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Sterling and markets calm ahead of Jackson Hole bankers meeting - live Sterling and markets calm ahead of Jackson Hole bankers meeting - as it happened
(35 minutes later)
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Summary
Markets remain calm ahead of the Jackson Hole speeches from ECB boss Mario Draghi and US Federal Reserve chair Janet Yellen.
Most analysts expect the central bankers to be cautious about their comments, especially Draghi.
Elsewhere there were more indications of the strength of the German economy, with second quarter GDP growth of 0.6%, although a key business sentiment index slipped slightly.
But in the US, durable goods orders slumped in July.
Meanwhile, the head of the White House’s national economic council, Gary Cohn, has told the Financial Times he came under “enormous pressure” to quit his post after Donald Trump’s Charlottesville comments but felt duty bound to carry on. He also suggested Trump would move forward with tax reforms next week.
And with Hurricane Harvey heading for Texas, oil prices have moved higher on fears of disruption to production.
On the markets the FTSE 100 is currently up 0.3% , Germany’s Dax is 0.2% higher and France’s Cac has climbed 0.13%.
The pound is currently up 0.23% at $1.1.2828 and 0.13% better at €1.0864.
With the recent pressure on the pound, there has been some talk it could reach parity with the euro, but ING thinks this is unlikely.
On that note it’s time to close for the day.
Keep an eye on the Business site for reports from Jackson Hole.
Meanwhile, thanks for all your comments and we’ll be back next week.
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US durable gds #order -6.8% July as expect: #Boeing order plunge after June surge. Overall, good core orders (+3.5y/y) & shipments (5.7%y/y) pic.twitter.com/Rz5wbyPbZxUS durable gds #order -6.8% July as expect: #Boeing order plunge after June surge. Overall, good core orders (+3.5y/y) & shipments (5.7%y/y) pic.twitter.com/Rz5wbyPbZx
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Commenting on the durable goods numbers, Dennis de Jong, managing director of UFX.com, said:Commenting on the durable goods numbers, Dennis de Jong, managing director of UFX.com, said:
The ever-volatile durable goods report delivered once again today, with figures showing a 6.8% decline in orders for July.The ever-volatile durable goods report delivered once again today, with figures showing a 6.8% decline in orders for July.
Investors will be concerned on the back of today’s results. Not only will support for the dollar dampen, the downbeat numbers will cast further shadows over the US growth outlook.Investors will be concerned on the back of today’s results. Not only will support for the dollar dampen, the downbeat numbers will cast further shadows over the US growth outlook.
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US durable goods orders disappointUS durable goods orders disappoint
US orders for durable goods - long lasting items such as cars and washing machines - fell by more than expected last month.US orders for durable goods - long lasting items such as cars and washing machines - fell by more than expected last month.
They fell by 6.8% compared to a 6.4% rise in June and expectations of a 6% decline, according to the US Census Bureau. The fall is the biggest since 2014.They fell by 6.8% compared to a 6.4% rise in June and expectations of a 6% decline, according to the US Census Bureau. The fall is the biggest since 2014.
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All eyes may be on ECB president Mario Draghi and whatever comments he may or may not make at Jackson Hole about tapering its bond buying programme or the strength of the euro. But what action will the ECB actually take? Does the ECB even know what to do next? Economist Carsten Brzeski at ING says:All eyes may be on ECB president Mario Draghi and whatever comments he may or may not make at Jackson Hole about tapering its bond buying programme or the strength of the euro. But what action will the ECB actually take? Does the ECB even know what to do next? Economist Carsten Brzeski at ING says:
When the ECB currently looks at the Eurozone, it sees a modest party with people enjoying themselves. The party is far from over but it could probably do with fewer QE drinks served by one of the hosts: Mario Draghi. In fact, serving less would come in handy as the drinks in Mario’s fridge are running low. But how to tell the party guests? And how to do it without getting called out as a party pooper?When the ECB currently looks at the Eurozone, it sees a modest party with people enjoying themselves. The party is far from over but it could probably do with fewer QE drinks served by one of the hosts: Mario Draghi. In fact, serving less would come in handy as the drinks in Mario’s fridge are running low. But how to tell the party guests? And how to do it without getting called out as a party pooper?
In our view, the main arguments in favour of tapering are the successful defeat of the deflation risk, the strong economic recovery and bond scarcity. Tapering should be a cautious and very gradual withdrawal of some monetary stimulus, preferably without causing any tightening of financial conditions.In our view, the main arguments in favour of tapering are the successful defeat of the deflation risk, the strong economic recovery and bond scarcity. Tapering should be a cautious and very gradual withdrawal of some monetary stimulus, preferably without causing any tightening of financial conditions.
Financial market reactions since the Sintra speech in June suggest that Mario Draghi and the ECB have lost some of their golden touch when it comes to guiding expectations. This has been partly driven by the fact that the ECB itself does not seem to be fully convinced what to do next and also by regularly changing its main messages.Financial market reactions since the Sintra speech in June suggest that Mario Draghi and the ECB have lost some of their golden touch when it comes to guiding expectations. This has been partly driven by the fact that the ECB itself does not seem to be fully convinced what to do next and also by regularly changing its main messages.
