• Dec. 8, 2016, 9:55 pm

Mark Carney warns Brexit adds to UK current account risks – business live

Powered by Guardian.co.ukThis article titled “Mark Carney warns Brexit adds to UK current account risks – business live” was written by Graeme Wearden (until 2.15) and Nick Fletcher, for theguardian.com on Tuesday 26th January 2016 15.05 UTC

World Bank slashes oil price forecast

The World Bank has cut its forecast for crude oil prices for 2016 by $14 a barrel to $37, and also reduced its predictions for 37 out of 46 commodities. Phillip Inman reports:

The World Bank has slashed its forecast for oil prices this year, saying the cost of a barrel of crude will stay near its current lows for the rest of 2016.

The Washington-based institution said a glut of oil that sent prices crashing by almost half last year and another 27% this month will continue to dominate the market for the next year.

It added that warm winter weather in Europe and weaker than expected growth in China and other emerging economies will depress demand and keep the average price at $37 a barrel, down from a projection of $51 last October.

“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, senior economist and lead author of the bank’s commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”

Brent crude is currently up 1.1% at $30.85 a barrel.

Here is our full story:

Updated

US services sector slows

More weak data for the US Federal Reserve to consider as it gathers for its first meeting since raising interest rates in December, a move many believe may have been a mistake.

The US services sector has seen its slowest growth since December 2014. The Markit initial reading for the purchasing managers business activity index came in at 53.7 in January. This is down from 54.3 the previous month and just below the expected 53.9. Markit said:

U.S. service providers started the year with another slowdown in business activity growth…Although still indicative of a solid increase in business activity, the headline index has now signalled weaker overall growth in four of the past five months.

Chris Williamson, chief economist at Markit said a drop in business confidence suggested things could get worse:

The survey data paint an inauspicious start to the year for the US economy.

A struggling manufacturing economy is being accompanied by a services sector where growth showed further signs of losing momentum in January even before the bad weather hit.

The data are by no means disastrous, signalling a 1.5% annualised rate of economic growth at the start of the year, but the drop in business confidence to one of its lowest levels for over five years suggests that firms are bracing themselves for worse to come. Worries about financial market volatility, the impact of slower growth overseas, a downturn in the energy sector and uncertainty about higher interest rates all took their toll and set the scene for further weakness in coming months.

Service sector growth slips.

Service sector growth slips. Photograph: Markit

Updated

Wall Street opens higher

On what has been a volatile day for markets so far, Wall Street has started off on the front foot ahead of results from Apple and as the Federal Reserve begins its latest two day meeting.

With oil recovering from its early falls – Brent crude is now up 1.6% at $30.99 a barrel having fallen as low as $29.27 – the Dow Jones Industrial Average is up 133 points or 0.8% in early trading.

In Europe the FTSE 100 is 0.15% higher while Germany’s Dax, France’s Cac and Spain’s Ibex have edged into positive territory despite the earlier 6% slump on the Chinese market.

Ibex shows early falls before recovering.

Ibex shows early falls before recovering. Photograph: Juan Carlos Hidalgo/EPA

Updated

Britain’s economy continues to grow pretty steadily, according to the Bank of England’s chief economist Andy Haldane, and a Chinese slowdown is unlikely to push the world economy into negative growth.

Haldane said in an interview with Wolverhampton’s Express and Star newspaper:

We would have to fall a long way, or something very untoward would have to happen for that to fall into negative territory,.

I think that is a reasonably unlikely event. Now are there things that could happen that could slow that rate of growth? Yes there are. It’s true to say there are some concerns about how rapidly the Chinese economy is growing.

These days China is of such a size and it’s sufficiently well integrated into the world economy that when it sneezes there is a sense at which the world economy is at risk of catching a cold.

Does that mean there is a chance that world growth could slow from current levels? Yes, there is a chance of that.

Do I think there is a big risk of us being tipped into negative growth in the world economy? That strikes me as quite unlikely as things sit today.

Haldane.

