BoE intervenes as IMF criticises UK budget

LONDON - The Bank of England stepped in Wednesday to shore up market confidence after the International Monetary Fund criticised Britain's inflation-fighting budget.

Reacting to markets turmoil, the BoE announced it was temporarily buying up long-dated UK government bonds "to restore orderly market conditions".

However, the pound promptly slumped 1.7 percent to $1.0552.

The BoE intervention followed criticism Tuesday from the IMF, which argued that Britain's budget could increase inequality and worsen inflation.

Credit ratings agency Moody's also waded in overnight with a warning about soaring debt.

Finance minister Kwasi Kwarteng's big tax cuts and energy price freeze, aimed at boosting the UK's recession-threatened economy, appeared to have had the opposite effect as traders warn of ballooning debt to pay for the incentives.

Following last Friday's budget, UK government bond yields have soared and the pound hit a record low at $1.0350.

Critics added that Kwarteng's measures would benefit the rich more than the poorest, as millions of Britons suffer from a cost-of-living crisis.

"We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise," the Treasury said as it sought to defend itself.

"We are focused on growing the economy to raise living standards for everyone," it added, blaming sky-high oil, gas and electricity prices on Russia's invasion of Ukraine.

IMF ADVICE

In a highly unusual intervention, the IMF late Tuesday said it was "closely monitoring" developments and urged the government in London led by new Prime Minister Liz Truss to change tack.

The Fund added: "We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.

"However, given elevated inflation pressures in many countries... we do not recommend large and untargeted fiscal packages at this juncture."

The IMF said the "UK measures will likely increase inequality" and stressed the importance of fiscal policy not working "at cross purposes to monetary policy".

Analysts warned that Britain's controversial measures could force the Bank of England to hike interest rates far higher than forecast.

"Expectations that there will be a super-size interest rate hike coming from the Bank of England to try and counter the government splurge on tax cuts and spending have increased," Hargreaves Lansdown analyst Susannah Streeter noted Wednesday.

Many central banks, including the BoE, are aggressively hiking interest rates in a bid to cool decades-high inflation. 

TAX CUTS 

In his budget, Chancellor of the Exchequer Kwarteng cut the highest rate of income tax and scrapped a cap of banker bonuses.

He also, however, announced a plan to lower income tax for all workers.

Conservative party head Truss appointed Kwarteng to replace Rishi Sunak, who reached the final two in the race to be prime minister.

Sunak had hit out strongly at Truss's promise of tax cuts, arguing that the UK priority was to first bring down the nation's inflation rate that stands at a near 40-year high of 9.9 percent. 

Moody's called Britain's new fiscal policy regime "credit negative", adding that a sustained confidence shock could "permanently" weaken its debt affordability.

Kwarteng has said he would wait until November 23 to outline plans on controlling government debt.

Agence France-Presse

Bank of England hikes rate again as UK enters recession

LONDON - The Bank of England hiked its interest rate again on Thursday to combat soaring inflation as it warned that the UK's economy had already slipped into recession.

The BoE's decision caps a busy week for central banks as its peers in the United States and elsewhere in Europe further tightened their own monetary policies in global efforts to tame runaway inflation.

The British central bank's decision had been postponed from last week following the death of Queen Elizabeth II.

The BoE met most market expectations as it lifted its key rate by 0.5 percentage points to 2.25 percent, repeating its August increase that had been the biggest rise since 1995.

Some commentators had speculated that the BoE could mirror the European Central Bank and the US Federal Reserve and spring a jumbo hike of 0.75 percentage points -- which would have been the BoE's largest in three decades.

Across the world, consumer prices have galloped to their highest levels in decades on rampant energy and food prices in the wake of Russia's war on Ukraine.

Central banks have responded by increasing their rates, fanning recession fears because they push up loan repayments for consumers and companies alike, thereby exacerbating the UK's cost-of-living crisis.

The BoE said the UK had already entered recession.

The Fed on Wednesday unveiled a 0.75-percentage-point increase, its third straight jumbo hike, one day after Sweden's Riksbank shocked markets with a jump of a full percentage point.

On Thursday, the Swiss National Bank unleashed a 0.75-percentage-point hike that lifted its policy rate out of negative territory for the first time since 2015, meaning depositors no longer have to pay to park their money at the bank.

On Thursday, the Norwegian central bank raised its rate by 0.5 percentage points, taking it to its highest level in more than a decade.

Bucking the trend, the Bank of Japan kept its ultra-loose monetary policy unchanged, sending the yen to a fresh 24-year low against the dollar.

The BoE earlier this month defended itself against accusations of being too slow to tackle sky-high inflation, after new Prime Minister Liz Truss proposed to review its operational independence.

- Tax cuts -

UK inflation eased to 9.9 percent in August but remains near a 40-year high.

Truss on Wednesday launched a six-month plan, starting in October, to pay about half of energy bills for businesses, charities, hospitals and schools, as she sought to soften the economic blow of sky-high prices.

The premier had already announced plans for a two-year energy price freeze for cash-strapped households.

Finance minister Kwasi Kwarteng will unveil Friday a mini-budget of tax cuts designed to boost economic activity, and will also outline the vast cost of the energy assistance.