In our view, it seems most likely that the ECB would reduce the monthly purchases to €30bn in January, with an open end to the programme but at least until June 2018 and probably increasing the issuer limit and broadening maturities to grant itself maximum flexibility to scale back up once conditions warrant such a move.In our view, it seems most likely that the ECB would reduce the monthly purchases to €30bn in January, with an open end to the programme but at least until June 2018 and probably increasing the issuer limit and broadening maturities to grant itself maximum flexibility to scale back up once conditions warrant such a move.
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The Financial Times interview with Gary Cohn, head of the White House economic council, also contains positive news for those hoping for tax reforms.The Financial Times interview with Gary Cohn, head of the White House economic council, also contains positive news for those hoping for tax reforms.
President Trump has been singularly unsuccessful so far in pushing through much of his agenda, and markets have almost given up on expected the long promised reforms. But Cohn said Trump will launch a major push on tax reform next week with a speech in Missouri.President Trump has been singularly unsuccessful so far in pushing through much of his agenda, and markets have almost given up on expected the long promised reforms. But Cohn said Trump will launch a major push on tax reform next week with a speech in Missouri.
And this has helped the US market perk up. Connor Campbell, financial analyst at Spreadex, said:And this has helped the US market perk up. Connor Campbell, financial analyst at Spreadex, said:
The [US] index has already had a bit of good news this Friday. Trump’s economic advisor has stated in an interview with the Financial Times that felt duty bound to stay on as part of the administration despite the President’s failure to fully condemn the neo-Nazis in Charlottesville, putting to bed rumours of his departure.The [US] index has already had a bit of good news this Friday. Trump’s economic advisor has stated in an interview with the Financial Times that felt duty bound to stay on as part of the administration despite the President’s failure to fully condemn the neo-Nazis in Charlottesville, putting to bed rumours of his departure.
Cohn went further, claiming that Trump will put tax reform back on the agenda next week with a speech in Missouri – no doubt a relief for investors desperate for a sign that the President will deliver on his market-lifting promises. Whether he can push through said reforms, however, is another matter entirely.Cohn went further, claiming that Trump will put tax reform back on the agenda next week with a speech in Missouri – no doubt a relief for investors desperate for a sign that the President will deliver on his market-lifting promises. Whether he can push through said reforms, however, is another matter entirely.
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In tandem with the European markets, Wall Street is expected to open marginally higher ahead of the Jackson Hole shindig.In tandem with the European markets, Wall Street is expected to open marginally higher ahead of the Jackson Hole shindig.
The Dow Jones Industrial Average is expected to climb around 23 points or around 0.1% in early trading, while most European markets are currently around 0.3% higher. Craig Erlam, senior market analyst at Oanda, said:The Dow Jones Industrial Average is expected to climb around 23 points or around 0.1% in early trading, while most European markets are currently around 0.3% higher. Craig Erlam, senior market analyst at Oanda, said:
The Jackson Hole Symposium is widely regarded as one of the most notable annual events, not only because of the speakers it attracts but also because it has been used as a platform to warn of upcoming policy announcements. In the past it has been Janet Yellen’s predecessors – Alan Greenspan and Ben Bernanke - that have delivered such warnings, the question today is whether she will do the same.The Jackson Hole Symposium is widely regarded as one of the most notable annual events, not only because of the speakers it attracts but also because it has been used as a platform to warn of upcoming policy announcements. In the past it has been Janet Yellen’s predecessors – Alan Greenspan and Ben Bernanke - that have delivered such warnings, the question today is whether she will do the same.
The final months of the year are going to be very interesting as far as the Fed and the ECB are concerned which makes today’s appearances from Fed Chair Yellen and ECB President Mario Draghi all the more interesting. Both central banks have started the process of tightening monetary policy, although the ECB would probably claim it’s more a case of removing accommodation. Either way, with the process underway, investors are keen to know what they plan next.The final months of the year are going to be very interesting as far as the Fed and the ECB are concerned which makes today’s appearances from Fed Chair Yellen and ECB President Mario Draghi all the more interesting. Both central banks have started the process of tightening monetary policy, although the ECB would probably claim it’s more a case of removing accommodation. Either way, with the process underway, investors are keen to know what they plan next.
The Fed is already well underway with its rate hikes, having started almost two years ago and having raised three more times since (so four in total). With inflation still lagging well below target though, there is growing unease within the central bank about whether the current pace is appropriate. Investors have long been unsure that there’ll be another rate hike this year and the message seems to finally be filtering through to the Fed. It will be interesting to see whether Yellen will address this today or instead focus on balance sheet reduction, which is expected to be announced in September and doesn’t interest investors in the same way.The Fed is already well underway with its rate hikes, having started almost two years ago and having raised three more times since (so four in total). With inflation still lagging well below target though, there is growing unease within the central bank about whether the current pace is appropriate. Investors have long been unsure that there’ll be another rate hike this year and the message seems to finally be filtering through to the Fed. It will be interesting to see whether Yellen will address this today or instead focus on balance sheet reduction, which is expected to be announced in September and doesn’t interest investors in the same way.
