the back of recovering UK economy by downplaying potential fallout for UK from emerging markets slowdown…

 

Powered by Guardian.co.ukThis article titled “Bank of England policymaker says rate rise will come sooner, not later” was written by Katie Allen, for theguardian.com on Friday 16th October 2015 13.06 UTC

An interest rate hike in the UK will come “sooner rather than later” and pessimism about the state of the global economy is overdone, according to a Bank of England policymaker.

Kristin Forbes, a member of the bank’s rate-setting monetary policy committee (MPC), was also upbeat about the domestic economy. She argued that the country had only limited exposure to emerging markets such as Russia and Brazil and that, despite signs of a slowdown in those markets, British businesses should not be deterred from building stronger links with them.

Forbes’s intervention, against the backdrop of a recovering UK economy, indicated that she is preparing to vote for rates to be raised from their current record low of 0.5%.

“Despite the doom and gloom sentiment, the news on the international economy has not caused me to adjust my prior expectations that the next move in UK interest rates will be up and that it will occur sooner rather than later,” she said in a speech on Friday.

Forbes conceded that if some of the potential risks to emerging markets play out – such as a sharper than expected slowdown – “then the UK economy is unlikely to be immune”. But she said the UK’s exposure “appears manageable”.

Her comments align her with fellow rate-setter Ian McCafferty, who has voted for higher rates at recent policy meetings, where the MPC has split 8-1 at recent gatherings in favour of holding rates steady. But the Bank’s chief economist, Andy Haldane, said last month that rates may have to be cut further given signs of a slowdown in the UK and risks to the global economy from China.

The newest member of the nine-person MPC, Jan Vlieghe, also left the door open to an interest rate cut this week when questioned by MPs. Highlighting low inflation, Vlieghe told parliament’s Treasury committee that there was an option to cut rates but that the next move was “more likely to be up than down”.

Forbes, a US economics professor, said that on emerging markets, “recent negative headlines merit a closer look”.

“After considering the actual data and differences across countries, the actual news for this group is much more balanced (albeit not all bright),” she said in her speech, entitled “growing your business in the global economy: Not all doom and gloom”.

She was speaking a week after the International Monetary Fund warned central bankers that the world economy risks another crash unless they continue to support growth with low interest rates.

Forbes referred to the IMF’s latest downgrade to global growth prospects but noted that the fund had left its China forecasts unchanged. The data from China “has not yet weakened by anything close to what the gloomy headlines imply”, she added.

More broadly, she felt the global outlook was also better than headlines suggested.

“Although the risks and uncertainties in the global economy have increased, the widespread pessimism is overstated,” Forbes said.

She told business leaders that they should not be deterred from trading with emerging markets by the recent negative news, which “should prove temporary”.

“UK companies – as a whole – have been slow to expand into emerging markets. This may provide some stability over the next few months if the heightened risks in some of these countries become reality. But when viewed over a longer perspective, this limited exposure to emerging markets has caused the UK to miss out on growth opportunities in the past,” Forbes said.

UK interest rates were slashed to shore up the economy during the global financial crisis and they have stayed at a record low for more than six years. With inflation below zero and headwinds from overseas, economists do not expect a rate hike until well into next year.

In the US, interest rates are also at a record low of near-zero. Policymakers had been signalling they could start hiking last month but then worries about China’s downturn prompted them to wait. Still, the Federal Reserve chair, Janet Yellen, recently said the current global weakness will not be “significant” enough to alter the central bank’s plans to raise rates by December.

Forbes was also optimistic that the UK could weather the turmoil and said its domestic-led expansion “shows all signs of continuing, even if at a more moderate pace than in the earlier stages of the recovery.””

Howard Archer, an economist at the consultancy IHS Global Insight, said Forbes’ remarks reinforced the picture of a wide range of views on the rate-setting committee.

“The current wide range of differing views within the MPC highlights just how uncertain the outlook for UK interest rates is – although it still seems to be very much a question of when will the Bank of England start to raise interest rates rather than will they,” he said.

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A £500m rise in cars shipped abroad fails to ease prospects of huge UK trade deficit in third quarter fueled by strong pound plus eurozone woes and declining oil industry. The significant improvement seen in Q2 now considered as “only temporary”…

 

Powered by Guardian.co.ukThis article titled “Car exports cut monthly UK trade deficit but quarterly gap is growing” was written by Phillip Inman Economics correspondent, for theguardian.com on Friday 9th October 2015 11.47 UTC

A rise in car exports helped improve Britain’s trade deficit in August, according to official figures.

The monthly shortfall in the trade balance for goods narrowed to £3.3bn from £4.4bn in July. However, the UK was still heading for a huge deficit in the third quarter of the year after an upward revision to July’s shortfall.