Yet the package threatens to ultimately push inflation higher as a result of strengthening demand, according to US bank Citi.

"While the capping of energy prices is disinflationary in the first instance, we continue to see many of these measures as boosting demand and increasing the risk of more embedded inflation," wrote Citi analysts in a research note.

Commentators also warn the measures will ravage public finances that are already reeling from huge spending during the deadly Covid pandemic.

Barclays bank analysts estimate that the government's total cost-of-living expenditure could reach a colossal £235 billion ($267 billion).

Agence France-Presse

UK inflation jumps to new 40-year high

LONDON - British inflation surged to a new 40-year high in July on rising food prices, official data showed Wednesday, adding to a cost-of-living crisis as the country faces the prospect of recession.

The Consumer Prices Index (CPI) accelerated to 10.1 percent last month from 9.4 percent in June, the Office of National Statistics said.

The Bank of England warned earlier this month that inflation will climb to just over 13 percent this year, the highest level since 1980.

It also projected that the country would enter a recession that would last until late 2023.

The central bank raised its key rate by 0.50 percentage points to 1.75 percent at its last policy meeting, the biggest hike since 1995.

The BoE move mirrors aggressive monetary policy from the US Federal Reserve and the European Central Bank last month, as the world races to cool red-hot inflation that has been fuelled by Russia's invasion of Ukraine.

The UK's statistics office said the "largest movements" in the CPI in July came from food.

Bread and cereals were the largest contributors to the rise in food prices, followed by milk, cheese and eggs.

Agence France-Presse

Bank of England sees less severe UK downturn

LONDON - Britain's economic downturn fuelled by the coronavirus pandemic will be less severe than thought -- but the nation's surge in unemployment will delay any recovery, according to a forecast by the Bank of England.

The pound rallied on the update, which included news that the BoE held its main interest rate at a record-low 0.1 percent.

The BoE added that its cash stimulus programme used to prop up the economy before and during the coronavirus pandemic would remain at £745 billion ($967 billion, 813 billion euros).

The amount includes £300 billion added to its so-called quantitative easing programme since March when COVID-19 prompted a UK lockdown.

The economy was now expected to contract by 9.5 percent this year, the BoE said, altering its prior guidance of a 14-percent contraction.

"Nonetheless, the recovery in demand takes time as health concerns drag on activity," the BoE said in minutes of its latest regular meeting that took place Tuesday.

"GDP is not projected to exceed its level in 2019 Q4 until the end of 2021, in part reflecting persistently weaker supply capacity," it added.

The BoE estimated that UK gross domestic product would rebound in 2021 by nine percent, but down on an earlier forecast for output growth of 15 percent.

- Negative rates -

The Bank added that it "does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the (bank's) two percent inflation target sustainably".

BoE governor Andrew Bailey told a virtual press conference that negative interest rates were in the bank's "toolbox", but said there were no immediate plans to use the controversial measure.

"The Bank thoroughly bashed the idea of negative interest rates, at least in the next six months or so," noted Ruth Gregory, senior UK economist at Capital Economics research group. 

"It suggested that while negative rates can work in some circumstances, it would be 'less effective as a tool to stimulate the economy' at this time when banks are worried about future loan losses."

- 'Unemployment at 7.5%' -

The BoE on Thursday also forecast that Britain's unemployment rate would shoot higher to around 7.5 percent by the end of the year.

"Employment appears to have fallen since the COVID-19 outbreak, although this has been very significantly mitigated by the extensive take-up of support from temporary government schemes," the minutes said. 

"Surveys indicate that many workers have already returned to work from furlough, but considerable uncertainty remains about the prospects for employment after those support schemes unwind."

UK companies -- from major retailers to airlines -- are axing thousands of jobs despite government efforts to safeguard employment during the pandemic.

The state has been paying up to 80 percent of wages for almost ten million workers under its furlough scheme, which finance minister Rishi Sunak plans to end in October.

Replacing the scheme is a stimulus package worth £30 billion, including bonuses for companies retaining furloughed staff and offering apprenticeships, amid fears of mass youth unemployment resulting from the virus fallout.

Britain's official unemployment rate stands at 3.9 percent, while annual inflation is at 0.6 percent.

Other recent official data showed Britain's economy tanked in the first quarter by 2.2 percent -- the biggest quarterly contraction for more than 40 years. 

Economists expect there to have been a far sharper slump in the second quarter, or three months to June, placing Britain in a technical recession. 

Confirmation is due Wednesday when the first official estimate on second-quarter output is published.

Agence France-Presse

Bank of England rebuilds stimulus war-chest with an extra 100 bln pounds

LONDON - The Bank of England increased its bond-buying program by 100 billion pounds ($125 billion) on Thursday as it sought to help steer the economy away from a record slump in March and April caused by the coronavirus lockdown.

The BoE kept its benchmark interest rate at 0.1%.

Eight members of the nine-strong Monetary Policy Committee voted to increase the bond purchase program while BoE Chief Economist Andy Haldane voted for no increase.

All nine members voted to keep Bank Rate unchanged.