The ECB is taking a far more cautious approach having dealt with a far more severe crisis for the last decade, one that the region is only just starting to truly recover from. The central bank announced one reduction on asset purchases last December and it’s expected to announce another in the coming months. While investors are desperate to get more information on this, I think it’s highly unlikely given the ECB’s unease at past market reactions. I think the central bank will prefer to address this after the meeting next month on home turf and won’t want to risk further tightening of financial conditions in the meantime, with the euro having already sharply appreciated this year.The ECB is taking a far more cautious approach having dealt with a far more severe crisis for the last decade, one that the region is only just starting to truly recover from. The central bank announced one reduction on asset purchases last December and it’s expected to announce another in the coming months. While investors are desperate to get more information on this, I think it’s highly unlikely given the ECB’s unease at past market reactions. I think the central bank will prefer to address this after the meeting next month on home turf and won’t want to risk further tightening of financial conditions in the meantime, with the euro having already sharply appreciated this year.
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Cohn felt "enormous pressure" to quit White HouseCohn felt "enormous pressure" to quit White House
Over to the US, and there had been some concerns in recent days that Gary Cohn, the head of the White House national economic council, might step down in the wake of Donald Trump’s comments over the violence at Charlottesville. Markets certainly did not like the idea, given his crucial role and the number of executives who had already quit various government councils.Over to the US, and there had been some concerns in recent days that Gary Cohn, the head of the White House national economic council, might step down in the wake of Donald Trump’s comments over the violence at Charlottesville. Markets certainly did not like the idea, given his crucial role and the number of executives who had already quit various government councils.
Now in an interview with the Financial Times (£) Cohn said he had come under enormous pressure to resign but felt duty bound to carry on. But he said the current administration had to do more to condemn neo-Nazis and white supremacists. He told the FT:Now in an interview with the Financial Times (£) Cohn said he had come under enormous pressure to resign but felt duty bound to carry on. But he said the current administration had to do more to condemn neo-Nazis and white supremacists. He told the FT:
This administration can and must do better in consistently and unequivocally condemning these groups and do everything we can to heal the deep divisions that exist in our communities...This administration can and must do better in consistently and unequivocally condemning these groups and do everything we can to heal the deep divisions that exist in our communities...
As a Jewish American, I will not allow neo-Nazis ranting ‘Jews will not replace us’ to cause this Jew to leave his job. I feel deep empathy for all who have been targeted by these hate groups. We must all unite together against them.As a Jewish American, I will not allow neo-Nazis ranting ‘Jews will not replace us’ to cause this Jew to leave his job. I feel deep empathy for all who have been targeted by these hate groups. We must all unite together against them.
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Markets are holding onto their gains, but investors are reluctant to commit themselves ahead of the key Jackson Hole speeches. Joshua Mahony, market analyst at IG, said:Markets are holding onto their gains, but investors are reluctant to commit themselves ahead of the key Jackson Hole speeches. Joshua Mahony, market analyst at IG, said:
Indecision is rife across financial markets this morning, as the impending appearances from Mario Draghi and Janet Yellen mean that there remains little certainty over how this week is likely to close out. For the most part we are likely to hear Draghi reiterate his stance from earlier in the week, with ECB sources recently speculating that Draghi wouldn’t announce any new policy shifts at today’s speech. However, we could see Janet Yellen steal the headlines, with today marking her final Jackson Hole appearance before Donald Trump decides her future in February.Indecision is rife across financial markets this morning, as the impending appearances from Mario Draghi and Janet Yellen mean that there remains little certainty over how this week is likely to close out. For the most part we are likely to hear Draghi reiterate his stance from earlier in the week, with ECB sources recently speculating that Draghi wouldn’t announce any new policy shifts at today’s speech. However, we could see Janet Yellen steal the headlines, with today marking her final Jackson Hole appearance before Donald Trump decides her future in February.
But there is more activity in the oil market. Mahony said:But there is more activity in the oil market. Mahony said:
Hurricane Harvey is bearing down upon the Gulf coast, with traders moving into crude oil given the potential for a massive disruption to a region which accounts for 45% of the nation’s refining capacity and 17% of US output. With possibly the biggest storm in over a decade to hit American soil heading straight into the oil producing heartlands, there is the potential for huge disruption both at sea and inland. With three refineries already shutting down ahead of the storm, there is a significant chance that we will see a major disruption to the extraction and refining of crude oil and gasoline irrespective of any physical damage.Hurricane Harvey is bearing down upon the Gulf coast, with traders moving into crude oil given the potential for a massive disruption to a region which accounts for 45% of the nation’s refining capacity and 17% of US output. With possibly the biggest storm in over a decade to hit American soil heading straight into the oil producing heartlands, there is the potential for huge disruption both at sea and inland. With three refineries already shutting down ahead of the storm, there is a significant chance that we will see a major disruption to the extraction and refining of crude oil and gasoline irrespective of any physical damage.
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German business confidence dips but economy still strongGerman business confidence dips but economy still strong
The continuing strength of the German economy, as shown earlier by the GDP figures, has been reinforced by the latest business survey.The continuing strength of the German economy, as shown earlier by the GDP figures, has been reinforced by the latest business survey.