Paul Hollingsworth, UK economist at Capital Economics, said: “Even if the trade deficit held steady in September, this would still leave the deficit in the third quarter as a whole at around £11bn, far higher than the £3.5bn deficit recorded in the second quarter.”

He said this suggests that net trade is probably making “a significant negative contribution to GDP” at the moment.

Hollingsworth warned that the strong pound and weakness in demand overseas as the US economy stuttered and the eurozone remained in the doldrums meant the government’s hopes of a significant rebalancing towards manufacturing exports would be dashed in the near term.

Alongside the £500m rise in car exports in August, the chemicals industry sent more of its production to the US, the ONS said. Total goods exports increased by 3.5% to £23.6bn in August 2015 from £22.8bn in July 2015.

But this positive news was offset by the continued decline in Britain’s oil industry, which has been a major factor holding back progress this year.

Lower production and the lower oil price have dented exports, and though oil imports are likewise cheaper, they continue to rise in volume.

The mothballing and subsequent closure of the Redcar steel plant could also have had an impact as the export of basic materials dived in August by more than 10%.

The services sector recorded an improvement in its trade balance, but the ONS pointed out that the UK continued to rely heavily on the financial services industry to pay its way in the world.

Figures for the second quarter showed that the surplus on trade in services was £22.8bn, of which almost half – £10.1bn – was contributed by banks, insurers and the fund management industry.

David Kern, chief economist at the British Chambers of Commerce, said the narrowing of the deficit in August was welcome, but taking the July and August figures together pointed towards a deterioration.

“This confirms our earlier assessment that the significant improvement seen in the second quarter was only temporary.

“The large trade deficit remains a major national problem. This is particularly true when we consider that other areas of our current account, notably the income balance, remain statistically insignificant.”

Kern urged the government to adopt measures that will “secure a long-term improvement in our trading position”.

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The US economy grew faster than previously thought by 3.9% in the second quarter of the year, exceeding economists’ expectations. New estimate fuels expectations the Federal Reserve will raise interest rates in 2015…

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Government data suggested the world’s biggest economy grew at an annual pace of 3.9% between April and June, exceeding economists’ expectations for the GDP estimate to stay unchanged at 3.7%. It marked an even stronger bounceback from the sluggish 0.6% growth recorded in the opening months of 2015 when an especially harsh winter hit economic activity.

The report followed comments on Thursday from the head of the US central bank, Janet Yellen, who said she could start raising borrowing costs from their record low “later this year”.

US GDP

The dollar strengthened against other currencies and US stock markets rallied after the upward revision to GDP, which the Commerce Department said was largely driven by consumer spending being stronger than previously thought.

Economists said the figures left the door open for the US central bank to raise interest rates from their current record low of close to zero at policy meetings in October or December.

“Yellen has confirmed a hike can still occur in 2015, so speculation over a December move is currently rife in the market – with short-term dollar bulls hoping for an October move,” said Alex Lydall, senior trader at foreign exchange business Foenix Partners.

“With the exception of inflation, economic indicators are still solid for the domestic economy in the US, so the pertinent question remains: will the Fed risk looking irresponsible and delay rate hikes into 2016, or will they take the plunge this year, with perhaps a more cautious hike than the expected 0.25%? The jury is still out.”

The Federal Reserve held off raising borrowing costs at its policy meeting last week as it cited volatility in the global economy. But Yellen indicated in a speech on Thursday this week that there was a still a good chance the first hike for almost a decade could come before the year is out. She said US economic prospects “generally appear solid” and it was best not to wait too long to tighten policy, which has been ultra-loose since the global financial crisis.

However, some experts noted that GDP figures did not give the most up-to-date picture of the economy’s performance and that more timely economic indicators painted a gloomier picture.

The revision had “little bearing on US policy”, said Chris Williamson, chief economist at economic data company Markit, which tracks business activity in the US and other economies.

“It does little to change the story that the economy rebounded strongly in the spring after the weak patch seen earlier in the year. More important are the forward-looking indicators, which include a number of red flag warnings that growth is slowing amid headwinds of the strong dollar, slumping oil prices, financial market volatility and emerging market jitters,” he added.

“The more up-to-date survey data play into the hands of dovish policymakers and will reduce the odds of interest rates rising any time soon.”

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Forecast for U.K. economic growth of 1.9% this year raised to 2.4% with IMF chief Christine Lagarde declaring ‘optimism is in the air’. IMF may also upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year…

 


Powered by Guardian.co.ukThis article titled “IMF upgrades UK economic growth forecasts as global economy expands” was written by Katie Allen, for theguardian.com on Monday 20th January 2014 12.14 UTC

The International Monetary Fund is widely expected to raise its outlook for the UK this week, nudging up the country’s growth forecasts by more than for any other major economy.

