Brexit would drive pound down to parity with euro, warns UBS - as it happened

Discussion in 'Market News' started by Lily, Feb 29, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    All the day’s economic and financial news, as UBS says sterling would suffer a sharp correction if Britain votes to leave the EU

    In other news:

    5.40pm GMT

    Despite continuing worries about the global economy, as well as disappointment that there were no new stimulus measures announced by G20 finance ministers following their meeting in Shanghai, shares held up pretty well on the last day of the month.

    A rise in crude prices after comments from Saudi Arabia about wanting to limit volatilty helped support markets, as did news that China was acting to try and boost bank lending and reduce borrowing costs. So the final scores in Europe showed:

    4.44pm GMT

    As European markets close in mixed fashion, Tony Cross, market analyst at Trustnet Direct, said:

    London’s FTSE-100 is finishing up the day’s session broadly flat – we’re still below where we started the year, but sentiment does appear to be on the up. There was disappointment that we didn’t see more clarity out of the G20 meeting at the weekend, so it’s arguably quite surprising that we haven’t seen additional downside pressures as a result. ...

    Where March takes the market remains to be seen – the tide does appear to have turned with regard to London’s FTSE-100 now being well beyond bear market territory and critically oil prices appear to be nudging higher, too. That said, the support we’re seeing for gold does suggest that there’s still a lack of confidence when it comes to the medium term view.

    4.13pm GMT

    An unexpected drop in US home sales adds to the weak data already seen. Reuters reports:

    Contracts to buy previously owned U.S. homes fell to their lowest level in a year in January, likely weighed down by harsh weather and a shortage of properties for sale, a report showed on Monday.

    The National Association of Realtors said its pending home sales index declined 2.5 percent to 106.0, the lowest level since January of last year. Economists polled by Reuters had forecast contracts rising 0.5 percent last month.

    4.09pm GMT

    The rally in stock markets could continue despite today’s uncertain performance, says Chris Beauchamp at IG:

    February is going out on a dull note, with markets around the globe ending the month in mixed form. Europe and the UK are broadly lower, with an absence of heavyweight economic and corporate news (after all, who wants to publish data on a leap day?) adding to the general lack of direction.

    The real fireworks come later in the week, with China data galore and then US non-farms on Friday. As a result, some of the month’s gains are being booked with an eye to buffing up returns for February. However, while this rally has been in effect for two weeks now, it doesn’t really show much sign of stopping, especially since we are hitting a strong historical period for stocks. So long as everyone keeps looking for a reason for the next selloff, the default direction for the market is upwards.

    4.06pm GMT

    China will kick off the manufacturing PMI numbers for February tonight, and there could well be a big impact on market sentiment:

    Last three #FTSE100 sell-offs coincide with disappointing China PMI Manuf data, which is out overnight. #Justsaying

    3.58pm GMT

    More downbeat data from the US:

    Dallas Fed Manufacturing Activity (Feb) -31.8 versus -30.0 expected, previous -34.6

    3.46pm GMT

    The planned merger between the London Stock Exchange and Deutsche Börse poses competition issues, according to France’s economy minister Emmanuel Macron.

    The deal would hit smaller exchanges such as Euronext Paris. Macron told reporters (quotes courtesy Reuters):

    We will assess the consequences in strategic terms for Paris’ financial centre.

    I think we should assess the possible consequences of a Brexit on such a merger.

    3.19pm GMT

    The G20 was right to list a UK exit from the European Union as a potential risk to the global economy in its statement following last week’s meeting of finance ministers in Shanghai, says Capital Economics.

    But the research group’s chief global economist Julian Jessop said:

    However, the negative impacts of ‘Brexit’ are likely to be smaller than many fear, including the short-term costs to the UK itself. More speculatively, there may even be some positives for the world economy – notably the additional pressure for more growth-friendly policies in the remainder of the EU.

    In our view... while Brexit would have global ramifications, these should not be overstated, nor need they all be negative. For a start, we doubt the disruption to the UK economy would be as large as many fear. In particular, the uncertainties about the UK’s relations with the rest of Europe could be reduced during the period of negotiations before exit actually takes place. And unlike some potential euro departures, the UK already has its own currency and would be opting to leave rather than being pushed out. The UK would surely also swiftly reassert its commitment to international organisations like NATO and to cooperation with other Western powers in areas of common geopolitical interests.

    2.59pm GMT

    Meanwhile there are more signs of weakness in the US economy, with the Chicago purchasing managers index coming in lower than expected.