Despite slipping slightly after six consecutive rises, the Ifo business climate index at 115.9 still met expectations. Clemens Fuest, resident of the ifo Institute, said:Despite slipping slightly after six consecutive rises, the Ifo business climate index at 115.9 still met expectations. Clemens Fuest, resident of the ifo Institute, said:
The ifo Business Climate Index edged downwards from 116.0 points last month to 115.9 points in August. But sentiment among German businesses remains very strong. The decline was due to slightly less positive assessments of the current business situation. Companies’ short-term business outlook, by contrast, improved. Germany’s economy remains on track for growth.The ifo Business Climate Index edged downwards from 116.0 points last month to 115.9 points in August. But sentiment among German businesses remains very strong. The decline was due to slightly less positive assessments of the current business situation. Companies’ short-term business outlook, by contrast, improved. Germany’s economy remains on track for growth.
Economist Carsten Brzeski at ING Bank said there was no signs of weakness in the German economy despite the dip in the Ifo index:Economist Carsten Brzeski at ING Bank said there was no signs of weakness in the German economy despite the dip in the Ifo index:
The Ifo index dropped only marginally in August, confirming the almost breathtaking strength of the German economy.The Ifo index dropped only marginally in August, confirming the almost breathtaking strength of the German economy.
After six consecutive increases and three all-time highs in a row, Germany’s most prominent leading indicator, the Ifo index, just dropped for the first time. The drop, however, was only marginal and the Ifo now stands at 115.9, from 116.0 in July. Interestingly, the decrease was exclusively driven by the current assessment component. Expectations increased to 107.9, from 107.3 in July.After six consecutive increases and three all-time highs in a row, Germany’s most prominent leading indicator, the Ifo index, just dropped for the first time. The drop, however, was only marginal and the Ifo now stands at 115.9, from 116.0 in July. Interestingly, the decrease was exclusively driven by the current assessment component. Expectations increased to 107.9, from 107.3 in July.
It is almost pointless searching for macro-economic explanations for today’s small drop. Of course, next to acrophobia, reasons for today’s drop could be the strengthening of the euro over the last few months, fresh geopolitical concerns with the US-North Korean conflict and fading signs of any imminent investment boom in the US. However, the best explanation for the drop is simply a small technical correction after three record-highs in a row.It is almost pointless searching for macro-economic explanations for today’s small drop. Of course, next to acrophobia, reasons for today’s drop could be the strengthening of the euro over the last few months, fresh geopolitical concerns with the US-North Korean conflict and fading signs of any imminent investment boom in the US. However, the best explanation for the drop is simply a small technical correction after three record-highs in a row.
All of this means that, unless German businesses are living in a kind of never-never land, today’s Ifo index sends a clear signal that the German economy is powering ahead. What might look boring from the outside is clearly enjoyable from the inside.All of this means that, unless German businesses are living in a kind of never-never land, today’s Ifo index sends a clear signal that the German economy is powering ahead. What might look boring from the outside is clearly enjoyable from the inside.
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Pound "unlikely" to hit parity with euro - INGPound "unlikely" to hit parity with euro - ING
The pound is holding fairly steady after a downbeat week dominated by Brexit worries, edging lower against the dollar but marginally higher against the euro.The pound is holding fairly steady after a downbeat week dominated by Brexit worries, edging lower against the dollar but marginally higher against the euro.
It is currently at ¢1.2798, down 0.01%, and €1.0860, up 0.09%. In recent days it has been flirting with eight year lows against the single currency, with some talk of it falling to parity. But Viraj Patel, foreign exchange strategist at ING Bank, thinks this is unlikely:It is currently at ¢1.2798, down 0.01%, and €1.0860, up 0.09%. In recent days it has been flirting with eight year lows against the single currency, with some talk of it falling to parity. But Viraj Patel, foreign exchange strategist at ING Bank, thinks this is unlikely:
The pound has been an easy target for currency markets as the combination of a post-Brexit economic reality check and ongoing political anxiety has made the UK economy an outlier relative to its faster growing European peers. We believe this economic divergence story has largely run its course. In fact, the pound is beginning to show signs of idiosyncratic selling, similar to previous periods when domestic political risks have flared up.The pound has been an easy target for currency markets as the combination of a post-Brexit economic reality check and ongoing political anxiety has made the UK economy an outlier relative to its faster growing European peers. We believe this economic divergence story has largely run its course. In fact, the pound is beginning to show signs of idiosyncratic selling, similar to previous periods when domestic political risks have flared up.
We make two points here. First, this tends to be a short-run phenomenon, with the pound’s material undervaluation acting as a limiting factor for sustained weakness. Second, and more importantly, we would need to see an additional layer of bad news to fuel any further politically-induced GBP selling. This seems unlikely in the absence of a Brexit disaster situation unfolding - that is a complete breakdown in UK-EU negotiations and renewed cliff-edge risks. Political will from both sides suggests the worst-case scenario will be avoided.We make two points here. First, this tends to be a short-run phenomenon, with the pound’s material undervaluation acting as a limiting factor for sustained weakness. Second, and more importantly, we would need to see an additional layer of bad news to fuel any further politically-induced GBP selling. This seems unlikely in the absence of a Brexit disaster situation unfolding - that is a complete breakdown in UK-EU negotiations and renewed cliff-edge risks. Political will from both sides suggests the worst-case scenario will be avoided.
