The UK currency has also come under renewed pressure on the uncertainty over the forthcoming referendum on whether Britain should leave the European Union, which Carney also referred to.
Saudi oil minister pours cold water of hopes of output cuts
Crude continues to weaken as Saudi oil minister Ali Al-Naimi suggested production cuts were not on the cards.
He told a conference in Houston that cutting production would not happen, but major producers would freeze output to help the market rebalance.
Saudi Arabia and Russia recently agreed to freeze output at January levels in an effort to deal with the supply glut which has sent crude prices tumbling.
He said in Houston that he hoped there would be more agreements on freezing in March, when more meetings will be held.
He said “most of the countries that count” would freeze, according to Reuters. Earlier Iran had apparently dismissed the proposal as ridiculous, despite the country seeming to support it last week.
Al-Naimi said the price rout would ease although he did not know when. And he added that he was not banking on cuts “because there is less trust than usual”, said Reuters.
Brent is currently down 3% at $33.62 a barrel while West Texas Intermediate – the US benchmark – is 4% lower at $32.03. Jasper Lawler at CMC Markets said:
Oil prices turned lower after the Iranian oil minister’s colourful description of the output freeze between Russia and Saudi Arabia as “ridiculous.” Iran and its plans to ramp up output after the lifting of sanctions is proving a thorn in the side of other producing counties which appear to be reaching consensus that production should stay at current levels. Tensions are clearly rising in the cartel as the Saudi oil minister reposted that “not all the countries will freeze. The ones that count will.”
The day’s confidence figures show how fragile sentiment is at the moment, says analyst Connor Campbell at Spreadex:
Whilst the [US] existing home sales figure actually saw a mild increase month-on-month, from 5.45 million to 5.47 million, more notable was the sharp decline in the CB consumer confidence number.
Coming in at 92.2 against the 97.4 last month the figure, like this morning’s year-low German Ifo business climate data, highlights just how entrenched the market’s current fears are, despite the sporadic surges that have taken the global indices to a variety of recent highs. There was to be no such surge this afternoon, however, the Dow Jones dropping over 100 in light of that literal knock to the index’s confidence.
Over in the UK the FTSE fell past its earlier lows as the afternoon progressed, declining around 50 points to trickle underneath the 6000 mark following the weak US open, a drop exacerbated by Brent Crude slipping under $34 per barrel once again.
LSE-Deutsche Börse deal faces “a number of challenges”
Back with the London Stock Exchange, and analysts at Numis point to a number of problems facing its proposed merger with Deutsche Börse:
This represents the third time the LSE and DB have attempted to merge, first in 2000 then in 2004. Although no details were given, a merger is expected to provide enhanced growth, significant customer benefits as well as substantial revenue and cost synergies.
However, we see a number of challenges in completing this deal, namely:
(1) the competition authority is likely to ask a number of questions as it would create a dominant player in exchanges and clearing in Europe – the EC blocked a similar deal between Deutsche Börse and NYSE Euronext in 2012 citing competition concerns;
(2) both have differing views on how to structure their respective clearing businesses – LSE backs open access (i.e. trading and clearing can occur on different platforms) whereas DB does not;
(3) national pride – would UK politicians be happy with the main UK exchange being owned by a foreign entity.
So whilst we see the obvious benefits from such a deal (namely cost and revenue synergies), we remain mindful of the challenges that would need to be overcome for it to complete.
The Richmond manufacturing index has also disappointed, coming in at -4 compared to the 2 which analysts had been looking for.
However US existing home sales have beaten expectations, up 0.4% in January compared to a forecast fall of 2.5%.
US consumer confidence worse than forecast
US consumer confidence figures for February have come in much lower than expected, as the recent market volatility outweighs the benefits of cheaper oil.
The index fell from 97.8 in January – itself revised down from 98.1 – to 92.2. Analysts had been expecting a figure of 97.
This is the lowest level since July. Dennis de Jong, managing director at UFX.com, said
Despite relatively healthy numbers over recent months, onlookers will be concerned with the worrying dip in this month’s consumer confidence data.
It’s surprising that US shoppers have kept their wallets in their pockets for another month, especially considering that low gas prices continue to help them save.
While the slip may have a short-term negative affect on the US Dollar, if gas continues to stay low, it’s only a matter of time before US consumers get the spending bug again.
Wall Street opens lower
Meanwhile US stock markets have opened lower, in line with the dips on European exchanges.
