Non-essential shops and services have reopened across England and Wales as lockdown rules are eased across the UK.
Gyms, hairdressers and zoos can now reopen, while pubs and restaurants are able to host customers in outdoor areas. Prime Minister Boris Johnson has urged people taking advantage of the eased restrictions to “behave responsibly” and continue to exercise advised steps to reduce the likelihood of contracting or spreading coronavirus.
Non-essential shops have been closed since 5 January when a third national lockdown was announced in England and similar measures imposed across the devolved nations. This new easing of restrictions coincides with the relaxing of Northern Ireland’s stay-at-home orders and other restrictions in Scotland and Wales.
58% of small businesses predict that their performance will improve this quarter as a result of these slackening restrictions, the highest proportion since the summer of 2015. Conversely, fewer than 24% anticipate a fall in sales.
“We’ve seen a phenomenal increase in bookings since the government confirmed restaurants can open on Monday,” said Patrick Hooykas, managing director of TheFork, formally known as Bookatable. “This week alone we’ve seen an 88% uplift in bookings.”
The pound also opened the week holding steady following heavy losses in the days prior. The GBP/EUR exchange rate fell over 2% over the past week before settling at €1.1514 on Friday.
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As of 05:16 UTC on Monday, GBP/EUR was trading -0.03% at €1.1509.
More than 32 million UK residents have now received a first dose of a COVID-19 vaccine. Last Sunday saw a reported seven deaths within 28 days of a positive COVID-19 test, the lowest daily total since 14 September.
More than 30 countries have imposed travel bans on the UK after a new strain of COVID-19 – which may be as much as 70% more infectious than the original strain – was detected in the country. Nations closing their borders include France, Germany, Italy, the Netherlands, Austria, Belgium and Israel.
Some of the travel bans imposed on the UK will last for 48 hours as leaders formulate plans to contain the spread of the mutant COVID-19 strain, while others are set to last until the end of January.
The news has caused immense disruption to accompanied UK freight, with the immediate future uncertain for the 10,000 lorries that pass through Dover each day. British supermarket group Sainsbury’s warned on Monday of fresh produce shortages if transport between the UK and Europe is not quickly restored.
The FTSE 100, London’s blue-chip index, fell as much as 2% on the open with British Airways owner International Airlines Group and Rolls-Royce down 16% and 9% respectively. As much as £33 billion was wiped out from the index’s shares.
Germany’s DAX fell 2.3%, France’s CAC 40 fell 2.4%, and the pan-European Stoxx 600 fell 1.8%, with travel and leisure stocks taking the brunt of the sell-off.
While the FTSE’s losses fell to 1.1% by the end of the first hour of trading, the impact on sterling was more extreme. The pound, which last week reached a two-year high, plunged as much as 2% to $1.3259 and 1.6% to €1.0864.
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The impact on the pound was aggravated by continued uncertainty as to whether the UK will secure a Brexit deal ahead of the end-of-year deadline, after which existing trade stopgaps with the EU will no longer remain in effect.
The value of the pound sank precipitously on Friday, falling by more than 1% against the euro and the dollar after UK prime minister Boris Johnson’s warning on Thursday that a no-deal Brexit remained a “strong possibility”.
Sterling fell 1.3% against the euro to €1.089 and against the dollar to $1.3204 in early London trading.
The pound has been under continuous pressure since Wednesday, when Johnson and European Commission president Ursula von der Leyen confirmed that “significant differences” were yet to be bridged after trade negotiations in Brussels.
The UK and EU are currently deadlocked over questions of their post-Brexit relationship, with main sticking points including competition rules and fishing rights in UK waters. The two sides have set a deadline of Sunday to reach an agreement and prevent a “no-deal” scenario that would likely cause economic chaos.
"We need to be very, very clear there's now a strong possibility that we will have a solution that's much more like an Australian relationship with the EU, than a Canadian relationship with the EU," Johnson said. Unlike Canada, Australia does not have a comprehensive trade deal with the EU, and most of its trade is subject to tariffs.
However, the UK as a nation conducts far more trade with the EU – around 47% of its overall trade compared with Australia’s 15%.
“With the UK now looking like it’s hurtling towards a no-deal Brexit, investors should adopt the brace position for swings in sterling and shares in domestic focused companies,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
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Whether or not a deal is achieved, the UK’s temporary trade arrangements with the EU will expire on 31 December.