    The index fell from 55.6 in January to 47.6 in February, compared to forecasts of a figure of 53. The PMIs for the US as a whole are due on Tuesday (along with the data for Europe and the UK among others).

    2.53pm GMT

    US markets are marginally higher in early trading, helped by a rise in the oil price.

    Brent crude is currently up 1.9% at $35.78 a barrel on hopes that oil producers could act to stem the slide in prices. That was helped by Saudi Arabia saying in a statement that it “seeks to achieve stability in the oil markets and will always remain in contact with all main producers in an attempt to limit volatility and it welcomes any co-operative action.”

    2.41pm GMT

    Directors at Royal Bank of Scotland must be hoping the shares have reached their bottom.

    Chief executive Ross McEwan and finance director Ewen Stevenson have both spent nearly £450,000 or 223p a share on buying 200,000 shares, while chairman Howard Davis has snapped up 40,000 at 222p each.

    2.25pm GMT

    With the eurozone falling back into deflation, the odds on the European Central Bank acting at its meeting next week are growing.

    SG expects #ECB to cut depo rate by 20bps in Mar to -0.5% & to extend QE til Dec2017. Sees BS to grow to 39% of GDP

    2.15pm GMT

    Time for a quick recap.

    Britain has been warned that the pound could slide to parity with the euro if the public votes to leave the EU. Analysts at UBS predicted that sterling would lose around 20% of its value after Brexit, but would strengthen if the Remain side win.

    In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU. ...

    We think that the result of the referendum will be one of the UK to remain in the EU, thus our forecast is that sterling will eventually strengthen back to 73p. However, we expect some further weakness of sterling between now and the vote on 23 June.

    Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other.

    1.39pm GMT

    Back in the UK, Amazon has sent shivers through the supermarket sector through a new deal with Morrisons.

    It’s now game on for the rest of the Big Four, who suddenly don’t look so big after all.

    Tesco could soon be about to find out what it’s like to be David rather than Goliath.”The problem for the Big Four is that if you pay £79 a year for Amazon Prime, you get the delivery free. Amazon seems content to deliver at a loss indefinitely.

    Related: Amazon enters fresh food market with Morrisons deal

    1.04pm GMT

    Gerard Lyons, chief economic advisor to London mayor (and Brexit campaigner) Boris Johnson, is tweeting about the Chinese RRR cut too.

    He believes it should help the economy, but also warns it could intensify talk of a currency war (the yuan hit a three-week low when the news was announced)

    1/ China's decision to cut reserve requirement ratio today by 0.5% was a good one & highlights the scope they have to ease monetary policy

    2/ The Chinese authorities have indicated clearly - and they did so again before the G20 - that they have scope to ease monetary policy

    3/ While other G20 countries will naturally welcome China's attempts to stimulate growth they will also closely watch currency implications

    4/ China has had falling producer prices for some time, low inflation & capital outflows so reserve requirement cut will boost liquidity.

    5/ China still has scope to cut reserve requirements further and also plenty of room to ease rates, even towards zero if it so wished,.

    6/ Ahead of the imminent Chinese Communist Party meeting & in the wake of G20 the authorities will be keen to use policy to stimulate growth

    7/ The authorities will also be keen to manage the challenge of easier policy without triggering too aggressive a weakening of the currency.

    8/ And we shouldn't overlook the scope for active fiscal policy, again fits with the G20, & also fits with the needs of the domestic economy

    12.59pm GMT

    Philip Uglow, chief economist at MNI Indicators, suggests China was right to cut the reserve requirements on its banks today, given its weakening economy.

    He says:

    “Given the continued slowdown in the Chinese economy, it was not too surprising to see the central bank step in once again and loosen policy. The reserve requirement still remains at a relatively high level and there is plenty of room for more easing if needed.

    Our own survey data showed a significant weakening in February, with the MNI China Business Sentiment Indicator dipping below the all-important 50 mark. The Westpac MNI China Consumer Sentiment Indicator also turned lower in February, clouding the outlook for spending over the coming months.”

    12.49pm GMT

    Britain’s smaller City banks and investment companies are being spared new European rules on bonuses, designed to avoid excessive risk-taking.

    Since the introduction of the bonus cap, a number of firms have markedly increased fixed pay as a percentage of total pay, whilst total pay remained stable during the same period.

    The PRA and FCA believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks subsequently come to light.

    UK regulators have said they're going to refuse to impose EU bank bonus regulations on small firms... Could cause a row.