The Dow Jones Industrial Average is down 40 points or 0.2% after another fall in oil prices – West Texas Intermediate is around 2% lower after a report Iran’s oil minister called the proposed output freeze ridiculous. At the open the S&P 500 is 0.3% lower and Nasdaq down 0.4%, ahead of the latest US consumer confidence figures.
Back in Europe the FTSE 100 is currently down 22 points or 0.3%, but would be another 4 points or so lower if not for the 16% jump in the shares of the London Stock Exchange.
It was not always so friendly between the LSE and Deutsche Börse:
Here’s our first take on the LSE-Deutsche Börse merger plan:
The London Stock Exchange is in talks to merge with Germany’s Deutsche Börse in a deal that would seal an alliance first discussed at the turn of the millennium.
The LSE confirmed on Tuesday it was in detailed discussions with its German rival about an all-share merger. Under the proposed structure, Deutsche Börse shareholders would own 54.4% of the combined company and LSE shareholders would hold 45.6%.
The UK exchange said: “The boards believe that the potential merger would represent a compelling opportunity for both companies to strengthen each other in an industry-defining combination, creating a leading European-based global markets infrastructure group.”
David Cheetham of City trading firm XTB.comsays a merger between the LSE and Deutsche Borse would create one of the world’s biggest financial trading platforms.
“Shares in London Stock Exchange Group have soared by over 17% in the past hour as news that they’re in talks with Deutsche Boerse have been confirmed. If the deal were to go ahead it would create a clear market leader for European and one of the largest exchanges in the world for trading and risk managing derivatives.
The timing of this development appears coincidental as the possibility of a Brexit has become increased in recent days now that a referendum date has been set and Boris has joined the Out campaign.”
The news that Britain’s stock exchange could soon merge with its German rival has startled the City, especially given the upcoming EU vote.
Mike van Dulken, head of research at Accendo Markets, tweets:
Further to the recent movement in LSE’s share price, the Board of LSE and the Management Board of Deutsche Börse confirm that they are in detailed discussions about a potential merger of equals of the two businesses.
This would create “a leading European-based global markets infrastructure group”, it claims, adding:
The combination of LSE and Deutsche Boerse’s complementary growth strategies, products, services and geographic footprint would be expected to deliver an enhanced ability to provide a full service offering to customers on a global basis.
Under the plan, Deutsche Börse shareholders would hold 54.4% of the new company, while LSE shareholders would hold 45.6%.
The LSE’s shares are now up 17%, valuing the group at almost £9.5bn.
Deutsche Börse shares have also jumped, by around 3%, following the reports of merger talks with Britain’s LSE.
And Euronext, another stock market operator, has seen its shares rally by 4%. Investors may be anticipating a bidding war.
Here’s the Reuters story that sparked the move:
LSE shares soar on takeover talks report
BREAKING: Takeover speculation has just driven shares in the London Stock Exchange up by 9%, to the top of the FTSE 100 leaderboard.
It has been trigger by a Reuters report, that the LSE is in talks over a possible merger with German rival Deutsche Börse.
Guardian readers have known for a while that the Bank of England was working on contingency plans for the EU referendum.
Back in May 2015, the Bank of England accidentally emailed us the details of Project Bookend, including how to deny it existed. #oops
We wrote at the time that:
The email indicates that a small group of senior staff are to examine the effect of a Brexit under the authority of Sir Jon Cunliffe, who as deputy director for financial stability has responsibility for monitoring the risk of another market crash.
Cunliffe also sits on the board of the City regulator, the Prudential Regulatory Authority.
James Talbot, the head of the monetary assessment and strategy division, is involved in Project Bookend, drawing on his past work as an adviser on European economic policy.
Carney: Brexit contingency planning is underway
The Bank of England is engaged in contingency planning for the EU referendum, Mark Carney tells the Treasury committee.
He also reveals that the Prudential Regulation Authority is keeping abreast of the contingency plans that UK banks are making ahead of the June 23 vote.
Further details will discussed on March 8, when the governor testifies to the committee specifically about the referendum.
Rachel ReevesMP asks Mark Carney whether he expects the recent falls in sterling to continue.
The governor reiterates that investors have been buying downside protection to protect themselves against falls against the pound, especially against the US dollar [rather than the euro, because it could also suffer if Britain leaves the EU].
Governor Carney concludes:
It is safe to say that an element of referendum premium has come into sterling.
Rachel Reeves MP reminds Carney that the latest Inflation Report states that interest rates are likely to rise, not fall. How can he can so confident?