The central bank said it would spend all the extra 100 billion on government bonds but would slow the pace of its purchases, saying it expected the new total 745 billion-pound target would be hit by the end of the year.

A Reuters poll of economists had pointed to a 100 billion-pound increase in the asset purchase program and Bank Rate remaining at 0.1%.

The BoE is using its bond-buying program as its main policy tool as it tries to help steer Britain's economy away from a record 25% slump in March and April.

There was no mention of the negative interest rates - an option the central bank has said it will consider - in the minutes of the BoE's policy meeting.

($1 = 0.7981 pounds) (Reporting by William Schomberg, editing by David Milliken)

-reuters-

Bank of England cuts rates in shock move over coronavirus

LONDON -- The Bank of England unexpectedly cut interest rates by half a percentage point to 0.25 percent on Wednesday in a move to bolster Britain's economy against disruption caused by the coronavirus outbreak.

"Although the magnitude of the economic shock from COVID-19 is highly uncertain, activity is likely to weaken materially in the United Kingdom over the coming months," the BoE said.

The cut was the first move to take place outside the BoE's normal schedule since the 2008 financial crisis, and takes Bank Rate back to the record low it reached after 2016's Brexit referendum.

Finance minister Rishi Sunak is due to present his first budget shortly after 1230 GMT (8:30 p.m. in Manila), which is expected to include more healthcare funding to fight the coronavirus, as well as further economic stimulus.


Sterling sank by more than half a cent against the US dollar after the news of the first rate cut since August 2016.

Last week the US Federal Reserve and the Bank of Canada lowered rates, and the European Central Bank is expected to take action on Thursday.

The BoE did not announce any new quantitative easing bond purchases, but did lower its counter-cyclical capital buffer for banks to zero from 1 percent and launch a new scheme to support lending to small businesses - both measures to keep borrowing flowing.

"Temporary but significant disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies," the BoE said.

source: news.abs-cbn.com

Dollar treads water as key central bank meetings loom

TOKYO -- The dollar trod water against its peers on Monday, as market participants awaited key central bank meetings this week, which could set the near-term course for currencies.

Central banks in focus include the Bank of Japan, which ends a two-day meeting on Tuesday, and the Federal Reserve, which concludes its policy meeting on Wednesday. The Bank of England also makes a policy decision on Thursday.

The dollar index against a basket of 6 major currencies stood little changed at 94.662 after dipping slightly on Friday. Upbeat second quarter US gross domestic product data failed to lift the greenback, as markets had mostly priced in strong figures.

The US currency was 0.05 percent lower at 110.970 yen following a loss of about 0.2 percent on Friday.

Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo, said investors would be more interested in US GDP data that incorporates July, which is when tariffs against Chinese goods were activated.

"On the other hand, the two-year Treasury yield is rising, underscoring strong rate hike expectations in the market. This is limiting the dollar's losses, although movements are likely to be limited ahead of the BOJ meeting," Yamamoto said.

The two-year Treasury yield rose to a decade high of 2.69 towards the end of last week.

The financial markets are keen to see whether the BOJ is mulling taking steps to make its massive stimulus programme more sustainable.

The euro nudged up 0.05 percent to $1.1659, extending Friday's modest gains.

The pound was nearly flat at $1.3110.

Sterling posted its third straight weekly loss last week, hit by concerns about the progress of Brexit talks. It will be looking for some relief on Thursday, when the BoE is widely expected to raise interest rates for only the second time since the 2008 financial crisis.

The Australian dollar dipped 0.05 percent to $0.7398, trimming some of its gains after rising roughly 0.4 percent on Friday against a broadly sagging dollar.

source: news.abs-cbn.com

'Our economy is not broken': UK finance minister defends capitalism

MANCHESTER, England - British finance minister Philip Hammond will defend his Conservative Party's management of the economy on Monday, seeking to stave off rising support for the opposition Labour Party's vision of a more centrally-controlled state.

Hammond is due to speak at the annual Conservative conference - seen as a chance for Prime Minister Theresa May's government to repair relations with the party's grassroots after a damaging botched election in June.


Divided over Brexit from activist level right up to cabinet ministers, and losing public support to a resurgent Labour led by socialist Jeremy Corbyn, May is leading a fragile minority government.

Hammond, finance minister for the center-right party since July 2016, will talk up the merits of a free-market economy.

"Our economy is not broken: it is fundamentally strong," he will say according to advance extracts of his speech.

"The market economy frees people and businesses, encourages them to create, take risks, give ideas a go because they can see the results and benefit from their success."

That view has been challenged by Labour, who last week at their own party conference fleshed out plans for wide scale nationalization, higher government spending, and a more hands-on approach to the banking sector.

Hammond's words echo those of May, who last week issued her own defense of capitalism - a sign of growing concern about the threat Labour poses to the pro-business orthodoxy which has underpinned British economic policy since Margaret Thatcher's reforms in the 1980s.

"As this model comes under renewed assault, we must not be afraid to defend it," he will say.

"While no one suggests a market economy is perfect, it is the best system yet designed for making people steadily better off over time and underpinning strong and sustainable public services for everyone."

But, Hammond's arguments come after 7 years of spending cuts that has tested the patience of the British public and failed to erase a deficit or bring down high levels of national debt.