    Funnily enough, EU authorities admit they never intended all these rules to apply to small firms. But they wrote the legislation wrong

    12.05pm GMT

    Money is continuing to pour into Eurozone government debt this morning.

    This is driving down the interest rate, or yield, on safe-haven bonds.

    10-year Bund yields at a 10-month low, on track for their largest quarterly drop since 2011

    11.42am GMT

    Debt campaigners have welcomed Mervyn King’s warning that a “significant proportion” of Greece’s debts must be written off.

    But Tim Jones, economist at the Jubilee Debt Campaign, also warns that the current proposals for debt relief fall short:

    “Lord King’s comments are yet another acknowledgment that Greece needs substantial debt cancellation, both for its own recovery, and the wider European economy.

    Yet even if implemented, the current discussions on debt relief for Greece would not reduce payments for at least 15 years, and would leave them 10 times higher than Germany was paying after it had substantial debt cancellation in 1953.”

    11.25am GMT

    It takes more than a global market rout to alarm Warren Buffett.

    The billionaire US investor is sounding remarkably relaxed this morning, as he appears on CNBC.

    Buffett to CNBC on markets: "Not much" happened in the markets over recent period; stocks will go up over time.

    11.13am GMT

    Today’s surprise cut in China’s Reserve Requirement Ratio will help stabilise the Chinese financial system, says Duncan Innes-Ker of the Economist Intelligence Unit.

    “The latest cut in the RRR shows the central bank straining to maintain loose monetary conditions in a difficult economic climate. The move will partly offset the effects of capital outflows from China and the provisioning requirements that are forcing banks to lock up more funds as non-performing loans climb.

    However, the surge in loans in January highlighted concerns that bank lending may be spiralling out of control. Ultimately, China’s economy cannot grow on credit alone. It needs further reforms to unlock productivity growth.”

    China RRR cuts. Room for more.

    10.41am GMT

    Today’s in deflation figures also show that the ECB’s existing stimulus programme hasn’t actually worked yet.

    The ECB is buying €60bn of assets each month, widening its balance sheet, but having little obvious impact on the consumer prices index (CPI)

    Slap in the face: #ECB's QE has failed as #Eurozone back in deflation again.

    10.35am GMT

    The eurozone’s lurch back into deflation means Mario Draghi is certain to announce new measures to stimulate the European economy in two week’s time.

    So argues Teunis Brosens of ING, who writes:

    The weakening of core inflation shows the real and present danger that cheap oil will cause low inflation to become ingrained in Eurozone price and wage dynamics. This is especially bad for debt-laden households, businesses and governments in Southern Europe, which will have little scope to “inflate away” their debt burden by increasing nominal wages.

    Today’s weak core inflation gives doves the upper hand at next week’s ECB-meeting and therefore pretty much seals the deal on additional monetary easing.

    10.18am GMT

    In another alarming sign, the eurozone has slumped back into deflation for the first time in five months.

    Prices across the single currency region fell by 0.2% in February, according to data just released by Eurostat.

    #Euro-area consumer prices fall most in year as #ECB mulls easing via @aspeciale

    10.11am GMT

    Did the #PBOC of China agree to cut the #RRR at G20 ?

    10.08am GMT

    The Chinese central bank says it cut the RRR rate, to guarantee “ample liquidity” in the financial sector, and to encourage “appropriate growth” in the credit market.

    The 50bp cut lowers the Reserve Requirement Ratio to 17%, meaning banks need to hold fewer assets in reserve and can offer cheaper credit.

    Stocks erase some of declines after #China cuts reserve ratio for banks, adding stimulus

    10.03am GMT

    Breaking news from China! The People’s Bank of China has just eased monetary policy, by cutting the RRR - or Reserve Rate Requirement.


    9.39am GMT

    Swiss bank UBS has just piled into the Brexit debate, saying there is a 40% chance that Britain will vote to leave the EU in June.

    In a new report, UBS predicts that sterling would be hit hard if Britain left the EU.

    The United Kingdom reached an agreement with the European Union and the UK announced that the referendum vote will take place on 23 June 2016 (see “Brexit: An ever closer referendum”). We map out where the pound could go in the event of a “Brexit”, how much of a rebound is likely with a vote to “Remain”, and the potential for further currency weakness between now and June.

    We think that EUR/GBP should revert to the 0.73 level, near which it spent most of last year. In our view, the largest part of the weakness in sterling since November can be attributed to increased concern over the possibility of exit from the EU.