Mark Carney gives a rather dovish answer, says the Bank expects interest rates to rise, gradually, over the forecast horizon.
But of course, if risks increased and the global economy deteriorated, that would have implications.
So do you expect the next move to be up, not down?
Carney replies that the UK domestic economy is positive, but that must be balanced with disappointing signs from abroad. We must weigh the two up, and we’re not taking a policy decision today.
Carney: No intention of imposing negative rates.
Mark Carney moves swiftly to crush speculation that the Bank of England could hit UK banks with negative interest rates.
We have absolutely no intention, no interest, in doing that [imposing negative rates].
He adds that mortgage rates in Switzerland have actually gone up, even though the Swiss central bank have imposed negative borrowing costs.
Can you explain the impact of negative interest rates on banks in simple terms, Steve Baker asks?
MPC member Gertjan Vlieghe outlines how banks have assets, which are loans, and liabilities, which are deposits.
They make a profit by charging borrowers more than they pay to savers.
So far, no commercial bank has passed on negative interest rates to its depositors.
So…as you lower interest rates more and more, the return on the assets goes down and down but there is no way to balance that with lower returns to savers.
In conclusion: The lower interest rates go, the harder it is for banks to make a profit.
Q: And do you need to abolish cash to allow negative interest rates to be imposed?
Deciding whether people are allowed to hold cash is not one of our tools, Vlieghe replies.
Steve Baker MP asks what the distributional impact of negative interest rates would be.
It’s too early to say, replies deputy governor Minouche Shafik. Central banks in several areas, including Switzerland, Denmark, Japan and the eurozone, now charge banks to leave money with them.
However, this has not generally fed through to consumers – so we don’t have the data to show the impact on the public.
Gertjan Vlieghe adds that it’s very hard to say how banks will react to negative interest rates – it depends on each institution.
Mark Carney also insists that the Bank could launch fresh stimulus measures. It could cut interest rates closer to zero, from 0.5% today, or buy more assets though QE.
Martin Weale says the Bank of England has more tools in the toolbox to stimulate the UK economy if needed.
That could include fresh asset purchases though its QE programme [which the Bank has used to buy £375bn of UK government debt].
Jacob Rees-Mogg MP asks whether the recent fall in bank share prices reflects the macro-economic environment. Or something else?
Mark Carney says it is primarily due to the macro picture. He cites ‘mildly disappointing’ data and uncertainty about the policy stance in emerging and advanced economies.
That caused a “renewed appreciation” that we are in an environment of low nominal growth — a difficult environment for banks.
On top of that, Carney adds, there are some concerns in investing circles about the impact of negative interest rates on bank profitability.
BoE policymaker: Brexit fears could hurt real economy
Dr Gertjan Vlieghe, a member of the Monetary Policy Committee, now warns MPs that the uncertainty over the In-Out EU referendum could hurt the UK economy.
Asked about the impact of the weaker pound, he says that on its own, a weaker currency should boost inflation and growth. But the current situation is more complex, given the possibility of Brexit .
Vlieghe tells the Treasury Committee that:
We think the exchange rate is falling because of increased uncertainty about what’s going to happen in the period leading up to, or the period following, the referendum.
It is possible at some point that increased uncertainty from foreign exchange investors also ends up manifesting itself in increased uncertainty by households and businesses which may, or may not, delay or reduce their spending.
So far we haven’t seen very clear evidence of that, but we are watching very carefully.
Back to the pound…. and Martin Weale says the recent fall in sterling should push inflation up (as it makes imports more expensive)
Mark Carney says he agrees, adding that the recent fall in the pound is partly due to the EU referendum [reminder, it hit a seven year low on Monday].
Carney addes that the Bank “will take the exchange rate as given” –[ie, it will not make predictions about the referendum result, and its impact on sterling].
And the Bank’s agents across the UK will be watching for signs that business confidence has been hit by exchange rate moves.
The committee is keen to find out whether the Bank of England will make a profit or a loss on its bond-buying quantitative easing programme.
After all, the richest households have certainly benefitted, because QE drives up asset prices. And we know who holds them…..
Tyrie then turns to Britain’s banks – is Carney confident that they are robust enough to rise out another crisis?
He points out that Sir John Vickers, who conducted a major inquiry into the UK financial sector after the 2008 crisis, has warned that the banks haven’t gone far enough. What’s your view, governor?
Carney insists that the UK banks have met the new capital requirements.
So why have bank shares fallen so sharply? Carney blames worries about profitability, not solvency:
Since the start of the year bank stocks have been under pressure. There are a variety of causes of that but what is not a cause, what it does not indicate in my view is concerns about the resilience of the institutions.