The Washington-based fund is due to unveil an update on Tuesday to its World Economic Outlook from last October. Back then it forecast UK national output would rise 1.9% in 2014. Now it is expected to predict growth of 2.4%, according to a Sky News report.

The IMF is also expected to upgrade its outlook for the global economy, which in October it predicted as expanding by 3.6% this year. That would reflect the cautiously optimistic tone in a New Year’s speech from its managing director, Christine Lagarde, last week.

“This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter. My great hope is that 2014 will prove momentous … the year in which the seven weak years, economically speaking, slide into seven strong years,” she said.

If confirmed, the substantial upgrade to the UK will be a welcome boost to Chancellor George Osborne and his much repeated assertion that the coalition’s “economic plan is working”.

But in the past the IMF has echoed other economists, including experts at the UK’s own Office for Budget Responsibility, that the UK remains over-dependent on consumer spending to grow.

The latest crop of official data underscored those concerns, with weaker outturns for construction and manufacturing and a jump in Christmas retail sales.

Economists generally feel, however, that overall growth will pick up this year and the IMF is just the latest of a string of forecasters to raise the UK’s outlook.

The business group CBI has pencilled in 2014 growth of 2.4%, the British Chambers of Commerce expects 2.7% and the OBR forecasts 2.4%.

A report from EY Item Club on Monday forecast UK economic growth would pick up to 2.7% this year from 1.9% in 2013. It too warned the recovery was not built on solid foundations, however, due largely to the pressure on household incomes.

Peter Spencer, chief economic advisor to the EY ITEM Club comments: “It is hard to find another episode in time where employment has been rising and real wages falling for any significant period of time. The weakness of real earnings is proving to be the government’s Achilles heel and could prove to be the weak spot in the recovery.

“Consumers have reduced the amount they save to fund their spending sprees. But they cannot continue to drive growth for much longer without an accompanying recovery in real wages or a rise in their debt to income ratio.”

There have also been warnings that the recovery is not being felt throughout the UK, and is instead largely benefiting London and the south-east.

A study by the TUC trade unions group on Monday said the recent recovery in jobs had failed to reach the north-east, the north-west, Wales and the south-west, leaving them in the same situation or worse at providing jobs than they were 20 years ago.

The US-based IMF could not be immediately reached for comment.

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With its linked trade and innovation deficits, the UK seems as unprepared for a currency war as it was for real war in 1939. Countries are trying to export deflation somewhere else, using currency manipulation to do so…

 


Powered by Guardian.co.ukThis article titled “UK looks ill-prepared if a global currency war breaks out” was written by Larry Elliott economics editor, for The Guardian on Sunday 17th November 2013 19.41 UTC

Rumours of war are in the air. Currency war, that is. The US treasury has forged an alliance with Brussels to attack Germany’s beggar-thy-neighbour approach to the rest of the eurozone. Last week the Czech government said it would defend its economy by driving down the value of  the koruna, following the aggressively interventionist example of  Japan and Switzerland.

It’s not hard to see why the atmosphere is becoming less cordial. This is a low growth world marked by over-capacity. Wages are under downward pressure and this is leading to ever-stronger deflationary pressure. A lack of international policy co-operation means that countries are trying to export deflation somewhere else, using currency manipulation to do so.

If a full-scale currency war does break out Britain looks as ill-prepared as it was for a military fight in 1939. We like to think of ourselves as a nation of buccaneering traders but only 16% of small and medium enterprises, with a turnover of over £20m, are actually exporting. We like to think of ourselves as the nation of innovators, yet as Richard Jones, of Sheffield University, notes, the UK is a less research and development intensive country than it was 30 years ago, and it lags well behind most of its rivals. The UK has linked trade and innovation deficits.

Jones, in a paper for the Sheffield Political Economy Research Institute, examines in detail how during the past 30 years the UK’s corporate laboratories have vanished and how big R&D spenders such as ICI and GEC switched from being companies that thought about long-term investment to ones where the prevailing doctrine was to return the money spent on R&D to shareholders.

Those in charge of UK manufacturing companies became more interested in the next bid, the next deal and the next set of quarterly results than in developing new product ranges.

The consequences of decades of neglect of the country’s productive base and an over-reliance on North Sea oil and financial services are now glaringly apparent. In the past, recessions have ended with the current account broadly in balance. This recovery starts with a current account deficit of more than 3%  of national output.

This is despite a fall of 20% in the value of the pound between 2007 and 2013, which in theory should have boosted exports. In reality, exports grew by 0.4% a year between early 2009 and the start of 2013, compared with 1% a year in the previous decade.

Ministers have a pat answer when quizzed about the poor performance of exports. It is, they say, the result of geography. More than 40% of UK exports go to the eurozone, where growth is weak and demand for imports has collapsed. So the impact of sterling’s depreciation has been blunted.