With Brexit on the horizon, a slowing economy and the Bank of England hinting that interest rates could rise, May's government has little fiscal room for manoeuvre.

Britain's economy grew 0.3 percent in the second quarter after 0.2 percent in the first -- adding up to the slowest growth for any major advanced economy since the start of 2017, according to official statistics.

Last month rating agency Moody's downgraded Britain's credit rating, saying the government's plans to bring down its debt load had been knocked off course and Brexit would weigh on the economy.

The Conservatives will pledge 400 million pounds ($535.00 million) of additional road and rail spending, but Labour said the plans did not go far enough.

"Hammond just wants to continue with the seven years of Tory economic failure that has seen the level of investment in our country fall behind many of our international competitors," Labour's finance policy chief John McDonnell said.

source: news.abs-cbn.com

Dow crosses 22,000 landmark as dollar continues to tumble

NEW YORK - Strong Apple earnings propelled the Dow above 22,000 for the first time Wednesday, marking its sixth straight record close, while the dollar continued to tumble against the euro.

The blue-chip index smashed above the milestone at the open and stayed in positive territory the entire session, finishing at 22,016.24.

Apple was the biggest gainer in the index, rising 4.7 percent after reporting better-than-expected earnings Tuesday and emphasizing its increased sales of digital content and services.

US stocks have risen to a succession of records over the last couple of weeks as second-quarter earnings have broadly bested expectations.

Some observers say stocks could find it hard to score additional gains given the already-lofty valuations, but others still see more potential upside.

"What's going on is good earnings and at the end of the day, earnings drives the markets," said JJ Kinahan, chief market strategist at TD Ameritrade. "It's been a pretty amazing season."

But equity markets elsewhere were mixed, with disappointing earnings at banking giants Societe Generale and Commerzbank weighing on Paris and Frankfurt, respectively.

London also pulled back ahead of Thursday's Bank of England decision.

DOLLAR IN RETREAT

European bourses also were pressured by the rising value of the single currency against the dollar. The euro moved above $1.19 for the first time since January 2015 before retreating somewhat.

"Investors continued to shun the (dollar) amid a backdrop of mounting dysfunction in Washington and mixed US economic data that have done little to encourage bets that the Fed will raise lending rates again this year," said Omer Esiner, analyst at Commonwealth FX.

Kinahan said the sinking dollar was a potential hindrance to future US stock gains.

A move by the euro above $1.20 would "cause significantly more worry," Kinahan said, because it would signal a loss of faith that the Federal Reserve will continue raising interest rates.

That would suggest "that the economy is starting to slow down," he added.

A trigger for further losses in the greenback could come as soon as Friday if the US jobs report for July disappoints and is seen lessening the odds of additional Fed rate hikes.

KEY FIGURES AROUND 2100 GMT (5 a.m. in Manila)

New York - Dow: UP 0.2 percent at 22,016.24 (close)

New York - S&P 500: UP 0.1 percent at 2,477.57 (close)

New York - Nasdaq: DOWN less than 0.1 percent at 6,362.65 (close)

London - FTSE 100: DOWN 0.2 percent at 7,411.43 points (close)

Frankfurt - DAX 30: DOWN 0.6 percent at 12,181.48 (close)

Paris - CAC 40: DOWN 0.4 percent at 5,107.25 (close)

EURO STOXX 50: DOWN 0.5 percent at 3,459.32

Tokyo - Nikkei 225: UP 0.5 percent at 20,080.04 (close)

Hong Kong - Hang Seng: UP 0.2 percent at 27,607.38 (close)

Shanghai - Composite: DOWN 0.2 percent at 3,285.06 (close)

Euro/dollar: UP at $1.1855 from $1.1801 at 2100 GMT on Tuesday

Pound/dollar: UP at $1.3225 from $1.3206

Dollar/yen: UP at 110.72 yen from 110.36 yen

Oil - Brent North Sea: UP 58 cents at $52.36 per barrel

Oil - West Texas Intermediate: UP 43 cents at $49.59 per barrel

burs-jmb/hs

source: news.abs-cbn.com

Dollar on the ropes as Fed deals blow to outlook

NEW YORK - The dollar dropped to a five-week low against a basket of currencies on Thursday, still reeling from the previous session, when a statement from the US Federal Reserve statement failed to signal a much faster pace of monetary policy tightening.

The US currency also slid to a two-week-low against the yen, and a five-week trough versus the euro.

EMBED: https://www.graphiq.com/vlp/dUzywcysOeV

EMBED: https://www.graphiq.com/vlp/2eEdynB062x

The Fed on Wednesday lifted the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1 percent, but stuck to its original forecast of three rate increases this year. Investors were expecting four rate hikes in 2017.

Chicago-based Ron Waliczek, managing director of over-the-counter FX and interest rates at INTL FC Stone, said going into Wednesday's Fed decision, the dollar had been overdone and had been so since 2014.

If ever there was a time when the dollar would consolidate and move lower, Wednesday provided the perfect opportunity as the market built in expectations of a more aggressive rate-hike pace, he said.