Haldane. Photograph: Bloomberg/Bloomberg via Getty Images

Meanwhile, as Carney was speaking, the World Economic Forum has announced the Bank of England governor as one of eight “senior decision makers” joining a taskforce to discuss the future of the global financial system.

The group was formed at the request of Carney and WEF founder professor Klaus Schwab and it will “work to identify, analyse and propose recommendations in response to major transformative forces influencing the future of global finance and economics.”

A recent WEF document identified five areas which the taskforce could discuss in its first meeting: emerging markets, technologyi, regulatory and monetary policies, loss of trust in financial services and financial inclusion.

Apart from Carney the other members of the taskforce are Citgroup chief executive Michael Corbat; Blackrock chairman Laurence Fink; HSBC chairman Douglas Flint; Bank of America chairman Brian Moynihan; Raghuram Rajan, governor of the Reserve Bank of India; Min Zhu, deputy managing director of the IMF; and Liu Mingkang, economics and finance fellow at the Chinese University of Hong Kong.

Why is governor Mark Carney worrying about the current account deficit anyway?

The current account is significant, as it shows the balance between the goods, services and financial transactions into, and out of, the UK. Britain has been running a persistent deficit for some time — dubbed the ‘invisible deficit’, as the financial markets have been relaxed about it.

UK current account deficit

UK current account deficit Photograph: ONS

But historically, countries with large current account deficits have often been hit with currency crises, as investors eventually lose faith and stop buying your assets. That’s what Mark Carney means when he mentions the “kindness of strangers”.

A currency depreciation can actually help fix a current account deficit, as it makes imports unpleasantly expensive while helping exporters compete.

But as our economics editor Larry Elliot has argued, Britain doesn’t have the manufacturing base to really profit from a Sterling crisis.

So if international investors decide not to buy UK assets, or hold the pound, if Britain’s EU membership is in doubt, there could be a problem…..

Mark Carney on Brexit, oil, and his own future

Bank of England governor Mark Carney takes part in a press conference at the Bank of England in London on December 1, 2015. Britain’s seven top lenders have passed the Bank of England’s stress tests, the central bank said today in its latest healthcheck on the sector. AFP PHOTO / POOL / Suzanne PlunkettSUZANNE PLUNKETT/AFP/Getty Images

A quick recap of the main points from the Governor of the Bank of England’s appearance at parliament:

1) Mark Carney warned that Britain’s current account deficit is still a risk to financial stability, due to the current market instability and the looming referendum on EU membership.

He warned that:

First, the general global environment has been much volatile.

Relying on the kindness of strangers is not optimal in that type of environment, and that’s what is the case when you’re running a 4%, 4.5% current account deficit.

And secondly, the possibility of a risk premium being attached to UK assets because of certain developments exists. And that plays into the riskiness of the situation.

Carney also agreed that “material decisions” can have an impact on financial stability, when questioned about Brexit.

2) Carney gave a clear hint that he might stay at the Bank of England for longer than planned.

The governor’s five-year term expires in July 2018, and he will decide this year whether to plump for a full eight-year term.

I guess this is a new form of forward guidance….

If he does, Carney would return to the jobs market just as the IMF’s top job comes up. #MediaSpeculation

3) Carney said the Federal Reserve’s interest rate hike last month has added to the turbulence in the market.

He said that domestic inflation pressure justified the hike, but cautioned that policymakers need to be aware that safe-haven currencies, and riskier ones, could both be buffeted as commodity prices tumble.

4) Carney said there is “no concern” at present, about direct or indirect stresses on UK banks. He argues that new capital rules, designed to bail in investors, should protect the system.

5) Carney also pointed out that OPEC’s ability to influence the oil prices isn’t what it was (as the plunge in the Brent crude oil price shows us)

6) Carney has also talked himself into a trip to the cinema. Hopefully The Big Short won’t give him any flashbacks

Updated

Stock markets have recovered some of their early losses. The FTSE 100 is now down just 28 points, or 0.5%, having been down almost 100 points earlier.