The value of the pound fell against the dollar and euro over the weekend, as news emerged that UK ministers were planning new legislation to undercut key provisions of the EU withdrawal agreement, giving rise to fears that the UK will face an end-of-year “no deal” Brexit.
The Financial Times first reported that the “Internal Market Bill” would undermine the legal force of areas of the agreement in areas including customs in Northern Ireland and state aid for businesses, risking a potential collapse of trade talks with the EU. Downing Street later described the measures as a standby plan in case talks fall through.
Political backlash followed as Michelle O’Neill, Northern Ireland’s Deputy First Minister, described any threat of backtracking on the Northern Ireland Protocol as a "treacherous betrayal which would inflict irreversible harm on the all-Ireland economy and the Good Friday Agreement". Scottish First Minister Nicola Sturgeon also stated that the legislation would “significantly increase” odds of a no-deal Brexit.
The pound was down 0.6% against the dollar by 10am on Monday for a total slide of 1% against the dollar in the past 5 days. The pound also slid 0.5% against the euro for a total of 0.7% in the same period.
The value of the pound is now equivalent to $1.319, or €1.1145.
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The eighth round of Brexit talks is set to begin on Tuesday, aimed at forming a deal that will allow companies in the UK and EU to trade without being hindered by customs checks or taxes.
The news follows Prime Minister Boris Johnson’s imposition of a 15 October deadline for securing a Brexit deal, recommending that both sides “move on” if no such agreement is reached by that date. The proposed deadline would come far ahead of the slated end of the transition period on 31 December 2020.
Analysts had originally predicted that the economy would continue to flatline at 0.1% growth, all the way into November 2019, as had been in previous months. However, the Office for National Statistics (ONS) says the MoM drop happened as a consequence of fall shorts in the production and services sectors. A fall in the pound has consequently led to overall pessimism when it comes to a pending recession.
31st January is the official Brexit deadline, and somehow the UK has managed to avoid recession, but slow growth is pushing the UK in this direction.
In an interview with the Financial Times, Gertjan Vlieghe, of the BoE Monetary Policy Committee, said he would vote for lower interest rates if data doesn’t show the economy picking up. Markets commentators also believe increasing hints that the Bank of England will cut interest rates is likely to prompt investors into overseas financial assets.
Nigel Green, chief executive and founder of deVere Group said: “This is the third senior Bank of England official within a week who has hinted that a rate cut could be imminent.
“In direct response, the pound has come under pressure, as you would expect when relative interest rate expectations change, and it has surrendered its $1.30 level.”
He continued: “The Bank appears to be confused about which risk to fear most.
“Is it a recession and deflation, caused by a no-deal Brexit at the end of this year and decreasing corporate investment over last few years?
“Or is it an overheating economy and inflation caused by a wave of relief if an EU trade agreement is signed that offers minimal disruption to business, combined with a splurge of government borrowing to pay for the Prime Minister’s increased spending plans.”
Amidst the recent shock resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, investment uncertainty, slower economic growth and a weaker pound, the United Kingdom is on its way to a slow but steady Brexit, with negotiations about the future relations between the UK and the EU still taking place.
And whilst the full consequences of Britain’s vote to leave the EU are still not perceptible, Finance Monthly examines the effects of the vote on economic activity in the country thus far.
Do you remember the Leave campaign’s red bus with the promise of £350 million per week more for the NHS? Two years after the referendum that confirmed the UK’s decision to leave the European Union, the cost of Brexit to the UK economy is already £40bn and counting. Giving evidence to the Treasury Committee two months ago, the Governor of the Bank of England Mark Carney said the 2016 leave vote had already knocked 2% off the economy. This means that households are currently £900 worse off than they would have been if the UK decided to remain in the EU. Mr. Carney also added that the economy has underperformed Bank of England’s pre-referendum forecasts “and that the Leave vote, which prompted a record one-day fall in sterling, was the primary culprit”.
Moreover, recent analysis by the Centre for European Reform (CER) estimates that the UK economy is 2.1% smaller as a result of the Brexit decision. With a knock-on hit to the public finances of £23 billion per year, or £440 million per week, the UK has been losing nearly £100 million more, per week, than the £350 million that could have been ‘going to the NHS’.