This view is not shared by the Bank of England. While admitting that the global recovery is patchy, the bank noted in its February inflation report that “the relative weakness of UK exports does not reflect particular weakness in its major trading partners”. It concluded that some other explanation was needed “to explain the disappointing performance of UK exports”, and found it in a sharp drop in exports of financial services and the tendency of UK firms to use a cheaper pound to boost profits rather than increase market share. The decline in exports from the City since the crash highlights the risks for Britain of the “eggs in one basket” approach.

As Ken Coutts and Bob Rowthorn note in a paper on the prospects for the balance of payments, the UK has gone from being a country that had a 10% of GDP surplus in trade in manufactures in 1950 to running a 4% of GDP deficit by 2011. North Sea oil and gas were in decline, so energy added to the deficit by 1.3% of GDP. Food and government transfers to overseas bodies such as the EU, World Bank and UN were the other big debits.

On the other side of the ledger there were three sources of surpluses: financial services and insurance (3.1% of GDP); other knowledge-intensive services, which include law, consultancy and IT (2.5% of GDP); and investment income (1.1% of GDP). Once all the debits and credits were totted up Britain had a current account deficit of 1.9% of national income. This rose to 4% of GDP in 2012.

The recession has taken a heavy toll on two of the surplus sectors. Investment income has turned negative, and global demand for financial services has fallen. This has affected the UK more than the other big global providers of financial services, the US and EU.

According to the Bank of England, “This could reflect lower demand for UK financial services in general, or a particularly sharp fall in demand for those financial products in which the UK specialised prior to the crisis.” This is a polite way of saying that no one any longer wants what Lord Turner once dubbed the City’s “socially useless” products.

Coutts and Rowthorn model what happens to the current account using assumptions for growth in the UK domestic economy and world trade, the level of UK competitiveness, oil prices, North Sea oil and gas production, and returns on financial assets.

The baseline projection is that the current account is 3% of GDP in 2022. Using a slightly more pessimistic assumption, the deficit swells to 5% of GDP. As the authors note: “A deficit of this magnitude would be a cause for serious alarm.”

It certainly would be. The outgoing trade and investment minister, Lord Green, told a conference in the City to mark export week that there was no guarantee the rest of the world would be prepared to finance deficits of this size for ever. The government has a target for raising exports to £1tn a year by 2020 – which will require them to grow by 9% a year. (The average since 2012 has been 5%.)

We have heard the “export or die” message many times in the past, to little effect it has to be said. It is not impossible to improve Britain’s export performance, though doing so with the current economic model is a pipe dream. It will require nurturing manufacturing, knowledge-based services and those bits of the financial services sector for which there is long-term demand.

Britain, Jones says, “needs to build a new developmental state, a state that once again takes responsibility for large-scale technological innovation as the basis for sustainable growth and prosperity”. Amen to that. If a currency war is brewing, we need the can-do spirit of 1940, not the head-in-the-sands approach of 1938.

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Chinese finance minister: US must act fast. US Treasury secretary: Congress is ‘playing with fire’. Goldman Sachs: 4.2% wiped off US GDP without debt deal. The US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff…

 


Powered by Guardian.co.ukThis article titled “China warns US over debt ceiling, as markets fall again – live” was written by Graeme Wearden, for theguardian.com on Monday 7th October 2013 14.40 UTC

Oil price drops

The oil price is down today, with a barrel of Brent crude dropping by over one dollar to $108.44.

That doesn’t look to be related to the US standoff, though. Instead, it reflects relief that Tropical Storm Karen weakened over the weekend. That means oil work in the Gulf of Mexico is resuming, having been suspended a few days ago as Karen approached.

China’s warning to America to raise its debt ceiling swiftly comes as the issue becomes intertwined with Congress’s failure a week ago to agree a budget for the new fiscal year (triggering the partial government shutdown).

Terry Morris, senior vice president of National Penn Investors Trust Company in Pennsylvania, says the deadlock is a growing worry, telling Reuters:

Now you’ve got not only the budget but the debt ceiling and time is running out and everybody knows it..

The longer this goes on, the more the uncertainty, the closer the deadline and the more nervous investors are going to be.

Gold has risen to a one-week high, with the spot price gaining 1.3% to $1,327 a ounce.

Updated

Although shares are down on Wall Street, there’s no sign of panic in the US stock markets over the budget and debt ceiling deadlock.

Todd Horwitz of Average Joe Options is telling Bloomberg TV that traders don’t like the uncertainty caused by the ‘blowhards in Washington’, saying:

It’s not a panic selloff, it’s very controlled.

Horwitz added that trading volumes are light at the moment, but could pick up as the debt ceiling deadline approached

The closer we get to the 17th [October], the more action we’ll see.