“The fundamental concerns are about the returns of the institutions.”
Carney: EU referendum is driving demand for sterling protection
Andrew Tyrie does have one question on the EU referendum:
Q: Has the Bank modelled the impact on sterling if the Out campaign win, given what’s been going on in the markets in recent days?
Mark Carney says the bank will treat the June 23rd referendum “exactly like we treat any other political event”.
That means the Bank will monitor developments in markets and confidence, and feed those changes into its models.
The Bank won’t take any judgements about who will win, or assess the consequences of a leave vote.
Q: So what would I see if I looked at your models?
We don’t make forecasts about the future value of the pound as part of the model, Carney says.
But he then points to the recent volatility in the foreign exchange and options markets, as investors brace for the In-Out referendum in four month’s time.
There have been movements, obviously, in sterling, since the timing of the referendum became clear, says governor Carney, adding:
Particularly, there has been a sharp increase in risk reversals – buying more downside protection against future falls in sterling around the referendum date as opposed to upside protection.
They have spiked to levels consistent with around the height of the Scottish referendum. And they’ve been particularly concentrated against cable…the sterling/dollar options market.
That’s as far as Carney will go today – we may need to wait until next month’s hearing for more….
Andrew Tyrie, committee chairman, says he doesn’t want to linger on the Brexit issue for long – as Carney is going to testify about it on 8 March.
Panic averted – the session is starting now…
The FT’s Emily Cadman reports that Mark Carney is behind schedule….
Looks like there’s a small delay with the web feed of Mark Carney’s session at parliament (hurry up chaps!).
Helpfully, Reuters are on the case — with some comments from deputy governor Minouche Shafik:
She’s predicted that UK interest rates will rise, in due course, rather than being cut to fresh record lows.
BANK OF ENGLAND DEPUTY GOVERNOR SHAFIK SAYS IF LABOUR MARKET CONTINUES TO TIGHTEN, EXPECT WAGE GROWTH WILL PICK UP
BANK OF ENGLAND’S SHAFIK SAYS DIFFICULT TO PREDICT TIMING OF WAGE PICK-UP
BANK OF ENGLAND’S SHAFIK SAYS BELIEVES NEXT INTEREST RATE MOVE WILL BE UP
BoE governor Mark Carney at parliament
The governor of the Bank of England, Mark Carney, is about to take his seat in the Thatcher Room at the Houses of Parliament.
But we’re also hoping to hear Carney’s views on the UK’s EU referendum.
You can watch the hearing live, here (right-click to open in a new tab).
Carney is accompanied by:
Dr Minouche Shafik, Deputy Governor, Markets and Banking,
Dr Gertjan Vlieghe, External Member of the Monetary Policy Committee
Martin Weale, External Member of the Monetary Policy Committee
Bloomberg economist Maxime Sbaihi is alarmed by the fall in German business confidence this month:
The euro just hit a three-week low, losing 0.3% to $1.0993 against the US dollar.
The single currency is being dragged down by this morning’s weak German business confidence report and the knock-on effect of Britain’s EU referendum (as discussed earlier)
German business confidence takes a tumble
Morale among Germany’s business leaders has hit a one-year low, after falling at its fastest rate in over four years this month.
IFO, the Munich-based think tank, has reported that German corporate chiefs are much gloomier about future prospects, due to the slowdown in China and recent stock market volatility.
IFO’s business sentiment index has fallen for the third month running, to 105.7 from 107.3 in January. That’s the lowest since December 2014.
It was driven by a slump in business expectations, suggesting firms are worried about prospects this year.
Carsten Brzeski of ING is calling it a “wake-up call”, adding:
Global events have finally reached German companies’ boardrooms…..
Expectations have taken another sharp hit from recent market turmoil, the adverse impact of low oil prices and renewed concerns about a slowing of the Chinese economy, dropping to 98.8 in February, from 102.3 in January.
There’s a lot of chatter that the Britain’s EU referendum could spark a sterling crisis.
And that’s because the pound (like the English cricket team) has a worrying history of occasionally collapsing under pressure.
The pound is hovering around $1.413 this morning, having hit a seven-year low of $1.4057 yesterday.
FXTM research analyst Lukman Otunuga believes the pound could fall further in the run-up to June’s vote, and take the euro with it.
The growing speculation that a Brexit may spillover to the Eurozone and threaten the future of the European Union has already encouraged bearish investors to attack the Euro across the global currency markets.
