Cable drops as UK economy contracts

Forex

The UK economy contracted by 0.2% in the second quarter of the year, its worst performance since 2012.

Figures from the Office for National Statistics showed the surprise contraction, which was significantly lower than the flatline economists expected. It also follows strong growth of 1.8% seen in Q1.

“PMI data had indicated we were set for a contraction, albeit not so severe,” explained Neil Wilson, Chief Markets Analyst at MARKETS.COM.

Much of the growth in the first quarter was attributed to panic buying and stockpiling before the original March Brexit deadline. Indeed, Head of GDP Rob Kent-Smith, also blamed the 2.3% drop in Manufacturing output in the Brexit delay. The initial strong start to the year included production brought forward ahead of the UK’s departure from the EU.

The services sector was the only positive contributor to GDP growth in the quarter to June 2019 – but only just at 0.1%. This marks the weakest quarterly growth in this sector since Q2 2016.

Output from the production and construction sectors also contracted at -1.4% and -1.3% respectively.

Cable dropped sharply on the news, before recovering slightly. Having fallen below 1.2090, GBPUSD was last recovering above 1.21 but remains under pressure and a good 30 pips away from its highs of the day. Having breached yesterday’s lows we may see further testing of the downside.

“Clearly the unwind of stockpiling carried out in Q1 ahead of the aborted March 31st Brexit deadline has had an impact. Also, we can point to plenty of data around the world that shows we are in the middle of a broad global slowdown,” Wilson said.

“But you do have to admit that the pervasive uncertainty around Brexit is acting as a brake on the economy.”

Rolling three-month growth was negative 0.2% in the three months to June 2019, the first time since Q4 2012. This continued a steady decline in three-month growth since the start of the year.

So, was there anything positive in the latest GDP figures?

“Well, a lot of the decline seems to be down to the fall in car making as companies brought forward usual summer shutdowns of factories. The sharp fall in manufacturing output was led by a 5.2% decline transport equipment, which the ONS says largely reflected the partial closures of various car manufacturing plants. This may be partially recovered in the second half, while we may see further stockpiling ahead of the October 31st deadline that leads to a boost to Q3 numbers,” said Wilson.

However, he added, “but on the whole the figures make for worrying reading”.

Does Boris mean bad news for cable?

Forex

The UK is less than a day away from finding out who the next Prime Minister will be. The winner of the Tory leadership contest will lead the UK in its exit from the EU later this year, and Boris – who has refused to rule out closing Parliament to secure a no-deal Brexit – is favourite to win.

Cable is unsurprisingly jumpy on the topic of Brexit, and it pushed higher last week when MPs made it harder for the future PM to force through a no-deal Brexit by suspending Parliament.

The new bill states that even if Parliament is suspended, it must sit for a few days in September and October to consider issues in Northern Ireland. It also requires ministers to make reports every fortnight on progress towards re-establishing Northern Ireland’s collapsed, devolved executive and to give lawmakers an opportunity to debate and approve those reports.

While the legislation would not prevent a Parliament being suspended, it would make it harder to sidestep lawmakers.

Already Decided?

A poll of Tory members suggested that Boris has two-thirds of the vote. More than half of those who voted Conservative in the last general election would vote for Boris, compared to just 27% for Hunt. Voting is currently taking place and closes at 5pm today, with the winner expected to be announced tomorrow.

However, Boris is the firm favourite to win and, barring something spectacular, will take over the reins as Prime Minister on Wednesday. So, while markets are likely to react to the news, it’s likely that much of the turbulence has already been factored in.

What to expect

The pound is already weaker, with cable losing about 50 pips today in morning trading.

Concerns about Brexit – and, therefore, the leadership contest – continue to drag the currency down. GBP/USD had started the session north of 1.25 but was last making new lows around 1.2460. It’s likely that if hard-brexiteer Boris is announced as the next PM, sterling will take a knock.

However, leading thinktank National Institute for Social and Economic Research (NIESR) has warned that the dampening impact of Brexit over the last three years could have dragged the UK into recession already.

Overall, the think tank sees a 30% chance Sterling will decline over the course of 2020, and that probability will be higher if Britain crashes out of the EU.

Even if a no-deal Brexit is avoided, NIESR predicts the economy will grow just 1.2% this year and 1.1% next year as uncertainty about Britain’s future trading relationship with the bloc will hold back investment and slow growth.

Sterling slumps as June’s budget deficit hits four-year high

Forex

Britain’s budget deficit grew in the first three months of the tax year. The figures come in the midst of the UK leadership contest, but both Boris Johnson and Jeremy Hunt have committed to tax cuts and higher spending.