Wall Sreet open: Dow falls

Shares are falling in New York as the echoes from the Wall Street opening bell fade away.

The Dow Jones industrial average is down 140 points in the first few minutes to 14931, a drop of almost 1%.

The other indices are also down, matching losses in Europe.

FTSE 100: down 51 points at 6403, – 0.8%

German DAX: down 73 points at 8549 ,- 0.85%

French CAC: down 28 points at 4136, -0.67%

Reaction to follow

Business is underway in Washington DC, with White Officials sticking to their position that President Barack Obama will not negotiate with congressional Republicans under the threat of a debt default.

Via Reuters:

“There has never been a period where you have a serious faction or a serious strategy by one political party … to use the threat of default as the main tactic in extracting policy,” White House National Economic Council Director Gene Sperling said at a Politico breakfast on Monday.

On asset class isn’t suffering from the looming debt ceiling today – US sovereign debt.

The price of 10-year Treasury bonds has actually risen this morning, showing stronger demand for America’s debt.

One-month bills are slightly weaker today, but are still changing hands at a yield (or rate of return) or just 0.147%. That doesn’t suggest bond traders are frantically dashing to sell them.

US debt is still being treated as a a place of safety, even though it’s at the centre of this particular storm.

Nick Dale-Lace, senior sales trader at CMC Markets, comments:

Ironically it seems one beneficiary of a risk off morning is US treasuries, with investors continuing to flock to the very bonds that are apparently at risk of default.

The ramifications of a default on bond markets are not clear cut, with much confusion about what the fallout would be given the dependency of the financial world on US debt markets. What are the legal triggers of such a default and are they irreversible? With every minute passed we edge closer to the unknown, and that is rarely good for the markets

US politicians get their chance to heed China’s chiding over the debt ceiling, when Congress returns to work today.

Both the House and the Senate will be in session, with votes scheduled for the afternoon.

However, none of the legislation on the table amounts to the ‘clean’ budget bill (stripped of cuts to the Affordable Care act) which the Democrats are demanding.

CBS’s News Mark Knoller is tweeting the state of play:

China warns US on debt ceiling crisis

China has raised the pressure on the US today, warning that time is running out to raise its debt ceiling.

Vice finance minister Zhu Guangyao told reporters in Beijing that America needs to take decisive steps to prevent hitting its debt limit in a fortnight’s time. The intervention came as European stock markets remained lower, on the seventh day of the US shutdown.

In the Chinese government’s first public comments on the deadlock, Zhu also urged Washington politicians to “learn lessons from history”. A reminder that the US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff.

Zhu said (quotes via Reuters):

The United States is totally clear about China’s concerns about the fiscal cliff.

We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political [issues] around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery

This is the United States’ responsibility.

As the biggest single holder of US debt, China would be in the front line to suffer if Treasury prices fell – and would obviously be hit if the US were to stumble into a technical default.

Beijing must have watched the deadlock in Washington with growing alarm (yesterday, Republicans continued to demand healthcare cuts as the Treasury Secretary warning Congress was playing with fire).

Analysts were already concerned about the lack of progress (round-up here). with Goldman Sachs warning of drastic cutbacks if America breaches the debt ceiling (details here).

Zhu’s warning added to the jitteriness in the City. Shares remain down across Europe’s trading floors, with the FTSE 100 down 50 points at 6402, a fall of 0.8%. The German and French stock markets are both down around 1%. Here’s a round-up:

Alastair McCaig, market analyst at IG, says there is an increasing ‘fear factor’ in the City as America moves closer to its debt ceiling:

The news that US politicians have again put self-interest ahead of the greater good of the country by failing to make any progress in sorting out the budget or tackling the debt ceiling will have surprised few.

As yet the US debt markets have remained calm but the closer we get to the mid-October deadline the less likely that is to remain the case.

And as mentioned earlier, the US dollar is still down against most major currencies. The pound has gained almost 0.5% to $1.608 so far today.

Updated

US showdown: What the experts are saying

Here’s a round-up of what City experts are saying about the deadlock in America over its budget talks, and the debt ceiling — which the US will hit on 17 October.

Louise Cooper of Cooper City:

As the disaster that is Washington continues, the world needs bond vigilantes to bring the political class to its senses. Sadly thanks to the Federal Reserve’s endless QE, that restraint and imposed market discipline is no longer in place. And that is dangerous. Without the market check, Washington is risking ruin.