"Overall, I think the dollar will continue to be under some pressure for a period of time in which the market has to digest what the Fed is saying," Waliczek said.

In late morning trading, the dollar index fell 0.3 percent to 100.40. It slid to as low as 100.39, its weakest level since Feb 9. Against the yen, the dollar was down 0.1 percent at 113.29, after earlier falling to a two-week trough.

The euro rose to a five-week high against the greenback, and was last at $1.0737, up 0.1 percent.

The single European currency was also buoyed by a Dutch election defeat of far-right leader Geert Wilders, which eased broader fears of a populist drift in European polls this year.

"The Dutch election result was consistent with the opinion polling," said Bank of America G10 currency strategist Kamal Sharma.

"Ultimately, the near term is going to be dominated by French election risks. So we still see that the euro is likely to trade lower heading into those elections," he added.

Sterling, meanwhile, rose on some surprise hints about the chances of a rise in UK interest rates. The pound hit a two-week high of $1.2373, after the Bank of England kept interest rates on hold but gave a handful of hints in voting results and its minutes that it might raise them soon.

The pound was last up 0.6 percent at $1.2360.

source: news.abs-cbn.com

Bond markets set for taste of the 60s as inflation picks up

LONDON - Inflation has a habit of creeping up on you. Just ask historians.

From rates below zero less than a year ago, inflation across the developed world has risen in recent months towards central bank targets, largely driven by a rising oil price.

And if history is any guide, bond markets had better beware.

Paul Schmelzing, a visiting scholar at the Bank of England from Harvard University, has studied 800 years of bond markets history and says the most relevant parallel with today's environment is with the late 1960s under USPresident Richard Nixon.

The United States was emerging from a prolonged period of low inflation, the jobs market was tightening and a new pro-business president had raised expectations of fiscal expansion. It was a bruising time for bond investors.

US bonds lost 36 percent in real price terms between 1965 and 1970, while annual consumer price inflation more than tripled in the period, to 5.9 percent from 1.6 percent.

As the world's biggest bond market, what happens to US Treasuries usually sets the tone for bonds across the world.

The specter of what Schmelzing describes as an "inflation reversal" could be the final nail in the coffin of a 36-year bull run in government bonds that has been underpinned by years of low growth and subdued inflationary pressures.

"If you look at inflation expectations in the 1960s, no one expected them to rise so quickly but inflation can accelerate quickly and take people by surprise," said Schmelzing.

Based on historical standards, bonds could be set for double-digit losses, he said.

Other elements of previous sell-offs are also coming into play, creating the potential for a "perfect storm" for fixed income assets, he added.

This includes a sudden steepening in yield curves, as witnessed in a sharp sell-off in Japan in 2003.

END OF AN ERA?

Bond yields globally have risen recently on Trump "reflation" bets and growing signs of strength in the global economy.

US 10-year yields have risen about 65 basis points since the November election to around 2.50 percent, and German Bund yields -- the euro zone benchmark -- are near one-year highs just under 0.50 percent.

Based on his analysis of bond bear markets, Schmelzing said that what is currently priced into market inflation expectations may be conservative.
A sharp jump in yields on signs that inflation is taking off could be painful for bond investors and hurt savers.

The interest rate on benchmark Bunds, for instance, is just 0.25 percent, so even a slight rise in yield can outweigh an investor's return and spark a snowballing sell-off.

The 2015 "Bund tantrum" provided a taste of what happens when investors sense inflation building -- German yields rose sharply from record lows as data pointed to an inflation uptick.

What that episode showed, said Schmelzing, is that inflation remains the key driver for bond markets. But what is different to 2015 is that the uptick in inflation appears more enduring.

US average hourly earnings rose 2.9 percent in December, the largest year-on-year increase since 2009, and Germany's unemployment rate is at its lowest level since reunification in 1990 -- suggesting the jobs market in Europe's biggest economy is tightening.

China's producer prices surged the most in more than five years in December, while in the UK, many economists expect inflation will hit 3 percent later this year -- well above the Bank of England's 2 percent target.

"What is changing is that we are no longer looking at economies with a lot of slack in them," said Lombard chief economist Charles Dumas.

Pictet estimates annual returns in the next 10 years from US Treasuries could be less than half the 4.8 percent of the past 10 years, while German Bunds, will on average deliver negative returns.

For some investors, there is now a clear risk from the trajectory for higher interest rates.

"The risk is greater for bond holders about rising interest rates now than at any point since the financial crisis," said Payson Swaffield, Chief Income Investment Officer at Eaton Vance, an asset management firm with $354 billion in assets. "There will be periods where we will question that, but I believe the landscape has changed."

source: news.abs-cbn.com

British shoppers defy Brexit shock as spending jumps in July

LONDON - Shoppers in Britain shrugged off June's shock Brexit vote as retail sales jumped by much more than expected last month, adding to signs there has been little immediate hit for consumers.

Warm weather boosted clothes sales and the pound's plunge tempted overseas buyers to splash out on luxury items such as watches and jewelry, official data showed on Thursday.

These are the first official figures to shed light on how consumer demand has performed since the unexpected decision by voters to leave the European Union in the June 23 referendum.