Whether you’re pro or anti-Brexit, the facts speak for themselves – the UK’s economic growth is worsening. Even though it outperformed expectations after the referendum, the economy only grew by 0.1% in Q1, making the UK the slowest growing economy in the G7. According to the CER’s analysis, British economy was 2.1 % smaller in Q1 2018 than it would have been if the referendum had resulted in favour of Remain.
To illustrate the impact of Brexit, Chart 1 explores UK real growth, as opposed to that of the euro area between Q1 2011 and Q1 2018.
As Francesco Papadia of Bruegel, the European think tank that specialises in economics, notes, the EU has grown at a slower rate than the UK for most of the ‘European phase of the Great Recession’. However, since the beginning of 2017, only six months after the UK’s decision to leave the EU, the euro area began growing more than the UK.
Reflecting on the effect of Brexit for the rest of 2018, Sam Hill at RBC Capital Markets says that although real income growth should return, it is still expected to result in sub-par consumption growth. Headwinds to business investment could persist, whilst the offset from net trade remains underwhelming.”
All of these individual calculations and predictions are controversial, but producing estimates is a challenging task. However, what they show at this stage is that the Brexit vote has thus far left the country poorer and worse off, with the government’s negotiations with the EU threatening to make the situation even worse. Will Brexit look foolish in a decade’s time and is all of this a massive waste of time and money? Or is the price going to be worth it – will we see the ‘Brexit dream’ that campaigners and supporters believe in? Too many questions and not enough answers – and the clock is ticking faster than ever.
If there's one thing that makes the process of investing decidedly complex, it's the constantly changing macroeconomic climate. This includes a number of individual aspects such as inflation and interest rates, and when combined they can have a cumulative impact on numerous assets and investment types.
Inflation is a particularly interesting macroeconomic factor, and one that tends to move independently to the value of the pound and the base interest rate.
Below Finance Monthly looks at the value of the pound against inflation during the course of the last 20 years or so, and ask how this should influence your investment choices in the near-term.
The Pound vs. Inflation – An Unbalanced Relationship
In simple terms, inflation has increased at a disproportionate rate to the pound over the course of the last two decades or more. More specifically, last years' prices were an estimated 303.3% higher than those recorded in 1980, meaning that 37 years ago £100 would have had the equivalent purchasing power of £403.34 in 2017.
Conversely, the pound itself has moved within a far narrower range during since the late 1980s and early 1990s, against a host of other major currencies. The GBP: USD has reached a peak 2.04 during this time, for example, while slumping to a low of 1.24 in January of last year. This trend is replicated across both the Australian Dollar and the Japanese Yen, while the pound has traded within an even more restricted range against the Euro since the 1990s.
From this, we can see that inflation and the cost of living has fluctuated far more noticeably than the underlying value of the pound, making it a particularly influence and volatile macroeconomic factor. This is an important point for investors to consider, as they must factor in the prevailing rate
of inflation and future forecasts to ensure that they build a viable trading portfolio.
Stocks vs. Bonds in the Current Macroeconomic Climate
To understand this further, let's compare the viability to stocks and bonds in the current, macroeconomic climate. In general terms, bonds are considered as more stable investment vehicles that are ideal for risk-averse investors, while stocks carry the burden of ownership for traders and are capable of delivering higher returns.
With inflation remaining high at around 3% in February (well beyond the Bank of England's target of 2%), however, bonds would appear to represent a better option in the current climate. This is because higher inflation can squeeze household incomes, lowering consumer confidence and spending in the process. As a result of this, both the economy and individual shares in the UK have the potential to be adversely affected in the short-term, while it's difficult to determine when inflation will return to a more manageable level.
Additionally, high inflation can also impact corporate profits through higher input cost, which can in turn lower share values and create negative sentiment within the stock market.
If this does happen, investors could well flock to defensive assets that are relatively risk-averse, particularly if inflation is expected to remain well above the BoE's 2% target throughout 2018. While further interest rate increases could reverse this trend, it's unlikely that the BoE will implement more than one hike this year if the current climate of uncertainty remains unchanged.
The Last Word
Of course, the economy and macroeconomic climate is a fluid entity, and one that could change considerably over the next few months.
