This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.
You can find the current article at its original source at http://www.theguardian.com/business/live/2017/aug/25/sterling-markets-jackson-hole-bankers-janet-yellen-live
The article has changed 8 times. There is an RSS feed of changes available.
| Version 0 | Version 1 |
|---|---|
| Sterling and markets calm ahead of Jackson Hole bankers meeting - live | Sterling and markets calm ahead of Jackson Hole bankers meeting - live |
| (35 minutes later) | |
| 8.59am BST | |
| 08:59 | |
| Pound "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. | |
| 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. | |
| 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. | |
| The four reasons are: | |
| The 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. | |
| 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 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. | |
| 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. | |
| The 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. | |
| Markets 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. | |
| 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: | |
| 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. | |
| 8.18am BST | 8.18am BST |
| 08:18 | 08:18 |
| Oil climbs as Hurricane Harvey approaches Texas | Oil 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. |
| Updated | Updated |
| at 8.23am BST | at 8.23am BST |
| 8.06am BST | 8.06am BST |
| 08:06 | 08:06 |
| European markets open higher | European 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 BST | 7.54am BST |
| 07:54 | 07:54 |
| German economy grows in line with forecasts | German 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 BST | 7.51am BST |
| 07:51 | 07:51 |
| Japanese inflation climbs | Japanese 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 BST | 7.43am BST |
| 07:43 | 07:43 |
| Agenda: Central bankers at annual US meeting | Agenda: 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 confidence | 9.00 BST German IFO business confidence |
| 13.30 BST US durable goods orders | 13.30 BST US durable goods orders |
| 15.00 BST Federal Reserve chair Janet Yellen speaks at Jackson Hole | 15.00 BST Federal Reserve chair Janet Yellen speaks at Jackson Hole |
| 20.00 BST ECB president Mario Draghi speaks at Jackson Hole | 20.00 BST ECB president Mario Draghi speaks at Jackson Hole |