So while EUR/GBP has overshot our 0.90 forecast for the third quarter of 2017 - and admittedly quicker than we had anticipated - we cite four reasons for why we think a move towards parity looks unlikely at this stage. Our revised forecasts acknowledge the pound could remain under pressure ahead of key domestic and Brexit political risk events in October. But we view this as an overshoot of more fundamentally-justified levels, rather than a sustained trend in EUR/GBP towards parity.So while EUR/GBP has overshot our 0.90 forecast for the third quarter of 2017 - and admittedly quicker than we had anticipated - we cite four reasons for why we think a move towards parity looks unlikely at this stage. Our revised forecasts acknowledge the pound could remain under pressure ahead of key domestic and Brexit political risk events in October. But we view this as an overshoot of more fundamentally-justified levels, rather than a sustained trend in EUR/GBP towards parity.
The four reasons are:The four reasons are:
The euro has become a ‘political haven’ for currency marketsThe euro has become a ‘political haven’ for currency markets
We had earmarked October as being a pivotal month for the pound regarding political risk events. The Tory Party Conference (1-4 October), the final round of opening Brexit talks (9 October) and EU summit (19-20 October) will give markets an opportunity to assess the progress made when it comes to the UK’s exit from the EU. These event risks mean that it is understandable to see the pound markets trading with some apprehension. We have been warning of a potential ‘sell on (PM) May and go away’ type of behaviour emerging ahead of October.We had earmarked October as being a pivotal month for the pound regarding political risk events. The Tory Party Conference (1-4 October), the final round of opening Brexit talks (9 October) and EU summit (19-20 October) will give markets an opportunity to assess the progress made when it comes to the UK’s exit from the EU. These event risks mean that it is understandable to see the pound markets trading with some apprehension. We have been warning of a potential ‘sell on (PM) May and go away’ type of behaviour emerging ahead of October.
However, the extent of the pound’s recent weakness - and deviation from short-term fundamentals - is now starting to look excessive relative to the near-term political risks at stake. This is certainly the case for EUR/GBP, which based on our estimates is trading around 4% above its short-term financial fair value. In contrast, GBP/USD is showing no visible signs of a UK-specific risk premium. We rationalise this as both UK and US political uncertainty offsetting each other in the near-term, making the euro the go-to ‘political haven’ in currency markets. How times have changed.However, the extent of the pound’s recent weakness - and deviation from short-term fundamentals - is now starting to look excessive relative to the near-term political risks at stake. This is certainly the case for EUR/GBP, which based on our estimates is trading around 4% above its short-term financial fair value. In contrast, GBP/USD is showing no visible signs of a UK-specific risk premium. We rationalise this as both UK and US political uncertainty offsetting each other in the near-term, making the euro the go-to ‘political haven’ in currency markets. How times have changed.
Political will suggests a Brexit disaster can be avoidedPolitical will suggests a Brexit disaster can be avoided
For the pound’s politically-driven weakness to persist and extend all the way towards parity against the euro, we would argue that ‘hard Brexit’ risks would need to notch up another gear. In reality, the only way this could occur over the next six months is if we get a nightmare Brexit scenario in October - that is a complete breakdown of UK-EU negotiations.For the pound’s politically-driven weakness to persist and extend all the way towards parity against the euro, we would argue that ‘hard Brexit’ risks would need to notch up another gear. In reality, the only way this could occur over the next six months is if we get a nightmare Brexit scenario in October - that is a complete breakdown of UK-EU negotiations.
Instead, while we have previously acknowledged it is too early for the pound markets to price in any Brexit transitional deal hopes, we do think the growing consensus within Theresa May’s cabinet over a transitional arrangement means that the tail risks of a cliff-edge Brexit are diminishing. The lack of clarity by the UK government on any preferred transition length - and rumours of only a 12 or 18-month arrangement being sought - may be seen as a near-term disappointment.Instead, while we have previously acknowledged it is too early for the pound markets to price in any Brexit transitional deal hopes, we do think the growing consensus within Theresa May’s cabinet over a transitional arrangement means that the tail risks of a cliff-edge Brexit are diminishing. The lack of clarity by the UK government on any preferred transition length - and rumours of only a 12 or 18-month arrangement being sought - may be seen as a near-term disappointment.
Progress on securing a transition deal - with both sides providing strong assurances - should help to ease any significant pound downside bias. However, for this to serve as a catalyst for a rebound in the currency, we would need to see evidence that a reduction in economic uncertainty is in fact spurring a rebound in investment activity. This is what would give the Bank of England (BoE) greater confidence to begin normalising monetary policy - which would undoubtedly be a positive pound development.Progress on securing a transition deal - with both sides providing strong assurances - should help to ease any significant pound downside bias. However, for this to serve as a catalyst for a rebound in the currency, we would need to see evidence that a reduction in economic uncertainty is in fact spurring a rebound in investment activity. This is what would give the Bank of England (BoE) greater confidence to begin normalising monetary policy - which would undoubtedly be a positive pound development.