So how are these “bond vigilantes” and how do they impose discipline on the ruling classes? They are simply the mass of investors in government debt who by their actions force governments back to the financial straight and narrow. If they think a Nation is spending too much without enough taxation, resulting in excessive deficits and ballooning debt, they will demand a higher interest rate. That is basic finance; higher risk is compensated by a higher return. So as a Nation’s debt rises rapidly, the nation has to pay higher interest rates. So bond yields – borrowing costs – rise. And that is the restraint imposed upon governments – borrowing becomes more expensive the more fiscally irresponsible the government becomes.

That is the check to stop politicians getting their country overly indebted.

And it is the same mechanism with irresponsible monetary policy too – a higher yield is required by investors to compensate for the loss in monetary value from inflation. So bond investors are really important for financially feckless nations, because they that drag the ruling classes back to sensible economic policies (by demanding higher interest rates).

But the problem is that the Federal Reserve is currently buying $85bn of bonds a month, manipulating America’s borrowing costs lower.

The Fed is the biggest player in the markets and if it wants bond yields down then few will bet they will go up. Thus there is no corrective mechanism. Without the Fed’s QE, the current Washington fiasco would have increased America’s borrowing costs and that would have helped to force politicians back to the negotiating table. It now looks likely that the Fed didn’t taper in September as it was concerned about the impact the shutdown would have on the economy. It is also likely that with no non farm payrolls figure being released on Friday, the Fed will not taper in October either.

Implicitly the Federal Reserve is bailing out the incompetency of Washington. The stick has been removed allowing the political class to play wild and threaten default.

Kit Juckes of Societe Generale

I have no vote and hope I am non-partisan in this debate but I think that this is a row about principles as much as about power, which argues for a drawn-out impasse, though the odds still favour last-minute resolution. A good question (from Joe Weisenthal) was what the Republicans would have used to justify the stalemate if Obamacare wasn’t there to argue over.

And while I am sure the GOP could have found a reason for disruptive politics, it also seems clear that Obamacare is too important to the President’s ‘legacy’ for him to compromise on that, while the right wing of the GOP is opposed on principle as much as anything else. But it’s also clear that the Republicans are
‘losing’ the public relations war. I don’t think that merely reflects my Twitter stream or choice of on-line reading.

The big winner of this mess will be Hilary Clinton. And that, in turn, means that a compromise, with tax cuts elsewhere, is likely to be found to get a deal through that allows the debt ceiling to be increased by 17 October.

Jane Foley of Rabobank

The rallying call of Republican House Speaker Boehner over the weekend that it is “time for us to stand up and fight” looks set to commit the shutdown of the US government into a second week.

The vote by Congress in favour of paying the government workers who has been sent home on leave will offset some concerns about the economic costs of the shutdown. Even so, with the October 17 deadline for a debt default looming, investors are likely to become increasingly nervous with every passing day.

Marc Ostwald of Monument Securities:

Shutdown Day 7 is unfortunately the theme for the day, and quite possibly for the week…

While mutterings ahead of the weekend suggested that Boehner said he would make sure that there was no default, and some hopeful whispers of a few Tea Party aligned members of the House softening their stance, positioning as the week starts appears to be even more entrenched.

The backlog of official US economic data is building quite rapidly with little obvious prospect of anything being published this week. One assumes that the end of week G20 meeting of finance ministers and central bank heads may have little else to discuss, though the protests about the US political impasse (assuming it has not been resolved) from other G7 and EM countries will be vociferous.

Elsa Lignos of RBC Europe:

The hard line on both sides has unsurprisingly been taken negatively by risky assets. The Yen and Swiss franc are outperforming, US equity futures are pushing down towards Thursday’s lows, while US Treasuries are still trading sideways.

It is still a case of waiting and watching on developments in Washington. Our US Strategists expect that the longer the government remains dark, the greater the likelihood that the shutdown and debt ceiling issues are resolved together, which would result in a better outcome

Investec Corporate Treasury

Some analysts have estimated that default is likely by November 1st when the Treasury Department is scheduled to make nearly $60 billion in payments to Social Security recipients, Medicare providers, civil service retirees, and active duty military service members.

With such a limited window of time available all eyes will be on the US this week to see if a resolution can be reached. In the meantime expect the US shutdown to dominate currency markets and be prepared for some volatility if a default starts to look more likely.

Updated

Greek budget predicts growth in 2014

Back to Greece, where the government has predicted a return to growth next year after a six-year slump.

The draft 2014 budget, announced this morning by deputy finance minister Christos Staikouras, also forecasts a surplus excluding debt financing costs. This is a crucial target for Athens as it aims to agree further assistance from its international partners.

Reuters has the details:

Greece will emerge from six years of recession next year, its draft 2014 budget projected on Monday, in one of the strongest signs yet that the country has left the worst of its crippling debt crisis behind.

The economy, which has shrunk about a quarter since its peak in 2007, will grow by 0.6% next year thanks to a rebound in investment and exports including tourism, the budget predicted. The economy is set to contract by 4 percent this year. Athens is also targeting a primary budget surplus of 1.6% of national output next year and is on track to post a small surplus this year.