Data released earlier this week also showed little immediate impact of the Brexit vote on the labor market but there were signs of inflation pressures building after the plunge in sterling, which could eat into the spending power of households going forward.

Sentiment surveys have shown levels of concern, but actual retail sales volumes surged 1.4 percent in July compared with June, the Office for National Statistics said, topping all forecasts in a Reuters poll that pointed to a much smaller rise of 0.2 percent.

The pound rose half a cent against the dollar and British gilt (bond) futures pared gains after the data release.

"This positive surprise is encouraging for (third quarter) growth, but with consumer confidence having plunged in the wake of Brexit and business surveys suggesting growing caution, we doubt that it is sustainable," said James Knightley, economist at ING.

"Inflation is starting to rise and will continue to do so due to the steep fall in sterling, meaning that real household income growth will weaken. This is likely to limit retail sales growth in coming quarters."

BANK OF ENGLAND WATCHING

The ONS retail sales figures are volatile and Bank of England policymakers will want to see more than one month's data before drawing firm conclusions about the health of consumer spending - a key pillar of British economic recently.

"Better weather this year could be a major factor with sales of clothing and footwear doing particularly well," said Joe Grice, chief economic adviser at the ONS.

"There is also anecdotal evidence from respondents suggesting the weaker pound has encouraged overseas visitors to spend."

Sales of watches and jewelry were up 16.6 percent in July compared with the same month last year - the biggest jump in nearly two years.

Major retailers including Tesco, Next and John Lewis say they have not been affected so far by the referendum result, while the British Retail Consortium also said spending in shops bounced in July.

But the long-running GfK survey - the main measure of consumer morale and an indicator of future household spending over the years - suffered its sharpest drop since 1990 last month.

Compared with a year earlier, July sales growth jumped to 5.9 percent, the biggest rise since September of last year and far stronger than the 4.2 percent forecast, Thursday's data showed.

The BoE more than halved its forecasts for household spending over the next two years in light of the vote to leave the EU. It now expects growth in spending of 1.0 percent and 0.75 percent in 2017 and 2018 respectively as lower growth in wages and higher inflation eat into spending power.

source: www.abs-cbnnews.com

A boost for the remortgage market

So June the 23rd delivered a momentous decision that few were expecting. The shock has not been the result so much as to how people have behaved subsequently: the Prime Minister has resigned, the labour shadow cabinet has thrown their toys out of the pram regarding the leadership of their party, while Nicola Sturgeon opportunistically wants to fragment the kingdom still further with, ironically, a vote for independence that will make the Scots less independent.

Ultimately however, democracy has taken its course and a vote has been taken, now it is time for everyone to pull together, regardless of political persuasion, or which way you voted.  It is time to look to the future of our great country and make it a success. This will only happen by everyone working together to make it so.  The more there is division the more that people who want to see the UK fail will start to gain a foothold.

So to the mortgage market. Mortgage rates were dropping for many weeks before the referendum and we had already seen the launch of the lowest ever fixed rate. Lenders have continued to lower interest rates, with a sub 1% rate being launched by HSBC before the referendum, and it looks like rates will not be going up any time soon.

In this respect it seems like what the politicians are forecasting and what is actually happening on the ground is pulling in separate directions and predictions are often little indication of what will actually happen.

In fact it is almost impossible to judge, partly because even the people meant to be making many of the pivotal decisions still do not know what decisions to make themselves. At the time of writing Mark Carney is unsure whether he will need to lower rates to boost spending or whether he will need to raise them as we may have an inflationary situation because the cost of oil will rise, as will other things dependent on the sterling/dollar exchange rate.

While swap rates have been falling for some time, giving banks access to cheap three and six month money, there is a chance that funds further down the line may be more expensive if UK banks find it harder to access money from the money markets. This would raise the cost of mortgages regardless of what the Bank of England does. However, there is certainly no shortage of money to be lent at the moment which is contributing to the incredibly low rates.

Either way this is arguably good news for the mortgage market right now as we may well see the number of remortgages rise. On the one hand we have the lowest mortgage rates we have ever had, on the other there is a prospect that they may rise in three to six months. Both of which mean if ever there has been a time for mortgage brokers to get in touch with their clients, now is it.

source: mortgageintroducer.com

Asian shares hover near 8-month peak on BoE rate cut hope

TOKYO/SINGAPORE - Asian shares remained near an eight-month high on Thursday as investors bet the Bank of England will cut rates to ward off recession following Britain's vote to leave the European Union.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 percent, hovering near the highest level since November it reached on Wednesday. Japan's Nikkei added 0.8 percent.

Chinese stocks, however, were lower, with the CSI 300 index slipping 0.3 percent and the Shanghai Composite down 0.4 percent. Hong Kong's Hang Seng was little changed.

U.S. stocks ticked up on Wednesday, just enough for the S&P 500 and Dow industrials to set record highs, with investors expecting upbeat earnings to keep the rally going.

Wall Street shares have quickly recovered the losses triggered by Britain's vote on June 23 to leave the European Union, driven by solid U.S. economic data.

"Brexit doesn't mean a breakdown of the global financial system after all, nor a major slowdown in the economies outside the UK," said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank in Tokyo. "Investor activity is slowing down after June 24 but uncertainty is gradually easing."