The pound is cheap, very cheapThe pound is cheap, very cheap
We see the pound as extremely undervalued, with the very stretched valuation likely putting a limit on the scale of further downside. EUR/GBP is rich by a staggering 20% based on our medium-term Behavioural Equilibrium Exchange Rate valuation framework. Even if we control for the post 2015 rise in pound fair value due to improving UK terms of trade and declining UK government consumption, EUR/GBP would still be overvalued by 14%. When the medium-term valuation reaches such extreme levels, it tends to be difficult for the currency to weaken materially given the limits imposed by the underlying fundamentals.We see the pound as extremely undervalued, with the very stretched valuation likely putting a limit on the scale of further downside. EUR/GBP is rich by a staggering 20% based on our medium-term Behavioural Equilibrium Exchange Rate valuation framework. Even if we control for the post 2015 rise in pound fair value due to improving UK terms of trade and declining UK government consumption, EUR/GBP would still be overvalued by 14%. When the medium-term valuation reaches such extreme levels, it tends to be difficult for the currency to weaken materially given the limits imposed by the underlying fundamentals.
Markets have adjusted to a wait-and-see Bank of England stanceMarkets have adjusted to a wait-and-see Bank of England stance
The latest round of key UK economic data has put talks of a Bank of England rate hike on the back burner, with the breakdown of second quarter GDP highlighting the current weakness of the UK consumer. However, markets have now adjusted to a wait-and-see BoE policy stance and see limited risks of a flatter UK rate curve. For short-term domestic rates to move lower, we would need to see evidence of weak consumer activity turning into a hard-landing for the UK economy. Our economists see this as highly unlikely and are not expecting the economy to take a significant turn for the worst.The latest round of key UK economic data has put talks of a Bank of England rate hike on the back burner, with the breakdown of second quarter GDP highlighting the current weakness of the UK consumer. However, markets have now adjusted to a wait-and-see BoE policy stance and see limited risks of a flatter UK rate curve. For short-term domestic rates to move lower, we would need to see evidence of weak consumer activity turning into a hard-landing for the UK economy. Our economists see this as highly unlikely and are not expecting the economy to take a significant turn for the worst.
We also believe EUR/GBP parity may not be in the economic interests of the BoE given the implications that further pound weakness has for imported inflation and the squeeze in real household incomes story. Equally, one could argue it is not in the economic interests of the ECB for financial markets to get ahead of themselves when it comes to pricing in the end of the central bank’s quantitative easing programme. With implicit opposition from both sides, it’s difficult to fundamentally justify any EUR/GBP move towards parity - certainly over the next three to six months.We also believe EUR/GBP parity may not be in the economic interests of the BoE given the implications that further pound weakness has for imported inflation and the squeeze in real household incomes story. Equally, one could argue it is not in the economic interests of the ECB for financial markets to get ahead of themselves when it comes to pricing in the end of the central bank’s quantitative easing programme. With implicit opposition from both sides, it’s difficult to fundamentally justify any EUR/GBP move towards parity - certainly over the next three to six months.
But Patel admits ING could be wrong about not hitting parity:But Patel admits ING could be wrong about not hitting parity:
Apart from one (or more) of our four assumptions turning out to be wrong, currency markets can sometimes be an untamed beast. Just because the pound is undervalued doesn’t mean it should rally. There needs to be some positive catalysts for the pound to manifest, not least signs of a stabilisation in a slowing UK economy and greater progress towards a Brexit transition deal (even if not fully agreed). But certainly, the very negative psychology needs to be broken, such that the pound is not such a clear sell on rallies. Indeed we – and the BoE – are on the look-out for a ‘sell UK’ mentality developing, where the pound, gilts and equities all sell-off at the same time. This, however, has not been the case so far.Apart from one (or more) of our four assumptions turning out to be wrong, currency markets can sometimes be an untamed beast. Just because the pound is undervalued doesn’t mean it should rally. There needs to be some positive catalysts for the pound to manifest, not least signs of a stabilisation in a slowing UK economy and greater progress towards a Brexit transition deal (even if not fully agreed). But certainly, the very negative psychology needs to be broken, such that the pound is not such a clear sell on rallies. Indeed we – and the BoE – are on the look-out for a ‘sell UK’ mentality developing, where the pound, gilts and equities all sell-off at the same time. This, however, has not been the case so far.
If that mood was to develop, with pound weakness proving more trouble for the inflation trajectory, the IMF might recommend sharp rate hikes to break the vicious cycle. Typically that has been the prescription for significant 20% falls for the likes of the Russian ruble, Turkish lira and Brazilian real. Of course, the UK has had some painful experiences in using rate hikes to defend the pound (think 1992), and we very much doubt that the BoE would do that to support the currency. Yet, we believe, the bearish psychology on the pound still needs to be broken.If that mood was to develop, with pound weakness proving more trouble for the inflation trajectory, the IMF might recommend sharp rate hikes to break the vicious cycle. Typically that has been the prescription for significant 20% falls for the likes of the Russian ruble, Turkish lira and Brazilian real. Of course, the UK has had some painful experiences in using rate hikes to defend the pound (think 1992), and we very much doubt that the BoE would do that to support the currency. Yet, we believe, the bearish psychology on the pound still needs to be broken.