Attaining a primary surplus – excluding debt servicing costs – is key to helping Athens secure debt relief from its international lenders.

“In the last three years Greece found itself in a painful recession with an unprecedented level of unemployment,” Deputy Finance Minister Christos Staikouras said as he unveiled the 2014 budget.

“Since this year the sacrifices have begun to yield fruit, giving the first signs of an exit from the crisis.”

These signs of recovery are encouraging hedge funds to buy stakes in Greek banks (see 9.12am) and fuelling rumours that Greece could swap some debt for new 50-year bond (see opening post).

The budget also shows that Greece will run a deficit of 2.4% (including debt costs). This will push its public debt to 174.5% of GDP, despite investors taking a haircut early last year.

How much damage would be caused if American politicians doesn’t raise the debt ceiling before the October 17 deadline?

Goldman Sachs has crunched the numbers, and told clients over the weekend that the Treasury would be forced into a drastic cutback in spending from the end of October which would wipe 4.2% off annualised GDP.

The research note (from Saturday, but still well worth flagging) showed how the Treasury is on track to hit its borrowing limit in two weeks.

After that point, the amount of money coming into the Treasury will equal only about 65% of spending going out, Goldman said. There are various ways that the US could play for time — such as prioritising some payments over others, or delaying payments altogether.

But officials would soon be forced to implement measures that would hurt growth badly, in a bid to avoid missing a debt repayment and triggering a downgrade to Selective Default status.

Here’s a flavour of the note:

If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

And more detail….

A very short delay past the October deadline—for instance, a few days—could delay the payment of some obligations already incurred and would create instability in the financial markets. This uncertainty alone could weigh on growth.

But a long delay—for example, several weeks—would likely result in a government shutdown much broader than the one that started October 1. In the current shutdown, there is ample cash available to pay for government activities, but the administration has lost its authority to conduct “non-essential” discretionary programs which make up about 15% of the federal budget.

By contrast, if the debt limit were not increased, after late October the administration would still have authority to make most of its scheduled payments, but would not have enough cash available to do so.

US deadlock hits euro investors

The US government shutdown debacle has hit investor confidence within the eurozone, according to the latest data from German research firm Sentix.

Sentix’s monthly measure of investor sentiment dropped to 6.1, from 6.5 in September. Analyst had expected the index to jump to 8.0, but it appears morale has suffered from the deadlock in Washington.

Sentix reported that investors’ current assessment of the United States, and the assessment of prospects in six-months time, has been noticeably damaged by the budget row and the debt ceiling fears. Its headline index for the US dropped to 16.8, from 24.8 last month.

Overall indices for the emerging markets regions rose, while those surveyed remain optimism for Japan’s prospects.

Over in Italy, Silvio Berlusconi is preparing to request a community service sentence, following his tax fraud conviction in August.

Berlusconi, whose efforts to bring down the Italian government (and reignite the eurozone crisis) failed last week, has now turned his attention to his legal troubles.

From Rome, Lizzy Davies has the story:

“Silent and humble manual tasks” are not something to which Silvio Berlusconi has ever felt naturally drawn. Before big business and politics he sold vacuum cleaners and sang on cruise ships.

Now, however, thanks to the Italian legal system, a very different kind of activity awaits him. His lawyer has said he intends to ask to serve his sentence for tax fraud in a community service placement.

Franco Coppi said that barring any last-minute changes, the former prime minister’s legal team would submit the request to the Milan courts by the end of this week. It would be then up to the judges to decide how to proceed.

More here: Silvio Berlusconi to request community service for tax fraud sentence 

Former Greek minister convicted over money-laundering charges

Court drama in Athens this morning, where a former defence minister has been found guilty of money-laundering.

Akis Tzohatzopoulos was one of 17 defendants convicted after a five-month trial. Associated Press reports that Tzohatzopoulos’s wife, ex-wife and daughter were also found guilty.

Tzohatzopoulos was charged with accepting bribes in exchange for agreeing military hardware contracts, in the 1990s and the early 2000s. The court heard that these kickbacks were laundered through a network of offshore companies and property purchases.

Sentences will be handed down tomorrow.

Greek journalist Nick Malkoutzis reckons this is the most serious conviction of a Greek politician in around 20 years.

In March, Tzohatzopoulos was convicted of corruption charges, after lying on his income statements and hiding luxurious spending. He was jailed for eight years following that case.

Updated

Some interesting stories about Greece this morning. First up: John Paulson, the hedge fund boss who made billions of dollars betting against America’s mortgage market before the crisis began, is a big fan of Greek banks.

Paulson is making a serious move into the Greek financial sector, as investors gamble that the worst of its woes are over.