    We estimate the exchange rate level that would accommodate a sharp correction in the UK’s current account deficit and find that EUR/GBP could go to parity.

    We assign a 60% probability to the UK staying in the EU and up to 40% probability of a vote to leave, as we have argued previously based on published opinion polls.

    We think that the result of the referendum will be one of the UK to remain in the EU, thus our forecast is that sterling will eventually strengthen back to 0.73. However, we expect some further weakness of sterling between now and the vote on 23 June.

    The price action so far makes it clear that sterling would weaken in the event of an exit vote. We think that the market would re-price to parity – and to the extent that it could accommodate a shift in the current account by 2.7% of GDP.

    9.36am GMT

    Breaking: UK mortgage approvals have hit their highest level in two years.

    A total of 74,600 new home loans were approved last month, implying that the British housing market remains pretty robust.

    UK mortgage rates hit new record low at avg. 2.96% in Jan as mortgage approvals rise to 2 yr high @bankofengland.


    9.20am GMT

    Here’s a jaw-dropping fact -- China is planning to lay off almost two million workers from its coal and steel industry.

    Yin Weimin, the minister for human resources and social security, told a news conference on Monday that 1.3 million workers in the coal sector could lose their jobs, plus 500,000 from the steel sector.

    China’s coal and steel sectors employ about 12 million workers, according to data published by the National Bureau of Statistics.

    Related: China to cut 1.8m jobs in coal and steel sectors

    8.46am GMT

    European stock markets have opened lower, amid disappointment that the world’s top finance ministers didn’t announce any concrete measures at their meeting last week.

    In London, the FTSE 100 has shed 38 points, or 0.6%, to 6057 points.

    Markets are kicking off the last trading day of February on a rather downbeat note with the weekend’s G20 meeting of finance ministers in Shanghai almost appearing to have muddied the waters, rather than provided any clarity.

    Policymakers appear to be in agreement that they need to act in a coordinated manner, but given the reactions we’ve seen so far, that certainly doesn’t appear to be the case.

    Related: UK officials 'instigated G20 Brexit warning'

    8.21am GMT

    Mervyn King also warns that Greece needs debt relief and a cheaper currency:

    As he puts it:

    It is evident, as it has been for a very long while, that the only way forward for Greece is to default on (or be forgiven) a substantial proportion of its debt burden and to devalue its currency so that exports and the substitution of domestic products for imports can compensate for the depressing effects of the fiscal contraction imposed to date.

    "It is evident that the only way forward for Greece is to default [...] and to devalue its currency." M'kayy Mervyn King.

    I liked it better when Mervyn King was boring.

    8.19am GMT

    The Chinese stock market has closed at its lowest level in a month, as fears over the global economy dogged trading floors again.

    At one stage, the Shanghai Composite was heading for a 15-month low, before finishing down 2.8%.

    [Finance ministers delivered an]....admission of downside growth risks but no tangible commitments to fiscal policy action in particular to bolster growth in the short term”

    China's stocks hit 15-month low after only vague G20 commitments on growth

    8.18am GMT

    As a devoted Aston Villa fan, Lord Mervyn King must have relegation on the brain right now.

    EG: I simply don't understand the case for "temporary" Euro exit. Huge invite to speculative attack. Either it's irreversible or it isn't.

    8.10am GMT

    Ambrose Evans-Pritchard, the Telegraph’s international business editor, reckons King’s intervention is very significant.

    This is huge. Nobody has more credibility than Mervyn King. If Otmar Issing joins him, walls will come crashing down

    7.56am GMT

    Lord King also suggests that Germany, rather than Greece, might pull the trigger on the eurozone.

    He writes:

    Germany faces a terrible choice. Should it support the weaker brethren in the euro area at great and unending cost to its taxpayers, or should it call a halt to the project of monetary union across the whole of Europe?

    The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit.

    7.47am GMT

    Mervyn King, the former governor of the Bank of England, has fired a fierce broadside at the eurozone - claiming the single currency block may be doomed.

    “Monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous.”

    The more likely cause of a break- up of the euro area is that voters in the south will tire of the grinding and relentless burden of mass unemployment and the emigration of talented young people. The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight.

    If the members of the euro decide to hang together, the burden of servicing external debts may become too great to remain consistent with political stability.

    7.24am GMT

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

    It may be February 29th, but investors aren’t exactly leaping for joy this morning. Asian markets are falling, and European bourses are likely to follow suit.

    Down day ahead...disappointment on no coordinated action from #G20

    Continue reading...

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