Still, the spectre of high inflation is sure to be impacting on the decisions of investors and wealth management firms, as they look to diversify and optimise the returns of their clients in a challenging climate. This includes firms like W H Ireland, who are looking to build on recent growth and continue to thrive amid slower stock market activity and increasingly stained economic conditions.
So, while bonds may not be the most glamorous of asset classes, they offer genuine stability in the current marketplace.
Discussing the latest on stock markets, currencies and the news that Carillion will be heading into liquidation, Rebecca O’Keeffe, Head of Investment at interactive investor talks to Finance Monthly below.
The strength of sterling and the euro are seeing European stock markets fall slightly, as currency gains cap equity valuations. Sterling has been riding high both on the basis of a weaker US dollar and expectations of a softer Brexit than previously forecast. These currency moves are having a mixed effect on big corporates in the UK, where dollar weakness has given commodity prices a further boost with the big miners benefiting, while other big global companies are falling on the basis of lower dollar profits when converted back into sterling.
The government’s decision to walk away from Carillion appears to be based on optics rather than logic and looks like the wrong decision was made for the wrong reasons. There is no doubt that Carillion posed a huge political challenge for the government, which did not want to be seen to bail out another group of private shareholders and banks after suffering such a backlash from their decisions during the financial crisis. However, the prospect of the government temporarily funding existing Carillion public service contracts, alongside the likely increase in costs for renegotiating contracts with new suppliers, make it highly likely that they could ultimately pay far more than if they had provided the guarantees that Carillion’s creditors needed. It is far from clear at this stage what the wider implications will be from the liquidation of Carillion, both in terms of its impact on the construction industry and on the wider economy as a whole, not least from the enormous uncertainty that now afflicts the tens of thousands of Carillion staff and those other companies directly dependent upon it.
With recent news that the pound took a tumble over the weekend, partly attributed to the future of Theresa May as Prime Minister and the upcoming EU summit, rumours that China is looking to open its finance sector up to more foreign ownership, and updates on the latest trade announcement being teased by US President Trump after he pretty much told Japan they ‘will be the no.2 economy’ here are some comments from expert sources on trade worldwide.
Rebecca O’Keefe, Head of Investing at interactive investor, told Finance Monthly: “European markets have opened relatively flat, with the FTSE 100 the main beneficiary after sterling’s latest fall, as pressure mounts on Theresa May who is struggling to maintain her grip on power. The gravity defying US market has been the driving force behind surging global markets, so investors will be hoping that the Republicans can get their act together and deliver key US tax reform to help support the path of growth.
In sharp contrast to Persimmon’s lacklustre results and a gloomy report from the RICS last week, Taylor Wimpey’s trading update is much stronger and paints a relatively rosy picture of the current housing market. Confirmation of favourable market conditions and high demand for new houses is good, although there are early warning signs that the situation might deteriorate, with slowing sales rates and a drop in its order book. Share prices have already come off recent highs, amid fears that the sector had got ahead of itself and investors will be hoping for more help from the Chancellor in next week’s budget to try and provide a new catalyst for the sector.
Gambling companies have been making out like one armed bandits since the summer, as expectations grow that the Government will compromise on a much higher figure for fixed odds betting terminals than the £2 maximum suggested during this year’s election campaign. However, while betting shops are the focus of attention for politicians, the real action can be found on smartphones and elsewhere – with surging revenues and profits being driven from online betting. Companies who have got their online strategy right are the significant winners and although Ladbrokes Coral has seen a 12% jump in digital revenues, the comparison against online competitors such as bet365 and Sky Bet, who both reported huge revenue growth last week, has left the market slightly disappointed and sent the share price lower.”
Mihir Kapadia, CEO and Founder of Sun Global Investments, had this to say: “The last couple of days have seen two of the big global economies China and Germany report large trade surpluses underlining their robust performance over the year. In contrast, the UK economy has been on a downbeat weakening trend as Brexit and political uncertainties lead to declining economic confidence and slower growth.
Data released last month showed August’s trade deficit at £5.6 billion, and in comparison, today’s data of £3.45 billion for September has been a better than expected improvement, but nevertheless indicative of an additive gap that appears unlikely to be closed anytime soon.
