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In this week’s round-up: Mansion House speeches to throw focus on UK economy as the Bank of England meets; and will OPEC turn the oil taps back on?
19 June 2018 – In this week’s round-up: Mansion House speeches to throw focus on UK economy as the Bank of England meets; and will OPEC turn the oil taps back on?
Attention falls firmly on the UK domestic economy this week with the Bank of England’s Monetary Policy Committee meeting to refresh its thinking on rates and QE, while the Bank’s Governor Mark Carney and Chancellor of the Exchequer Philip Hammond will each make their annual Mansion House address.
Taking the MPC meeting first; no change in either interest rates or QE is expected, but that doesn’t mean there’s nothing riding on Thursday’s meeting. UK Bank Rate remains stuck at 0.5% despite the Bank spending much of this year warning borrowers that it will rise very soon.
A rise in rates was expected in May, but the Bank was blindsided by unexpectedly weak economic growth in the first quarter of the year, as well as by inflation that has been steadily falling despite the Bank’s central case that it will take off any time now.
The economic news since then has been mixed, at best. The British Chambers of Commerce became the latest forecasting group to lower its forecast for UK economic growth in the UK this year, suggesting growth of 1.3%, which would be the lowest since 2009 and the financial crisis.
Last week, official CPI inflation was confirmed as rising at a rate of 2.5%, the same level as the month before. That’s still above target but some way below the 3.1% level seen as recently as November and makes it hard for the Bank to justify raising borrowing costs on the grounds that it need to curb price rises.
The minutes from the meeting on Wednesday on Thursday will be scoured for clues as to the Bank’s thinking on the economy, and for any signs that rates could rise when the MPC next meets in August. There could also be clues in the Governor’s annual Mansion House speech, made that evening.
He will take the stage to address City grandees shortly after the Chancellor Philip Hammond. There were reports over the weekend that the Government will ratchet up investment in the NHS in the years ahead, with the question becoming how it will be paid for. The Chancellor is expected to talk about new approach to capitalism, and a loosening of public finance austerity may feature in the plan.
Public sector borrowing figures, also out this week, will help tell us what state their country’s finances are in to cope with higher levels of borrowing.
For the UK stock market, the week started in downbeat fashion. The FTSE 100 followed global exchanges lower after China responded to $50bn of tariffs applied by the US on exported Chinese goods with $50bn of tariffs of its own.
China has proposed tariffs on more than 500 categories of US goods, and the list appeared aimed at hurting Trump’s Republican base before the US midterm elections in November. It included beef, poultry, pork, dairy products, seafood, tobacco and soybeans, of which China is the world’s largest buyer.
Beijing has also said it will target $16bn of US products like coal, crude oil, natural gas, and medical equipment at a later date.
The worsening rhetoric on trade helped push the S&P 500 down slightly on the level seen last week. The MSCI China Index also opened the week lower.
In other US economic news, the Federal Reserve did raise rates last week, as expected, and even suggested it could do so twice more in 2018. That would take the rises this year to four. Whether its four rises or three, it’s clear that the central bank policy is now diverged after several years in lock-step.
Higher risk-free returns in the US are likely to squeeze other parts of the world, where investors will demand a higher return for the risk they take.
In currencies, the pound fell against the dollar last week, to $1.321. Against the euro the pound was worth €1.145.
In commodities, the news this week will come from oil producers, who hold an important meeting on Friday.
Two of the countries attending, Russia and Saudi Arabia, will make an unpopular pitch to OPEC, of which Russia is not a member, to end an 18-month supply squeeze that has sent the price of crude soaring to a four-year high.
Since the beginning of 2017, Saudi and Russia have led production curbs that have helped burn through glut of supply. Now there is political pressure, including from the US, to open the taps and add as much a 1m barrels a day to global supply.
Even if that happens, there is still upward pressure on prices thanks to lower flows from OPEC members Iran and Venezuela. Iran’s supply has been affected by Trump-imposed sanctions on the country while Venezuela’s has collapsed in sympathy with its economy.
Oil prices were lower ahead of the meeting, with Brent Crude at $73.05 a barrel, and US West Texas at $64.24 a barrel.
In corporate news, Virgin Money has agreed to an all-share takeover offer from FTSE 250 rival CYBG, which owns Clydesdale and Yorkshire banks. The Virgin Money name will continue.
The deal is important because this newly-created bank could create a significant player in the UK banking market. With 6 million customers and a balance sheet of £70 billion, it will be watched closely to see whether a medium-sized challenger bank of this sort of size is big enough to pose a real threat to the ‘Big Five’ - Lloyds, RBS, HSBC, Barclays and Santander.
CYBG first made its approach for Virgin at the start of May. The Leeds-based group made a preliminary approach valuing the company at £1.6 billion.
News of the deal sent shares in Richard Branson’s Virgin Money 2.3% higher. Shares in CYBG ticked up a more modest 0.6%.
In the corporate diary this week, there’s final results from Flybe, Ashtead and Berkeley Group, and a trading update from Saga.
That’s it from me. Have a great week everyone.
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