The figures had an immediate impact on sterling, which dropped 0.28 per cent against the dollar to 1.251 as economists warned the slump was a challenge for the incoming Prime Minister.

The UK’s budget deficit hit a four-year high for June at £7.2bn, almost double the £3.3bn for last year, the Office for National Statistics (ONS) revealed.

In the three months to June, borrowing was a third higher than the same period in 2018 in 17.9 billion pounds. Public sector net debt rose to £1.81 trillion, which is the equivalent of 83.1% of gross domestic product (GDP). June’s higher borrowing was linked to increased interest costs for inflation-linked government debt and higher spending on public services.

However, there was a “notable increase” in expenditure on goods and services, which reached £1.2bn.

The figures come as a blow for the leadership challenger, Johnson and Hunt, as it comes hot on the heels of economist predictions that their respective promises of tax cuts and increased spending could cost the economy tens of billions.

The pound tumbled in response to the news, in what has already been a shaky period for the currency. Sterling hit a 27-month low against the dollar earlier this month and slumped to a six-month low against the Euro. While much of its weakness is a result of the strong dollar, Brexit and economic uncertainty has plagued the pound.

Gold also pushed to a six-year high following the news, bouncing off the back of rising debt and falling interest rates. The last time gold traded this high for UK traders was summer 2011.

The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP

Equities
Forex

With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.

The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.

“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.

He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.

His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.

Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.

Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.

Lagarde new ECB president

Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.

Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.

It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.

However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.

Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.

Non-Farm Payroll better than expected

Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.

It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.

The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.

However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.

As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.

HSBC jaws fears, BHP, Greggs, Bitcoin’s ramp

Equities
Forex

After US markets were closed yesterday, the week begins in earnest today. US futures are steady with the SPX and DOW unmoved around 2,775 and 25,880. European markets are opening on the flat. Looking ahead to this morning’s FTSE session, HSBC figures will likely weigh after the shares dipped in Hong Kong following a disappointing set of annual results. HSBC missed on both the top and bottom line as profits came in more than $1bn short and revenues were also c$1bn short despite rising 5% year-on-year. Pre-tax profits came in at $19.9bn versus $21.3bn expected as the market came off in the final quarter. Nevertheless profits jumped 16% from 2017 levels and the bank is still producing cash.

Big numbers to consider –   

  • Jaws were negative at -1.2% and this is a worry if you are looking at how the shares might perform over the medium term. 
  • CET1 ratio down to 14% from 14.5% a year before, against the trend we have seen but still a healthy number. 
  • Return on average tangible equity rose to 8.6% from 6.8%, which is encouraging but doubts remain around the 10% target.

Clearly HSBC’s focus on China and Asia is a double-edged sword. There are still huge returns and opportunity in these markets, but the bank’s exposure to this region means the recent slowdown in China in particular, as well as fears about what the trade landscape will look like going forward, can bite.

BHP – H1 missed forecasts, with revenues flat at $21.59bn and EBITDA -3%, but management sees a stronger H2. Supply disruptions hit BHP hard in the first half, with management having warned in Jan of a $600m hit to earnings as a result of problems at copper and iron ore sites. Improved iron ore prices because of the Vale disaster suggest a better second half of the year is coming. Risks remain from a slowdown in China.

Greggs – on a roll, of course.

The vegan sausage roll is proving to be a marketing masterstroke. Total sales were up 14.1% in the first seven weeks of the year, with LFL sales up 9.6%. Management has called the performance ‘exceptionally strong’ and this means full year underlying profits will be ahead of expectations. There is such a thing now as Veganuary and Greggs tapped into this trend with precision. More importantly the core offering remains strong and the focus on delivering value is still there, meaning consumers are continuing to head to Greggs. This could be even more important should food prices rise after Brexit.

In currencies, the dollar has firmed, with DXY back to 96.70 having sunk to 96.50. A recovery above 87 again depends on the twin factors of the FOMC minutes and a slew of EZ PMI data later this week. EURUSD has eased back off the 1.13 handle having failed the test around 1.1340. Support on the round number 1.13 level and then at 1.1290 before the lows at 1.1240.

Sterling was unmoved by the political drama for once, and remains supported at 1.29 for the time being. All quiet on the Brexit front for now as the Independent Group take the headlines away from the government’s floundering – a welcome distraction for some but this won’t last. The pound still looks overly sanguine on the risks ahead. On tap this morning is the UK wage data at 09:30.

Bitcoin ramped yesterday and is showing signs of recovery. Futures were last changing hands at 3,887.50, marking a 9% recovery in the last week, but there does seem to have been a rejection of anything close to $4,000. This is a notable resistance area now, therefore a break on the upside would be meaningful.”

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