While Brexit uncertainty has weakened the pound against its major peers, it had helped boost exports but in turn has also made imports more expensive. This is the short term “J Curve” effect which is often seen after a devaluation. Over the long term, the weaker pound is perhaps likely to help the trade deficit as exports rise (due to the lower pound and higher growth in the global economy) while import growth slows down due to the slowdown in the UK.”
The pound hit an eight-year low against the euro a few weeks back, with the official exchange rate at €1 to £1.083. At some airports, such as Southampton, travelers were being offered just €0.872 to £1. This represents a 15% reduction in value against the euro since the UK decided to leave the EU and comes as Brexit negotiations are dominating the headlines.
Adaptive Insights VP of United Kingdom and Ireland, Rob Douglas, argues that market fluctuation like this is exactly why businesses need to change their financial planning to be as agile and adaptable as possible. He comments:
“While for many it will be those going holiday that are top of mind as the pound devalues, a much greater concern is how businesses will deal with this fluctuation. Not only will businesses likely be dealing with much greater sums of money and therefore potential loss, but as margins are reduced and prices potentially increased, there will be a knock-on effect across the UK economy that everyone needs to be prepared for.
“Businesses need to be able to bend and flex to changes in exchange rates, while minimising the impact on customers and staff. For many, however, this is not a reality. Recent research shows that over half (60%) of CFOs say it takes five days or more to generate new scenario analyses, enabling them to model the impact of market movements such as this, and yet the majority would like it to be a day or less. This unmet expectation by CFOs sheds a light on the need for a different kind of financial planning that focuses on agility and active planning in nearly real-time to keep pace with the rapid changes in today’s businesses.
“For the UK, uncertainty and volatility is likely to become the new norm, which means businesses need to be prepared for the unknown. While being agile will allow businesses to be more responsive, ‘what-if’ scenarios are also fundamental for businesses to understand the potential consequences of the changing market. After all, many would not have predicted that the pound and euro would reach parity.”
Below Sam Bennett, COO at Frontierpay, provides Finance Monthly with a brief overview on UK inflation over the past few weeks, looking at the current state of play, the evolution of optimism and the overall position of the pound among global currencies.
Mark Carney must have breathed a sigh of relief from his office in the Bank of England when the news reached him just a few short weeks ago that UK inflation had fallen to 2.6%; contradicting market expectations that it would remain at, or even rise above May’s figure of 2.9%
The rate at which inflation rose over the last year had been better than predicted, after hitting what was already a 20-month high in June 2016, when the UK voted to leave the European Union. The CPI’s unexpected drop in July, which came largely as a result of lower oil prices reducing the cost of petrol and diesel, was therefore very welcome.
While the fall in inflation was quickly hailed as good news by many businesses and everyday consumers, sterling’s position in the currency market was hit hard, with a slowdown of the domestic economy creating significant downward pressure.
The 0.3% fall led to an immediate drop in the value of the pound, which landed at €1.12 against the single currency and shed more than a cent against the dollar. As sterling continued to feel investor pressure in the following days, the pound fell another 1% against the euro and found itself sitting below $1.30.
Today, a little over three weeks since the fall in inflation was first announced, the state of play for the pound isn’t looking any more encouraging than it was in those first few troublesome days.
Despite German industrial production falling unexpectedly, an event which we might have expected to provide some relief, sterling has not only remained under pressure, but has actually slipped further against the euro and dollar. Even with the most recent data from the Eurozone being weaker than many analysts predicted, potential investors are still wrestling with the uncertainty of the UK’s weak UK inflation data.
It should be pointed out that there is still some relative positivity in the investor community, thanks largely to robust global growth rates. Equity markets are sitting at fresh highs, with global indices rising, on average by 23% this year so far. Cause, therefore, for some optimism.
For the time being, however, the UK continues to look like the perceived weaker cousin, in comparison to the other major global currencies. We’ve seen several attempts to gain ground against the euro and the dollar pushed back, and live prices have settled at levels of around €1.10 and $1.30. As lower inflation numbers continue to weigh heavily on the pound, a rapid turnaround isn’t looking very likely.
With socio-political uncertainty reigning the decisions of businesses and banks, currency fluctuation is unpredictable and both the USD and GBP have been undergoing copius periods of pressure. Here Bodhi Ganguli, Lead Economist at Dun & Bradstreet gives Finance Monthly an updated run down on the currencies and their status moving forward.