Mark Carney

Mark Carney gets the giggles when asked about The Big Short Photograph: Parliament Live

On a lighter note, Wes Streeting then asks Mark Carney if he’s seen The Big Short, the new film of Michael Lewis’s excellent book about the US sub-prime crash that almost brought down Wall Street.

I feel like I lived it, Carney replies [he was running the Bank of Canada at the time]

I haven’t seen it, but I’m sure I will. I’m happy to go.

The question was prompted by Paul Waugh of the Huffington Post:

A bottle of wine for any reader who spots the Carneys at their local Odeon.

Q: Has the MPC or FPC gathered any information on how negative interest rates might affect the UK economy?

We have thought more carefully about where the zero lower bound is, Carney replies. [ie, could they cut rates below the current record low of 0.5%?]

But the actual question of negative interest rates, and the impact on the financial system, has not arisen, as we don’t think that is the prospect.

Labour MP Wes Streeting asks Carney whether the Treasury has ever leant on him over banking regulations.

No, and it wouldn’t make a difference if it tried, Carney replies.

Q: And is the bank worried about recent elections in Spain and Portugal, given the relative instability of the governments which arose?

Carney says the latest financial stability report concluded that the biggest risk had moved from advanced economies to emerging economies. He still thinks that is still the case.

Carney: ‘Risk premium’ could be added to UK assets

Rachel Reeves MP asks Carney about Britain’s current account deficit, and the implications on UK trade if it leaves the EU.

Q: Is the UK current account a growing risk, a declining risk, or a stable risk? And do you think Brexit would make it more or less of a risk?

Carney says the current account deficit has gone down somewhat, and the improvement in the European economy should mean our net foreign income improves (as Britain exports more across the Channel).

But he won’t say that the riskiness has not gone down, for two reasons:

“First, the general global environment has been much volatile.

Relying on the kindness of strangers is not optimal in that type of environment, and that’s what is the case when you’re running a 4%, 4.5% current account deficit.

And secondly, the possibility of a risk premium being attached to UK assets because of certain developments exists. And that plays into the riskiness of the situation.

Carney didn’t define ‘certain developments’, but it’s pretty clear what he meant.

Credit Suisse, the Swiss bank, warned yesterday that investors would probably demand a considerably higher risk premium to hold UK assets if the public voted to leave the EU.

Updated

John Mann MP demands to know whether Carney had any role in the decision to abandon Britain’s review of banking culture.

This decision was taken entirely by the FCA, Carney replies.

We have nothing to apologise for regarding our handling of UK bank culture, Carney continues, adding that the BoE isn’t yet satisfied with bank’s responses to questions about their conduct.

Mark Carney is asked whether Britain would face financial instability if it votes to leave the EU.

The governor says the Bank will reveal its precautionary measures ‘after the fact’.

Speaking carefully (to avoid saying anything too controversial) he adds that material decisions can have an impact on financial stability, but doesn’t give a particular view on Brexit.

Carney also denies that central bankers hope the oil price goes up, to push inflation higher.

Oil rig is seen during sunset at Lagunillas field in the eastern coast of Lake Maracaibo.

Q: Can OPEC survive the slump in the oil price?

Mark Carney says that OPEC’s ability to influence the global supply has been diminished, given technical developments and increased supply sources (eg US shale gas).

But the competitive position of the major opec suppliers, especially Saudi Arabia, is unrivalled as they can produce oil cheaper than many others.

So one scenario is that OPEC has some influence, but at a lower price point.

Updated

Back in the committee room, Mark Carney has been fielding questions about market turbulence, and the oil price.

We are in an environment of “heightened risk aversion” which could continue for some time, says the BoE governor.

And that will effect currencies that are seen as safe (the US dollar, the Swiss franc), and those that are riskier (emerging market currencies). Authorities need to bear this in mind.

Could Carney eventually follow Lagarde at the IMF?

Here’s a piece of idle speculation…..

If Mark Carney does change his mind and serve a full eight years at the Bank of England, he would leave the BoE at the end of June 2021.

That’s also the summer when the managing directorship of the International Monetary Fund becomes vacant. Christine Lagarde appears to be nailed-on to do a second five-year term, starting in July 2016.

