Sterling Slips on Brexit and Economic Fears
The Pound is under pressure after the UK ruled out staying in the customs union with the EU, since the government has yet to agree on a post-Brexit trade deal stance. The inner cabinet meets this week to formulate their goal for a future partnership. The EU’s chief negotiator, Michel Barnier has warned that trade barriers are “unavoidable” if the UK leaves the customs union. Yesterday’s report that GDP growth will likely slow to 0.3% in the first quarter of the year has also weakened Sterling. The Pound is being further impacted by the global stock market rout which has rattled investors’ confidence.
The Euro’s recent surge creates “new headwinds” for policy makers that should be closely monitored, European Central Bank (ECB) president Mario Draghi warned. Speaking to the European Parliament yesterday, the ECB’s president urged policy makers to use “patience and persistence” to wait for inflation to pick up before unwinding the stimulus programme.
Pound Sterling – UK Markets
The Pound has fallen further against the US Dollar, with the exchange rate down to $1.39. Sterling is also weaker against the Euro, exchanging lower at €1.12.
EU negotiator Michel Barnier and Brexit minister David Davis met with prime minister Theresa May, after Barnier said that the UK and EU agreed to “accelerate” Brexit talks. The PM’s spokesperson dismissed the suggestion that the UK with stay in the customs union membership for a limited time after the transition period. The spokesman also said the UK hopes to strike free trade deals for both goods and services alike, without distinguishing between the two, after Brexit. Disagreements about the UK’s future trading relationship with the EU have split Theresa May’s government and the Conservative party.
The government is considering taking back control of the collapsing East Coast mainline rail franchise, less than three years after it was re-privatised. Transportation secretary Chris Grayling told MPs yesterday that Stagecoach, which runs the East Coast franchise along with Virgin, will suffer “significant losses” of nearly £200m because they “got their sums wrong.” Grayling said that Stagecoach, which owns 90% of Virgin Trains East Coast, overbid on their contract, but that they will “pay the price for that—not the taxpayer.”
According to today’s release by the British Retail Consortium (BRC), consumers spent 0.6% more in January than they had a year earlier. BRC noted that sales of non-food items “struggled in January.” BRC chief executive Helen Dickinson said that: “Rising food prices continued to inflate sales growth and absorb the lion’s share of shopper’s squeezed budgets.”
Former chief executive, Keith Cochrane told MPs at a select committee inquiry that Carillion lost £400m from Canadian and Middle East clients who avoiding paying bills, after learning the company was planning to leave those markets. 452 more Carillion workers were made redundant yesterday, as part of the liquidation of the collapsed outsourcing firm. The Official Receiver said they were able to protect 100 positions which are linked to public sector contracts. Last Friday, 377 jobs were lost after the Official Receiver noted it had secured 919 jobs.
US Dollar – US Markets
The US Dollar has weakened against the Euro, exchanging €0.80. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 89.53.
After Wall Street’s fall which began on Friday, with the Dow Jones Industrial Average shedding 666 points, global markets are still highly volatile. Fears that interest rates would be raised and loose monetary policies would be concluded soon has sparked a rout across global markets. At one point yesterday, the Dow Industrial Average plunged by 1,175 points, marking the biggest decline in a day since 2011. This has rippled into Asian and European markets with Reuters estimating that $4trillion of equity value has been wiped off global markets so far.
Stock in Wells Fargo plummeted after the Federal Reserve prohibited the bank from enlarging past its current level of $1.95trillion in assets until it improved its governance and controls. The bank expects the restrictions will cost it $300m to $400m in profits this year.
Yesterday, the Institute of Supply Management (ISM) Non-Manufacturing Composite Purchasing Managers Index
(PMI) showed the highest level surveyed in a decade. The reading of 59.9 was much stronger than expected figure of 56.5 after a December reading of 56. Activity is at its highest level since 2008, which will increase the case for raising interest rates as much as four times this year.
According to the IHS Markit Services PMI, the US service sector continued steady growth for January, as the reading of 53.3 matched December’s figure. Likewise, the composite reading was the same 53.8 for January as had been seen in December. The PMI was the 96th consecutive month of growth for the service sector.
Euro – European Markets
The Euro is making steady gains against the US Dollar, with the exchange rate set at $1.24. ECB president Mario Draghi warned that a stronger Euro could slow efforts to unwind its monetary stimulus programme.
German Chancellor Angela Merkel’s Christian Democrats (CDU) and the Social Democrats (SPD) are on “the final stretch” of agreeing to a coalition government deal, today. The parties are still in disagreement over labour policy and the SPD’s drive to reform Germany’s healthcare system. The two parties have agreed to invest €4bn to build new social and private homes and budget €10bn to expand high-speed broadband.
A report released by Destatis today, shows that Germany’s Factory Orders for December smashed past expectations of increasing by 0.7%. The month-on-month figure for December shows a surge of 3.8%. The year-on-year increased output of 7.3% was over twice the forecast increase of 3.1%.
Amazon has agreed to repay around £177m owed to French authorities in back taxes. The online retail company had been in a dispute since 2012 over earnings it made from 2006 until 2010. Amazon said it had finally reached an “overall settlement with the French tax authorities on past issues,” saying that their “main objective” is to continue providing the “best possible buying experience” for customers in France. Last year Amazon settled a £83m dispute over Italian tax payments from 2011 until 2015.
Eurostat’s December Eurozone Retail Sales release yesterday show that sales fell by 1.1% from those in November, due to Black Friday sales. Although shoppers made their holiday purchases earlier, the December retail figures were 1.9% larger than those in the previous December. Also, November’s year-on-year sales rate was revised higher to 3.9%.
Other Currencies – Highlights
Sterling has risen a little against the Australian Dollar, today, with the exchange rate at 1.77 AUD. The Reserve Bank of Australia (RBA) forecast that real GDP growth in 2018 would lift to 3¼%, in the minutes of their December meeting. The RBA also expects weak household income growth and high debt levels will be a “continuing source of uncertainty” for consumers.
The Pound has fallen against the New Zealand Dollar, exchanging lower at 1.91 NZD. Auckland house sales fell by 5.7% compared to the previous January sales, reported realtor Barfoot Thompson. Median house prices were also 1.6% lower as the amount of available properties swelled to a six-year high, signalling a buyers’ market.
The Pound has strengthened against the Swiss Franc, trading at 1.30 CHF. The Swiss Franc’s recent strength against the Euro was due to high expectation that the Swiss National Bank (SNB) tightening its monetary policy. Economists broadly expect the Franc to soften as it becomes clear that the SNB will move more slowly than the ECB to unwind their stimulus programme.