In addition, concerns that Brexit could disrupt European economies effectively took a Federal Reserve rate hike off the agenda in the near future, and boosted expectations of more monetary stimulus from central banks in Europe and Japan.

Financial markets expect the Bank of England to announce a rate cut later on Thursday. Governor Mark Carney has hinted he may ease policy to cushion the economy from the Brexit shock.

The British pound advanced 0.3 percent to $1.3194 on Thursday. Sterling climbed to this week's high of $1.3340 on Wednesday as political uncertainty eased following the appointment of Theresa May as prime minister.

But it ended the day down 1.4 percent from that peak after May named leading Brexit supporters to key positions in her new government, including former London mayor Boris Johnson as foreign secretary, and attention shifted toward a possible rate cut by the Bank of England.

"The Brexit vote appears to be having a psychological effect as informal measures of consumer confidence have already fallen precipitously," David Lafferty, chief market strategist at Natixis Global Asset Management, wrote in a note.

"Having argued that Brexit may lead to recession, it may be difficult for (Carney) to justify postponing a rate cut."

The euro was stuck in its familiar range and last stood up 0.2 percent at $1.1108.

While the European Central Bank is expected to keep policy on hold at its meeting next week, the euro's overnight index swaps were pricing in further rate cuts over coming months.

The yen, which slid 3.9 percent over the first three days of this week, extended losses by 0.2 percent to 104.75 to the dollar.

Japanese Prime Minister Shinzo Abe called for fiscal stimulus, expected to reach about two percent of GDP, following his election victory on Sunday.

Oil prices bounced back after losses of over 4 percent on Wednesday that erased most of the previous session's gains, as a run of bearish U.S. inventory data heightened concerns about a global glut.

Global benchmark Brent crude futures gained 1.2 percent to $46.79 per barrel.

U.S. crude added 1 percent to $45.18.

The revival in risk appetite weighed on gold. Spot gold retreated 0.3 percent to $1,338.40 an ounce.

source: www.abs-cbnnews.com

Asia stocks plummet, yen soars as risk aversion grips markets

HONG KONG - Asian stocks fell the most in more than four months and the Japanese yen jumped on Monday as risky assets took a hammering before key central bank meetings this week and while investors await Britain's stay-or-go referendum on European Union membership.

Further sapping confidence over recent days has been a steady drip of economic data that has highlighted an underpowered world economy despite years of heavy stimulus delivered by central banks.

European shares are set to open lower with spreadbetters expecting Britain's FTSE 100 to open down 0.4 percent, Germany's DAX to slip 0.8 percent, and France's CAC 40 to fall 0.9 percent.

The U.S. Federal Reserve, Bank of England, Swiss National Bank and the Bank of Japan will meet this week. All are expected to hold monetary policy steady against a backdrop of caution heightened by the global impact of a possible Brexit.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.7 percent, its biggest daily drop since Feb. 11. It is down almost 4 percent in the last two sessions.

Japanese stocks led regional losses with the benchmark index falling 3.2 percent in choppy trade.

"There are many long-term investors who have given up on Japanese stocks as there are no structural reforms being delivered. Meanwhile, monetary policy decisions only have short-term effects," said Michiro Naito, executive director at equity derivatives at JPMorgan who recently visited Asian investors.

Net selling by foreign investors from January through May was roughly 4.5 trillion yen ($42.07 billion) in Japanese cash equities, according to exchange data, a stark turn from net purchases of about 2.83 trillion yen in the same period last year.

Investors hunting for bright spots in Asia this year in China and India have also been disappointed by poor data.

Latest data showed China's fixed-asset investment growth cooling to 9.6 percent in January-May from the same period a year earlier, below market expectations, while the statistics bureau said downward pressures still exist in the economy.

"We have downgraded the China market because of the debt problems and we think by the third quarter, growth numbers would start reflecting a broader slowdown," said Francis Cheung, head of China and Hong Kong strategy at CLSA.

Reflecting the bearish sentiment, S&P e-mini futures were down 0.4 percent in Asia after Wall Street marked steep losses on Friday. A shooting spree in Orlando, Florida, in which 50 people were killed and similar number wounded only added to the pessimism.

In currency markets, the mood was one of risk aversion with the Japanese yen rising to a five-week high against the dollar.

The yen was trading at 105.88 per dollar, its lowest since May 3.

The British pound has whipsawed in recent weeks on news related to the June 23 referendum on its EU membership.

Early on Monday, the pound fell to as low as 150.63 yen, its lowest level since August 2013 while the euro fell to 119.16 yen, a level last seen in Feb. 2013.

Two polls on Saturday showed British voters were still divided on whether to stay or go.

"Ahead of the referendum, many look for sterling to underperform and the yen and Swiss franc to outperform," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said in a note.

"The euro and central and eastern European currencies are vulnerable, while risk assets, in general, are expected to weaken on a Brexit victory," he said.

Crude oil futures extended losses after falling 3 percent on Friday, pressured by the stronger dollar and data showing the U.S. oil drilling rig count rose for the second week in row.

