• The OECD has backtracked on its warning that Brexit would damage the economy – upgrading its growth forecast for this year to 1.8% from 1.7% in June – but did cut the outlook for 2017 by half to only 1.0%.
• The UK Chancellor acknowledged the OECD outlook for 2017 and the likelihood of some difficult times ahead but remains confident that the UK has the tools necessary to support the economy.
• MPC member, Kristin Forbes, has broken ranks by stating that in her view the BoE does not have to cut interest rates further to tackle the negative effects of the Brexit vote.
• Confidence among UK consumers appears set to continue to rebound from its post-Brexit downturn with the GfK monthly consumer confidence indicator improving to -4 this month, from -7 last month.
• With inflation and unemployment low there is little sign of any imminent consumer belt-tightening but the BoE believes that companies across the UK are scaling back expansion plans.
• Economists forecast that the UK’s current account deficit will have narrowed slightly in the second quarter to £30.4bn but remains a key risk if overseas investors were to stop buying UK assets.
• The FTSE 350 Bank Index improved slightly over the week by 1.6% underpinned by the Fed decision not to increase U.S. interest rates.
• Although the ITRAXX Europe Senior Financials 5-year CDS index rose only slightly to 97bps from 96bps, the spreads of major banks rose between 5% and 13% on contagion fears after the DoJ shock settlement claim for $14.0bn against Deutsche Bank for their role in the mis-selling of mortgage-backed securities.
Last week the Organisation for Economic Co-operation and Development (OECD) backtracked on its warning that a Brexit vote would damage the UK economy by upgrading its growth forecast for this year and stating that swift action by the Bank of England (BoE) had helped to bolster activity. The OECD estimated the UK economy would suffer less than initially feared as a result of the vote in June to leave the European Union (EU). It has forecast UK growth of 1.8%, up from 1.7% in June. However it did cut the outlook for 2017 by half to only 1.0% citing the ongoing uncertainty about the UK’s trading relationship with the EU as the main reason.
The Chancellor, Philip Hammond, acknowledged the uncertainty reflected in the OECD outlook and the likelihood of some difficult times ahead but is confident that the UK has the tools necessary to support the UK economy as we adjust to a new relationship with the EU which will be outlined in the UK government’s first budget plans on the 23rd November.
Kristin Forbes, a member of the Monetary Policy Committee (MPC), has broken ranks by stating that in her view the BoE does not have to cut interest rates further to tackle the negative effects of the Brexit decision. She added that the current interest rate of 0.25% was low enough to prevent the economy from slipping into a recession. Ms Forbes had backed the vote to cut interest rates from 0.50% to 0.25% in August but now believes that the UK economy has not faltered to the levels that were predicted earlier and that she was confident it would recover without the need to cut rates to nearer 0%. These views appear to be at odds with a new Brexit warning last week from the BoE that the UK economy faces a challenging period that could undermine financial stability in the short term.
Confidence among UK consumers appears set to continue to rebound from its post-Brexit downturn in the latest sign that the economy is shrugging off the initial effects of the Brexit decision. The expected bounce when consumer confidence figures for September are released on Thursday is expected to show that sentiment has recovered close to its level before the referendum. Economists are forecasting a rise in GfK’s monthly consumer confidence indicator to -4 this month, from -7 last month. The closely watched gauge fell to -12 in July.
With inflation and unemployment low, there is little sign that a bout of consumer belt-tightening is in the offing but many economists still expect a gradual slowdown in growth as the ongoing uncertainty over Brexit is likely to make businesses reluctant to invest or to take on new staff. According to a report from the Bank of England’s regional agents last week, companies across the UK are scaling back their expansion plans.
Official figures this week are set to show the extent of the UK’s large trade gap with the rest of the world going into the referendum. Economists forecast that the UK’s current account deficit will have narrowed slightly to £30.4bn in the second quarter but which remains very high. The fall in the value of sterling since the referendum should help cut the deficit but the Bank of England (BoE) warned last week that the trade gap remains a key risk if overseas investors were to stop buying UK assets.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||26th September 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||18.60||18.20||+2.2%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.75||1.70||+2.9%|
|Allied Irish Banks||59||56||+5.4%||6.00||6.05||-0.8%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.10||15.50||-2.6%|
|Aust and NZ Banking Group Ltd||68||65||+4.6%||27.59||26.36||+4.7%|
|Banco Bilbao Vizcaya Argentaria S.A.||120||117||+2.6%||5.49||5.23||+5.0%|
|Parent: Barclays plc|
|Barclays Bank plc||94||87||+8.0%||1.71||1.65||+3.6%|
|BNP Paribas S.A.||71||70||+1.4%||46.96||44.64||+5.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||14.29||13.96||+2.4%|
|Credit Agricole S.A.||70||68||+2.9%||8.88||8.64||+2.8%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||131||121||+8.3%||21.28||20.45||+4.1%|
|Deutsche Bank AG||221||195||+13.3%||11.41||11.99||-4.8%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||68||65||+4.6%||5.74||5.67||+1.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||62||58||+6.9%||11.06||10.68||+3.6%|
|Intesa Sanpaolo S.p.A.||143||133||+7.5%||2.00||2.01||-0.5%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.75||4.60||+3.3%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||81||77||+5.2%||0.56||0.57||-0.9%|
|Metro Bank plc||n/a||n/a||n/a||27.83||27.32||+1.9%|
|Nationwide Building Society||85||80||+6.3%||n/a||n/a||n/a|
|Nordea Bank AB||68||62||+9.7%||85||84||+1.2%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||116||104||+11.5%||1.83||1.86||-1.6%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||80||+2.5%||3.96||3.88||+2.1%|
|Shawbrook Group plc||n/a||n/a||n/a||2.49||2.43||+2.5%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||110||103||+6.8%||6.39||6.07||+5.3%|
|Svenska Handelsbanken AB||61||56||+8.9%||118||114||+3.5%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3591||3535||+1.6%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||97||96||+1.0%||n/a||n/a||n/a|