The FT has the details:

Mr Paulson, best known for his successful wager against the US subprime mortgage market in 2007, praised Greece’s “very favourable pro-business government”.

“The Greek economy is improving, which should benefit the banking sector,” Mr Paulson told the Financial Times.

He confirmed his fund, Paulson & Co, had substantial stakes in Piraeus and Alpha, the two banks that have emerged in best shape from the crisis. “[Both] are now very well capitalised and poised to recover [with] good management,” he said in rare public comments.

More here: Paulson leads charge into Greek banks

The US dollar has also dropped this morning against most major currencies. This pushed the yen up around 0.5%, to ¥ 96.9 to the dollar. That won’t please Japanese exporters, who’d rather see the yen over the ¥100 mark.

America’s stock indices are also expected to drop around 0.8% when trading begins in about 6 hours, Marketwatch flags up.

The head of ratings agency Moody’s reckons America won’t default, even if it ploughs into the debt ceiling this month.

Raymond McDaniel told CNBC overnight:

Hopefully it is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities.

Markets drop:

Europe’s stock markets have followed Asia by falling in early trading, as investors fret over the lack of progress over America’s government shutdown.

In London the FTSE 100 swiftly shed 46 points, or 0.7%, with 95 of the companies on the index . It’s a similar tale across Europe’s markets, with Germany’s DAX down 0.85% and the French CAC shedding 0.75%

Mike van Dulken of Accendo Markets sums up the mood in the City:

Sentiment is still dampened by USuncertainty as the partial shutdown moves into its second week and the more troubling debt ceiling of 17 October nears. How long will this drag on for? Only the politicians know.

The congressional stalemate shows no signs of progress with House Speaker Boehner adamant that a clean spending bill will not be approved while Treasury Secretary Lew says congress is playing with fire putting the nation’s sovereign reputation at risk, on top of President Obama’s highlighting of the potential impact on Q4 GDP.

It all adds up to another sea of red on the European markets:

Updated

World Bank cuts China growth forecasts

America’s deadlock isn’t the only issue worrying the City today. The World Bank has warned that East Asia’s economic growth is slowing as it cut its GDP forecasts several nations, including China.

In a new report, the Bank said weaker commodity prices means weaker growth in the region. It also urged Chinese policymakers to tackle the consequences of recent loose policy and tighten financial supervision.

Here’s a flavour:

Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand,” the World Bank said in its latest East Asia Pacific Economic Update report.

“Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports,” it added.

It now expects the Chinese economy to expand by 7.5% this year, down from its April forecast of 8.3%. For 2014, the forecast is cut from 8% to 7.7%.

Full story here: World Bank cuts China growth forecasts

US deadlock continues to worry the markets

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

It’s the seventh day of the US government shutdown, and the lack of progress in Washington continues to cast a shadow over the financial world.

Shares have slipped in Asia overnight; in Japan, the Nikkei shed another 1.2%. European markets are expected to fall again.

America seems no closer to a solution to the deadlock, nearly a week after the Federal government began shutting services and sending workers home. It is, though, closer to its debt ceiling — the US is still on track to hit its maximum borrowing limit of $16.7bn on 17 October.

Yesterday, Treasury secretary Jack Lew warned that America would default if the ceiling isn’t raised. Congress, he said, was ”playing with fire”.

Lew said:

I’m telling you that on the 17th, we run out of the ability to borrow, and Congress is playing with fire.

But the Republican-controlled House of Representatives hasn’t blinked — continuing to demand concessions from President Obama.

House speaker John Boehner was defiant last night, saying his side would “stand and fight” for concessions on issues like healthcare reforms.

Boehner told ABC television:

You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country.

The nation’s credit is at risk because of the administration’s refusal to sit down and have a conversation.

So the deadlock continues, with investors pondering whether this impasse really could turn into a catastrophic debt default.

Stan Shamu of IG explains that traders are more nervous than late last week:

While Friday’s modest gains in US equities were driven by a glimmer of hope that leaders are getting closer, this seems to have waned over the weekend.

House speaker John Boehner was quoted as saying he wouldn’t pass a bill to increase the US debt ceiling without addressing longer-term spending and budget challenges. This has really rattled markets and is likely to result in further near-term weakness for global equities.

Not much on the economic calendar today, although we do get the latest eurozone reading of investor confidence at 9.30am BST.

In the UK, the row over the Royal Mail privatisation continues, with critics warning that it’s being sold off too cheaply.

While in Greece, there were reports on Saturday that Athens is considering swapping some bailout loans for new 50-year bonds, as part of a third aid package.

Reuters had the story: Greece mulls swapping bailout loans with 50-year bond issue: source

I’ll be tracking all the action through the day….

Updated

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After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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