Standard Chartered shares slide after $1.5bn loss
Shares in Standard Chartered are sliding sharply after it posted its first annual loss since 1989.
The bank has lost $1.5bn, and warned that it faces a “broad range of challenges and uncertainties….notably China and commodities”.
The loss is partly due to a $1.8bn restructuring charge as Standard Chartered tries to address the slowdown in emerging markets (the bank is a big player in Asia).
The City aren’t impressed — shares slumped by 11% as investors digested the details. They’re currently down 6%. More to follow later…
Over in Frankfurt, the German DAX has slid by 103 points, or over 1%.
Conner Campbell of SpreadEx says BHP’s decision to slash its shareholder payout has shocked investors:
It doesn’t help that the mining sector got its own unwelcome surprise; whilst it was expected that BHP Billiton would post its first half year loss in 16 years (coming in £4 billion in the red) analysts were still looking for a 31p dividend.
Instead BHP slashed its interim payout by 75% to 16p, whilst also sacrificing its progressive dividend policy in order to protect its credit rating. The company’s subsequent 3.5% slide helped ensure its mining peers started the day at a loss, dragging the FTSE down by nearly 50 points after the bell.
On the other hand, given the rather weak development of exports, you can see that there’s a problem for the German economy.”
German exports fall as global economy weakens
Germany has suffered a fall in exports as the powerhouse European economy is hit by the global downturn.
The Federal Statistical Office has revealed that exports shrank by 0.6% in the final three months of 2015. Economists had expected a dip of 0.3%.
That, according to the Financial Times, is the first decline in three years.
Imports rose by 0.5% during the quarter, suggesting that Germany was propped up by its domestic economy.
ING’s Carsten Brzeski fears that German consumers might struggle to sustain this performance in 2016:
Today’s figures also confirmed that Germany grew by an unspectacular 0.3% in the final three months of 2015, with growth dragged back by its negative trade performance.
Government spending grew by 1% during the quarter – perhaps partly due to the cost of helping the refugees who arrived in Germany last year.
Asian markets fall back after BHP’s £4bn loss
Asian stock markets have fallen today, as the recent rally in shares subsided. And it could be a downbeat day in Europe too, with the main indices expected to fall.
Shares are being pulled down by the oil price, which has dipped by almost 2% this morning – erasing its own recent gains.
And mining giant BGP Billiton has added to the pessimism, by reporting a stonking loss of £4bn for the last six months – and slashing its dividend by three-quarters.
Reuters has the details from Asia:
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.2%, after earlier rising 0.4% to its highest level since January 8. Japan’s Nikkei erased morning gains to close down 0.4%.
Korea’s Kospi, which started the day higher, and Australia’s ASX 200, which opened little changed from Monday’s three-week high close, both ended the day with losses.
Chinese stocks , which opened little changed, were last trading down almost 1%.
Oil markets jumped as much as 7% on Monday as speculation about falling U.S. shale output fed the notion that crude prices may be bottoming after their 20-month collapse. But they retreated on Tuesday on concern that any cuts to U.S. production may be countered by rising output from Iran.
U.S. crude futures fell 1.9%, and the international benchmark Brent slid 1.6% on Tuesday.
City firm IG reckons European markets will fall at the open.
Introduction: Brexit fears haunt City ahead of Mark Carney’s testimony
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Coming up today…..
Britain’s In-Out EU referendum continues to cast a shadow over the markets, after Brexit fears sent the pound sliding to a seven year low yesterday.
The prospect of months of heated debate and uncertainty over the UK’s future is already weighing on the pound in early trading, as some investors continue to sell sterling.
Overnight, a group of UK business chiefs have signed a letter backing the In campaign.
But crucially, others have declined to get involved. The bosses of Tesco, Sainsbury’s and Morrison all remain firmly on the fence….
Bank of England governor Mark Carney should be quizzed about the European vote, when he testifies to MPs at 10am GMT on the Bank’s latest inflation report. Deputy governor Minouche Shafik, and fellow interest rate-setters Martin Weale and Gertjan Vlieghe should be providing support.
On the economics front, new German trade data is being released this morning. We also get the latest IFO measure of business confidence in the eurozone’s largest economy, at 9am GMT.
Standard Chartered, the bank with a big exposure to emerging markets, is reporting results at 8.15am.
And in the afternoon, the latest US consumer confidence figure are released. They’ll show how much damage has been caused by the stock market turmoil earlier this year.
We’ll be tracking all the main events through the day…