When he arrived in London, the talk was that Carney fancied a move into Canadian politics.

The prime minister-ship is now in Justin Trudeau’s youthful hands, and could stay there for some time.

Having run two central banks (UK and Canada), and also chaired the Financial Stability Board, Carney would be well-qualified to run the International Monetary Fund.

It would also break the European hold on the top job at the IMF, without giving it to an American.

Tesco blasted for not treating suppliers fairly

Looking away from the select committee…. Tesco has been ordered to improve the way it deals with suppliers.

An official inquiry into the 2014 scandal around Tesco’s financial results found that the supermarket has delayed payments to suppliers, to support its profits.

Christine Tacon, the Grocery Code Adjudicator, was damning about Tesco’s behaviour, saying:

“I was troubled to see Tesco at times prioritising its own finances over treating suppliers fairly.”

Here’s some reaction:

Now the Treasury Committee has moved onto the new rules to handle failed banks, which will see bond-holders ‘bailed in’ to cover the costs of a rescue.

Q: When will the system be ready, and will it work?

Carney says several things need to happen.

1) Banks need to refinance debt, so that their ‘bail-in-able debt’ is in the right place within the organisation, to cover the cost of failure.

2) The holders of the debt need to know that they can be bailed in – he doesn’t want retail bond investors to be surprised that they are now shareholders.

3) That knowledge will creates an incentive on bond-holders to ensure that banks hold enough equity to handle problems.

Mark Carney

The aim is to be ready by 2019, says Carney, so that the ‘ring-fenced’, systemically important banks are protected and can keep running after a collapse, if needed.

This process will cost billions, and it will push up funding costs. But that’s the price of avoiding another huge taxpayer-funded bailout.

Q: But could the markets freeze up, leaving banks unable to protect themselves?

Carney says he’s met with many bank chiefs recently (including, I suspect, at Davos), and confirmed they are on track with building up the capital buffers they need.

He argues that there’s very little chance of one bank failure causing a systemic failure. That’s more likely to be triggered by a general shock to the economy.

Right now, he insists, there are no concerns about direct or indirect stresses on major banks.

Updated

Q: Carney is then asked who, if anyone, he consulted before giving a speech last week saying that it’s not time to raise interest rates?

I wouldn’t clear a speech with anyone before giving my personal view, Carney replies.

Q: But did you discuss it with anyone on the MPC (monetary policy committee)?

All draft speeches by MPC members are circulated in advance, as a courtesy, says Carney.

And he denies that he said rates would definitely stay on hold for some time (as some papers reported)

Q: So was the speech also shared with members of the FPC? (financial policy committee)?

It wasn’t – MPC speeches aren’t typically shared with the FPC beforehand.

Q: Was the Federal Reserve right to raise interest rates in December?

Carney gives a long answer, arguing there is solid growth at the core of advanced economies.

And domestic inflation pressures merited the change in monetary policy, he argues.

Q: But did the rate hike cause the turmoil in the financial markets in recent weeks?

The governor says that it was not the fundamental cause, but it did contribute to it.

Could Mark Carney seek a longer term?

Andrew Tyrie, chairman of the Treasury Committee, then asks Mark Carney if he is reconsidering his decision to only serve five years at the Bank of England.

Could he now decide to serve the full eight years?

Carney smiles, then replies that he’s certainly not planning to leave and follow Andrew Bailey to the FCA.

We are making progress at the Bank of England, but there’s more work to do, the governor says. And if I were to request a longer term, I’d probably have to do so by the end of this.

Carney is half-way through his five-year term.

Tyrie says it would be valuable to know as soon as possible whether Carney might change his mind, and seek a longer stint at the Bank of England.

Updated

The session begins with Mark Carney paying tribute to Andrew Bailey’s career at the Bank of England.

It will probably take three to six months to appoint a new deputy governor to replace Bailey.

There is no designated successor, Carney adds. So get your application ready, readers

Mark Carney facing MPs

Heads-up: Mark Carney, governor of the Bank of England, is about to start taking questions from the Treasury Committee. The session is being streamed live here.