An investigation of the movements in the dollar-pound exchange rate needs to balance short run fluctuations against the medium to long term fundamentals. While day-to-day volatility in the currencies can produce financial gains for a subset of finance professionals like currency traders, the underlying trends in the exchange rate are far more important for the overall growth of the two economies, and eventually of more significance to businesses.
Note that the USD-GBP exchange rate is a “relative price”, or in other words, it is the price of one currency in terms of the other currency. As such, all movements in the exchange rate are relative to each other. Therefore, factors that have an impact on either the USD only, or the GBP only, will end up producing fluctuations in the exchange rate. The latest phase of weakening in the GBP relative to the USD began in earnest after the Brexit referendum in June 2016. The UK’s decision to exit the EU was seen as detrimental to growth in the near to medium term, causing erosion of investor confidence in the GBP. The immediate reaction was a slump in the relative price of the GBP; in less than a month the value of the GBP fell from USD1.45 to USD1.30 or nearly an 11% depreciation in the sterling. Since then, the GBP has lost even more ground vis-à-vis the USD.
The USD’s behavior over the last couple of years was also a factor behind the post-Brexit slump in the GBP. The drop in the pound happened to coincide with one of the strongest phases of the dollar in recent history. Against the currencies of a broad group of major US trading partners, the USD started appreciating sharply and steadily in mid-2014, and by the time of the Brexit vote in June 2016, it was already 18% stronger compared with July 2014. Since then, the USD gained even more thanks to investor optimism following the election of the Trump government.
More recent trends in the USD and GBP offer clues to the near-term movement of the exchange rate. The pound will remain under pressure during the course of the Brexit negotiations that have just commenced primarily because there is significant uncertainty associated with them. Brexit remains a systemic risk that will weigh on growth in the near term. More importantly, investor sentiment will be subject to frequent changes until Brexit is complete and any perceived increase in risks will weigh on the pound. This will tilt the exchange rate in favor of the USD, also, partly because the USD is a safe haven currency that investors flock to whenever there is an increase in geopolitical uncertainty. Over the longer run, we expect the pound to weaken modestly against the euro (the currency of the UK's most important trading partner) until 2021, but this assessment assumes that elections on the continent will be won by pro-European parties and the Greek debt crisis will not return. Against the dollar, a very modest strengthening should set in towards the tail end of this decade but political risk in the wake of the Brexit negotiations has the potential to impact on the exchange rate. In any case, currency volatility will be a bigger issue than in previous years, also caused by political events on both sides of the Atlantic and the Channel.
Monetary policy in the two countries will also be a driver. The US Federal Reserve has already started the process of monetary policy normalization—the only major western central bank that has started raising interest rates from the ultra-accommodative lows necessitated by the Great Recession. On the other hand, the Bank of England launched the latest round of monetary stimulus right after the Brexit referendum and continues to support the economy with record low interest rates. The spread between the US and UK interest rates will also favor the USD, although the USD has its own issues to worry about there. Following the latest rate hike by the Fed in mid-June, the dollar remained relatively subdued. There are two main reasons why the link between a Fed rate hike and dollar appreciation seems broken for now: one, investors are assigning a low probability to aggressive rate hikes by the Fed given the recent weakness in US inflation data, and secondly, while investor optimism is still there, it is now widely accepted that the Trump administration’s fiscal policy measures, like tax reform and deregulation, will not add to US growth in 2017. In fact, implementation risk remains high given the level of disagreement on key issues among Congressional Republicans.
Ironically, while currency weakness fundamentally signals weakness in a country’s economic prospects over the longer run, it could benefit an economy in the short run. This is clearly evident from the gains in manufacturing seen in the UK, thanks to the weakness of the pound. However, there are downside risks from the weak pound, like rising inflation, which will weigh on consumers and prompt the BoE to raise rates. Similarly, no one seems to mind the lackluster reaction of the USD to the Fed rate hike. Manufacturing benefits, corporate profits gain, and even the Fed might not be too worried as the weak dollar will boost inflation and help it stay on track to raise rates. Eventually, of course, economic fundamentals will take over and the exchange rate will reflect the varying economic prospects of the two countries.