U.S. crude futures fell 1.1 percent to $48.51 a barrel, while Brent slipped 1 percent to $50.03.

Government bonds benefited with the yield on the 10-year Japanese bond marking yet another record low.

Yields on JGBs with maturities out to 15-years were well into negative territory.

Gold rose, hovering close to three-week highs. Spot gold added 0.1 percent to $1,275.16 an ounce.

source: www.abs-cbnnews.com

Outlook still cloudy for British economy

LONDON - Bank of England chief Mervyn King suggested this week the "black cloud" over the economy may be lifting, but with assets buoyant and the pound feeble, what investors think of Britain's growth prospects is less clear.

King surprised markets by saying on Thursday he saw "momentum" behind a UK recovery that will emerge this year, and that sterling was fairly valued after a recent tumble.

The pound's broad exchange rate index, which has plunged up to 7 percent in 2013, promptly perked up a bit.

Sterling remains about 25 percent lower on a trade-weighted basis than before the crisis that started in 2007, however, while soaring British stock prices appear in step with King's new-found optimism.

But which more accurately reflects investors' views of the British economy after a long period during which financial sector retrenchment, household deleveraging and fiscal austerity have meant little or no growth?

Pessimists feel the rhetorical shift by King, who talked last year of a "black cloud of uncertainty" over the economy, may simply be aimed at shoring up sterling to prevent "stagflation", where a free-falling pound aggravates import inflation even as growth flatlines.

Others say the gloom is probably overdone.

Standard Life Investments director Jonathan Gibbs said he is skeptical stagflation has taken hold, and that even if such a toxic combination persisted, it would not mean a repeat of the dire 1970s economic and investment environment the term evokes.

"We would argue that the medium-term return environment is continuing to improve," said Gibbs. UK markets' exposure to global reflation and recovery rather than the sluggish domestic economy is helping drive equity and real estate performance, he added, while investors are also seeking inflation protection.

The slow beginnings of a worldwide shift in asset allocations from expensive low-yielding bonds to equities is also a support for the stock market, which hit five-year highs this week, Gibbs said.

Citi economist Robert Buckland said the rally in UK and U.S. equities is driven mainly by valuations, with the state of the domestic economy almost beside the point, and reflects a similar rebound of earnings per share (EPS) back above 2007 levels.

Cyclically-adjusted price/earnings estimates for British stocks are still about 15 percent below 40-year averages despite recent gains.

"If economic growth, or lack of it, was all that mattered, then we would expect the GEMs (Global Emerging Markets) and Asia ex-Japan equity markets to be hitting all-time highs, which is not the case," Buckland wrote.

STERLING OFFSET

But for overseas investors, who according to the Office for National Statistics own more than 40 percent of Britain's stock market, the key issue may be the performance of sterling.

A dollar-based fund invested in the FTSE 100, which has gained 10 percent in 2013, would have seen its gains reduced to just 3 percent once the falling pound is taken into account.

With 10-year gilts offering annual yields of less than 2 percent, a sustained exchange rate move like the one we've seen this year is also a potential wipeout for bond investors.

And as few expect any let-up in government's fiscal squeeze in next week's annual budget, the pound will ultimately take its cue from whether the central bank moves again to support the economy by printing more money to buy bonds.

That's why yields on gilts, a third of which are already owned by the Bank of England, remain so low despite rising inflation expectations, the loss of Britain's triple-A credit rating and a general retreat from core government debt.

Sub-2-percent 10-year yields stand in stark contrast to 10-year inflation expectations as high as 3.3 percent, as read from the inflation-protected bond market.

Bank of England minutes next week will reveal whether King still favors more bond-buying and if he's winning the debate among fellow monetary policymakers. Beyond that, new governor Mark Carney is widely expected to be given a more dovish mandate when he takes over from King in July.

So if strength in gilts is at least partly a monetary illusion conjured up by current and expected quantitative easing, is the FTSE's surge - to all-time highs on total returns indices - also a QE distortion?

Buckland at Citi said there was little to back that up.

"If QE has been important in driving share prices up, it seems to be more through its fundamental support of EPS than its ability to inflate valuations," he said. "Some of this support might come from the ability of QE to weaken the currency and so boost stock market EPS."

The pounds' fall, then, is a double-edged sword, as the 'currency wars' debate and Japan's reflation push attests.

While some investors see a healing global economy and employment data that is more upbeat than backward-looking growth figures as supporting King's line, others feel the pound will continue to feel the heat for a variety of reasons.

Scott Thiel, Head of European and Global Bonds at the world's biggest asset manager BlackRock, told Reuters earlier this month the pound had further to fall, reflecting political uncertainty as much as the economic picture.

He cited questions about the stability of the governing coalition, rifts within the ruling Conservative Party and a promised referendum on European Union membership.

"Introducing the idea of British vote on European Union membership is a negative for how investors view the UK. A 'No' vote would be negative because of the amount of connectivity between the UK and EU is so unbelievably high," Thiel said.

"If you're starting a company ... you need a multi-year plan.

"If there is the possibility that in five to six years you're going to have to go through this Y2K-type problem, it will impede your 'animal spirits', as it were - your decision to hire, or open a new plant."

source: abs-cbnnews.com