Looking back at the markets quickly… the FTSE 100 is still deep in the red, down 64 points or 1% at 5812.

Oil is recovering some of its early losses, but it’s still down around 2% at $29.91 per barrel.

George Osborne has really surprised the City by announcing Andrew Bailey as the new head of the FCA.

Bank of England governor Mark Carney says he’s a fine choice (although would he really say anything else?….)

Andrew is an extraordinary public servant who has devoted his entire professional life to serving the people of the United Kingdom.

During his career, he has worked across all of the Bank’s policy areas, combining leadership and innovation to deliver consistently the Bank’s policy objectives. His work in helping to manage the crisis and then to develop the post-crisis regulatory framework has been exemplary.

Here’s some instant reaction:

Andrew Bailey named as new FCA chief

Newsflash: Britain has a new City regulator.

Andrew Bailey, the deputy governor of the Bank of England, has just been named as the new chief executive of the Financial Conduct Authority.

He replaces Martin Wheatley, who was ousted by chancellor George Osborne last July.

Bailey has been in charge of prudential regulation at the Bank of England – trying to sure that banks stick to the rules, and avoid the damaging risks that caused the 2008 financial crisis.

Osborne’s decision to sent Wheatley packing last year has been seen as a sign that the British government was taking a friendlier approach to the City.

Here are a couple of photos from China’s brokerage houses, as investors watched the market tumble by 6%.

An investor checks stock prices on a screen at a brokerage house in Beijing, Tuesday, Jan. 26, 2016. Asian stock markets sank Tuesday, led by a plunge in the Shanghai index, after a renewed slump in the price of oil kept investors on edge about the global economy. (AP Photo/Andy Wong)
A man sits near an electronic board displaying stock prices at a brokerage house in Beijing, Tuesday, Jan. 26, 2016. Asian stock markets sank Tuesday, led by a plunge in the Shanghai index, after a renewed slump in the price of oil kept investors on edge about the global economy. (AP Photo/Andy Wong)

Chinese market rout: What the experts say

Analysts are divided over the severity of the Chinese slowdown.

Yogi Dewan, founder of Hassium Asset Management (a wealth management firm) told Bloomberg TV that China is “slowing, not melting down”.

He argues that Beijing are taking some “very positive” steps, including devaluing the yuan and building close financial links with Europe.

But Joseph Oughourlian of Amber Capital Investment Management is less optimistic. He is steering clear of companies who benefitted from China’s investment boom over the last 15 years.

FXTM Research Analyst Lukman Otunuga says investors are worried that capital will continue to ooze out of China, as people try to escape its slowing economy:

A re-established wave of risk aversion gripped Asian equities sending most into red territory, while elevated fears that China capital outflows may accelerate as the economy decelerates has sent the Shanghai Composite Index diving -6.3% lower, to levels not seen in 13 months.

With days like today continuing to come back to haunt the Shanghai Composite Index, the Chinese New Year period and the trading break couldn’t come soon enough.

Large traditional lanterns and a sign of celebrating the upcoming new year of the Monkey at a commercial building in Beijing today.

Large traditional lanterns and a sign of celebrating the upcoming new year of the Monkey at a commercial building in Beijing today. Photograph: Kim Kyung-Hoon/Reuters

Aircraft left passengers at gate<br>File photo dated 05/03/12 of signage on the engine of an easyJet passenger plane as the budget airline has apologised after a flight from Malaga to Bristol took off without 29 passengers.

Shares in easyJet have dropped by 2%, after the company reported that recent terror attacks have weakened demand.

The budget airline said revenue suffered after November’s Paris terror attack, and the bombing of a plane flying form Egypt’s Sharm el-Sheikh.

The recent market turmoil has also been a mixed blessing for the airline. The fall in the oil price will save it £180m on fuel costs, however currency moves will wipe out £50m.

In other words, easyJet needs fewer dollars to pay for fuel, but it needs to stump up more pounds to buy the dollars first….