8.18am BST8.18am BST
08:1808:18
Oil climbs as Hurricane Harvey approaches TexasOil climbs as Hurricane Harvey approaches Texas
Oil prices are climbing as Hurricane Harvey, potentially the biggest to hit the US in more than a decade, approaches Texas.Oil prices are climbing as Hurricane Harvey, potentially the biggest to hit the US in more than a decade, approaches Texas.
Brent crude is up nearly 1% at $52.55 a barrel while West Texas Intermediate - the US benchmark - is 0.8% higher at ¢47.83.on concerns about the disruption the storm could cause. Justin Chan at Numis said:Brent crude is up nearly 1% at $52.55 a barrel while West Texas Intermediate - the US benchmark - is 0.8% higher at ¢47.83.on concerns about the disruption the storm could cause. Justin Chan at Numis said:
Hurricane Harvey, a category-three storm, is expected to make landfall Friday night along the central coast of Texas where many refineries are located. The hurricane has continued to strengthen; if Harvey remains a category-three storm on landfall, it will be the strongest to hit the US since 2005.Hurricane Harvey, a category-three storm, is expected to make landfall Friday night along the central coast of Texas where many refineries are located. The hurricane has continued to strengthen; if Harvey remains a category-three storm on landfall, it will be the strongest to hit the US since 2005.
Energy companies have already shut coastal refineries and removed workers from offshore oil platforms in the Gulf of Mexico, Reuters reports, adding that nearly 10% of offshore Gulf crude output capacity had been halted by Thursday.Energy companies have already shut coastal refineries and removed workers from offshore oil platforms in the Gulf of Mexico, Reuters reports, adding that nearly 10% of offshore Gulf crude output capacity had been halted by Thursday.
UpdatedUpdated
at 8.23am BSTat 8.23am BST
8.06am BST8.06am BST
08:0608:06
European markets open higherEuropean markets open higher
Ahead of the main speeches at Jackson Hole, European stock markets have made a positive start to the day.Ahead of the main speeches at Jackson Hole, European stock markets have made a positive start to the day.
The FTSE 100 is up 0.2%, Germany’s Dax has added 0.11%, France’s Cac has climbed 0.15% while Spain’s Ibex is 0.2% better.The FTSE 100 is up 0.2%, Germany’s Dax has added 0.11%, France’s Cac has climbed 0.15% while Spain’s Ibex is 0.2% better.
There could be some fluctuations as the day progresses but some analysts believe investors will prefer to keep their powder dry. David Morrison, senior market strategist at Spreadco, said:There could be some fluctuations as the day progresses but some analysts believe investors will prefer to keep their powder dry. David Morrison, senior market strategist at Spreadco, said:
It’s shaping up to be an uneventful trading session, at least until we get past speeches from Janet Yellen and Mario Draghi later this evening. Investors have used the Jackson Hole event as an excuse to go on “pause” despite numerous hints from various insiders that neither Yellen nor Draghi will say anything dramatic when it comes to monetary policy. This is especially true of the Federal Reserve chair...It’s shaping up to be an uneventful trading session, at least until we get past speeches from Janet Yellen and Mario Draghi later this evening. Investors have used the Jackson Hole event as an excuse to go on “pause” despite numerous hints from various insiders that neither Yellen nor Draghi will say anything dramatic when it comes to monetary policy. This is especially true of the Federal Reserve chair...
In other words, this year’s symposium should see a return to the days when it was a dry and dusty academic event only of interest to economists. But even though Mr Draghi isn’t expected to address the issue of the ECB’s €60 billion per month bond purchase programme, some traders believe he may have something to say about the euro. This follows on from last week’s release of minutes from the bank’s last meeting which showed that the Governing Council were concerned about the current strength of the euro. Some traders feel that the ECB don’t want to see the EURUSD get much above 1.2000 and will be listening out for anything that Mr Draghi may say on this matter.In other words, this year’s symposium should see a return to the days when it was a dry and dusty academic event only of interest to economists. But even though Mr Draghi isn’t expected to address the issue of the ECB’s €60 billion per month bond purchase programme, some traders believe he may have something to say about the euro. This follows on from last week’s release of minutes from the bank’s last meeting which showed that the Governing Council were concerned about the current strength of the euro. Some traders feel that the ECB don’t want to see the EURUSD get much above 1.2000 and will be listening out for anything that Mr Draghi may say on this matter.
7.54am BST7.54am BST
07:5407:54
German economy grows in line with forecastsGerman economy grows in line with forecasts
A revised second quarter growth figure for the German economy was in line with the initial estimates.A revised second quarter growth figure for the German economy was in line with the initial estimates.
The country - the economic powerhouse of the eurozone - saw GDP grow by 0.6% quarter on quarter and 0.8% year on year. Later comes the IFO business confidence index.The country - the economic powerhouse of the eurozone - saw GDP grow by 0.6% quarter on quarter and 0.8% year on year. Later comes the IFO business confidence index.
7.51am BST7.51am BST
07:5107:51
Japanese inflation climbsJapanese inflation climbs
Japan’s inflation rate edged up by more than expected in August.Japan’s inflation rate edged up by more than expected in August.