Today’s selloff comes nearly a week after global markets slumped into bear market territory, triggering alarm around the world:

Simon Smith, chief economist at currency trading firm FXPro, fears that more market turbulence is coming.

He writes:

Chinese indices are 6% lower overnight, Japanese over 2% in the red and oil is back below 30 bucks a barrel.

Volatility has been rising throughout the year so far but we’re still someway off the big spike in the Vix (volatility index or ‘fear gauge’) last August and so there’s potential for moves in markets to get even more dramatic.

Today’s selloff has been triggered by the slide in the oil price, as well as the Chinese market mayhem.

Tony Cross of Trustnet Direct explains:

Crude is sliding on renewed oversupply fears and even the building narrative we’re seeing from Opec that they are ready to strike a deal with other producer nations – possibly centred around Russia – doesn’t really appear to be lending any support to the equation, at least not yet.

The gold price has jumped by 1%, as money pours out of shares and into safe-haven assets.

That’s usually a sign that investors are worried.

Updated

Other European markets are also falling, with France’s CAC down 1.6% and the German DAX shedding 1.3%:

FTSE 100 falls 1.5% at the start of trading.

The FTSE 100 index of major UK companies has fallen by 87 points at the start of trading, or 1.4%, to 5789

Almost every share is falling, as traders face another day of volatile trading dominated by fears over the global economy.

BP and Royal Dutch Shell are both down around 3%, mirroring today’s sliding oil price.

Mining companies are also suffering, reflecting worries about China. Commodity trader Glencore has shed 3.5%, and Anglo American (which produces iron ore, copper, nickel etc) is down 3.2%

Almost every share on the Chinese stock market was hit by today’s rout, with only four gaining ground.

The CSI 300 today

The CSI 300 today Photograph: Thomson Reuters

Updated

Chinese stock markets slumps 6% to 13 month low

A late wave of selling has gripped the Shanghai stock market, sending shares slumping and triggering new angst in financial markets worldwide.

China’s benchmark index, the CSI 300, shed 188 points or 6.02% to finish the day at 2940. That’s its lowest level since December 2014.

The CSI 300

The CSI 300 over the last 2 y8ears Photograph: Thomson Reuters

Scores of shares were suspended after falling 10%, the maximum allowed under Chinese stock market regulations.

The Shanghai market tumbled by 6.4%, the biggest daily loss since the first week of 2015.

The selloff, which helped to drive oil down, came after new economic data showed that China’s rail freight volume dropped by 11.9% last year, compared to 2014.

That fuelled fears that China’s economy is slowing faster than official figures show.

Oil drops back through $30

The crude oil price has lurched back through $30 per barrel.

Brent crude has slumped by 3% this morning, and is changing hands at $29.61 per barrel.

The selloff is partly being driven by oversupply fears, with OPEC members sticking to their guns and keeping pumping in an apparent attempt to drive other suppliers out of business.

Kit Juckes of French bank Société Générale says the weak oil price will add to the gloomy mood in the markets:

The fall in oil prices will make most of the headlines and drive most of the movement in markets today, unless it is reversed for no particularly good reason. The latest driver is the news that Iraqi oil output is strong. US production remains the key swing on supply and is what will eventually trigger a turn. But it will take hard news about declining US output to shift the market mood.

Introduction: Losses expected in Europe after Asian falls

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

It looks like being another ‘challenging’ day in the markets.

Asia’s two-day rally has hit the wall, with most markets falling.

Japan’s Nikkei just closed down 2.4%, and we’re expecting European stock markets to fall at the open (8an GMT).

The surge of optimism which pushed shares higher at the end of last week has dissolved, in the face of worries about deflation and economic slowdown.

In the corporate sector, budget airline easyJet and high street tech chain Dixons Carphone are releasing results.

Mark Carney, Governor of the Bank of England, is testifying to MPs this morning about the BoE’s financial stability report, from 10am GMT.

And we’ll have an eye on Greece, where unions are expected to hold a protest rally in Athens today against pension cuts. That comes as

We’ll be tracking all the main events through the day….

Updated

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Get Daily Digest

No spam guarantee.

Leave A Comment