The consumer price index rose from 0.1% in July to 0.5% year on year, compared to expectations of a 0.3% increase. Ipek Ozkardeskaya, senior market analyst at London Capital Group, said:The consumer price index rose from 0.1% in July to 0.5% year on year, compared to expectations of a 0.3% increase. Ipek Ozkardeskaya, senior market analyst at London Capital Group, said:
Improved inflation is good news for the Bank of Japan, even though the Japanese economy is still very far from the 2% inflation goal.Improved inflation is good news for the Bank of Japan, even though the Japanese economy is still very far from the 2% inflation goal.
7.43am BST7.43am BST
07:4307:43
Agenda: Central bankers at annual US meetingAgenda: Central bankers at annual US meeting
Good morning, and welcome to our rolling coverage of the latest news from the world economy, the financial markets, the eurozone and business.Good morning, and welcome to our rolling coverage of the latest news from the world economy, the financial markets, the eurozone and business.
Investors will be looking to the Jackson Hole gathering of central bankers in the US for clues to the future of their various quantitative easing and bond buying programmes. In particular speeches by European Central Bank president Mario Draghi and US Federal Reserve chair Janet Yellen will be scoured for clues on policy. David Madden, market analyst at CMC Markets UK, said:Investors will be looking to the Jackson Hole gathering of central bankers in the US for clues to the future of their various quantitative easing and bond buying programmes. In particular speeches by European Central Bank president Mario Draghi and US Federal Reserve chair Janet Yellen will be scoured for clues on policy. David Madden, market analyst at CMC Markets UK, said:
After a long wait the Jackson Hole symposium finally kicked off yesterday, and traders will be paying close attention to the speeches from Janet Yellen and Mario Draghi, which are due to take place today...After a long wait the Jackson Hole symposium finally kicked off yesterday, and traders will be paying close attention to the speeches from Janet Yellen and Mario Draghi, which are due to take place today...
We were told by unnamed sources from the European Central Bank (ECB),that Mr Draghi will not be laying down the groundwork for the tapering of the stimulus package. The ECB chief will probably use the speech to congratulate himself on the recovery of the eurozone thanks to the loose monetary policy, but he might use the relatively low inflation rate as an excuse not to talk about reigning in the stimulus package.We were told by unnamed sources from the European Central Bank (ECB),that Mr Draghi will not be laying down the groundwork for the tapering of the stimulus package. The ECB chief will probably use the speech to congratulate himself on the recovery of the eurozone thanks to the loose monetary policy, but he might use the relatively low inflation rate as an excuse not to talk about reigning in the stimulus package.
The ECB are buying €60 billion worth of government bonds per month, and traders know full well the central bank will run out of bonds to buy. The ECB will have to come up with alternative ways to keep the policy loose, because a weak euro will assist the eurozone.The ECB are buying €60 billion worth of government bonds per month, and traders know full well the central bank will run out of bonds to buy. The ECB will have to come up with alternative ways to keep the policy loose, because a weak euro will assist the eurozone.
Janet Yellen, the chair of the Federal Reserve, is likely give us more of the usual, that the US economy is improving, and in particular unemployment is falling. Earnings could be firmer but they are edging higher. The US inflation level is below the Fed’s target, and if Ms Yellen brings that up, it will tip off traders that we are unlikely to see a rate hike in December.Janet Yellen, the chair of the Federal Reserve, is likely give us more of the usual, that the US economy is improving, and in particular unemployment is falling. Earnings could be firmer but they are edging higher. The US inflation level is below the Fed’s target, and if Ms Yellen brings that up, it will tip off traders that we are unlikely to see a rate hike in December.
Ahead of the speeches, markets look fairly calm. The Nikkei 225 is up 0.5% and the Hang Seng has added 1%. European markets are forecast to open slightly higher:Ahead of the speeches, markets look fairly calm. The Nikkei 225 is up 0.5% and the Hang Seng has added 1%. European markets are forecast to open slightly higher:
Our European opening calls:$FTSE 7415 +0.10%$DAX 12206 +0.20%$CAC 5123 +0.20%$IBEX 10378 +0.20%$MIB 21778 +0.22%Our European opening calls:$FTSE 7415 +0.10%$DAX 12206 +0.20%$CAC 5123 +0.20%$IBEX 10378 +0.20%$MIB 21778 +0.22%
On the foreign exchanges, the pound is holding steady against both the euro and the dollar.On the foreign exchanges, the pound is holding steady against both the euro and the dollar.
We have already had Japanese inflation - slightly higher than expected - and German GDP - in line with forecasts (more on those shortly). Otherwise the Jackson Hole meeting dominates the day.We have already had Japanese inflation - slightly higher than expected - and German GDP - in line with forecasts (more on those shortly). Otherwise the Jackson Hole meeting dominates the day.
The agenda:The agenda:
9.00 BST German IFO business confidence9.00 BST German IFO business confidence
13.30 BST US durable goods orders13.30 BST US durable goods orders
15.00 BST Federal Reserve chair Janet Yellen speaks at Jackson Hole15.00 BST Federal Reserve chair Janet Yellen speaks at Jackson Hole
20.00 BST ECB president Mario Draghi speaks at Jackson Hole20.00 BST ECB president Mario Draghi speaks at Jackson Hole