• The latest Reuters monthly poll of economists predicts that the MPC will reduce the UK Base Rate to 0.25% in August and that it will not rise from that level again until the end of 2018.
• The IMF has cut its global growth forecasts for the next two years, citing uncertainty over the UK’s exit from the EU, and now expects global GDP to grow by 3.1% in 2016 and by 3.4% in 2017.
• The IMF expects the Brexit impact will hit the UK hardest, cutting its 2016 growth forecast to 1.7%, down 0.2% from its April forecast, while cutting its 2017 UK forecast more sharply by 0.9% to 1.3%.
• The latest preliminary ‘flash’ survey of economic activity from the IHS Markit Purchasing Managers’ Index (or PMI) shows a fall to 47.7 in July, the lowest level since April 2009.
• Chancellor Philip Hammond expects the uncertainty about Brexit to begin to abate once the UK has laid out a vision for a future relationship with the EU, which should become clearer later this year.
• The Chancellor indicated that it is time for the UK to explore new business opportunities across the world and believes the EU are not in “punishment mode” over the Brexit vote.
• The Chancellor has also announced that the UK has begun discussions with China on an ambitious free trade deal which could see greater access for UK banks and businesses to the Chinese economy.
• Analysts believe that the U.S. Federal Reserve (Fed) is almost certain to keep interest rates on hold this coming Wednesday, possibly limiting the Fed to one further hike in late 2016.
• Both the The ITRAXX Europe Senior Financials 5-year CDS index and the FTSE 350 Bank Index improved over the week as financial market become more accustomed to living with the Brexit decision.
The latest Reuters monthly poll of economists predicts that the Monetary Policy Committee (MPC) will reduce the UK Base Rate to 0.25% in August and that it will not rise again from that level until the end of 2018. This compares to a steady rise to 1.50% by 2018 predicted in the June poll. Economists also expect the MPC to approve an additional £80.0 billion of quantitative easing (QE) at their August meeting.
The International Monetary Fund (IMF) has cut its global growth forecasts for the next two years, citing uncertainty over the UK’s exit from the European Union (EU). Cutting its World Economic Outlook forecasts for the fifth time in 15 months, the IMF said that it now expects global GDP to grow by 3.1% in 2016 and by 3.4% in 2017 – down 0.1% for each year from estimates issued in April.
The IMF expects the Brexit impact will hit the UK hardest, cutting its 2016 growth forecast to 1.7%, down 0.2% from its April forecast, while cutting its 2017 UK forecast more sharply by 0.9% to 1.3%. The IMF cautioned that its latest forecasts were made under relatively benign assumptions of a settlement between the EU and the UK that leads to limited political fallout, avoids a major increase in economic barriers and prompts no major further financial market disruptions.
The UK’s decision to leave the EU appears to have led to a significant deterioration in UK economic activity, not seen since the aftermath of the financial crisis. The latest preliminary ‘flash’ survey from the IHS Markit Purchasing Managers’ Index (or PMI) shows a fall to 47.7 in July, the lowest level since April 2009. A reading below 50 indicates contraction. The reading is consistent with the economy contracting by -0.4% in the third quarter. Both manufacturing and service sectors saw a decline in output and orders although exports picked up, driven by the weakening of the pound.
A communique issued by Members of the Group of 20 (G20) major economies at the end of their two-day meeting in China said Brexit, had added to uncertainty in the global economy where growth was considered to be weaker than desirable. It added that members, however, were well positioned to proactively address the potential economic and financial consequences. The G20 indicated that they have prepared actively to cope with the potential economic and financial impact of the Brexit decision but hope the UK and the EU can actively form a close partnership.
Chancellor Philip Hammond expects the uncertainty about Brexit to begin to abate once the UK has laid out a vision for a future relationship with the EU, which should become clearer later this year. But he warned that there could be volatility in financial markets throughout the negotiations in the years ahead. Mr Hammond said “If our European Union partners respond to such a vision positively, so that there is a sense perhaps later this year that we are all on the same page in terms of where we expect to be going, I think that will send a reassuring signal to the business community and to markets.”
The Chancellor indicated that it is time for the UK to explore new business opportunities across the world, despite a short-term economic shock to the global economy from leaving the EU who he believes are not in “punishment mode” over the Brexit vote. The Chancellor is confident that as the UK leaves the EU and is not bound by the rules of the EU it will be easier for the UK to negotiate new trade deals with the rest of the world in the future.
The Chancellor has also announced that the UK has begun discussions with China on an ambitious free trade deal. Chinese state media reported earlier in the month that China is keen to do a UK free trade deal. It will be the first time the UK has embarked on such a major project with the second largest economy in the world. In return for greater access to the UK for its manufactured products and investment, China would reduce barriers to the UK’s service industries like banking and insurance as well as UK goods. This could be an important source of additional export income for the UK.
Analysts believe that the U.S. Federal Reserve (Fed) is almost certain to keep interest rates on hold this coming Wednesday, acknowledging improved economic prospects but offering few hints about its next move. The Fed appears keen to avoid repeating its past mistake of stoking rate hike expectations. The next move is still seen as an increase in the Fed rate but as concerns over Brexit ease and the U.S. election draws closer, this is likely to push back any action towards the end of the year and possibly limiting the Fed to a single hike in 2016 which is a far cry from its early-year estimate for four moves.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||25th July 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.36||1.41||-3.5%|
|Allied Irish Banks||69||71||-2.8%||6.50||6.40||+1.6%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.60||14.24||+2.5%|
|Aust and NZ Banking Group Ltd||81||84||-3.6%||25.31||24.85||+1.9%|
|Banco Bilbao Vizcaya Argentaria S.A.||120||134||-10.4%||5.25||5.35||-1.9%|
|Parent: Barclays plc|
|Barclays Bank plc||109||125||-12.8%||1.52||1.50||+1.3%|
|BNP Paribas S.A.||73||77||-5.2%||43.40||42.78||+1.4%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.22||11.34||+7.8%|
|Credit Agricole S.A.||72||76||-5.3%||7.90||7.84||+0.8%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||134||144||-6.9%||21.57||21.53||+0.2%|
|Deutsche Bank AG||202||213||-5.2%||13.09||13.02||+0.5%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||78||83||-6.0%||4.94||4.79||+3.1%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||60||66||-9.1%||10.13||9.78||+3.6%|
|Intesa Sanpaolo S.p.A.||126||144||-12.5%||1.96||1.93||+1.6%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.58||4.49||+2.0%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||90||118||-23.7%||0.54||0.56||-3.6%|
|Metro Bank plc||n/a||n/a||n/a||18.62||18.97||-1.8%|
|Nationwide Building Society||98||100||-2.0%||n/a||n/a||n/a|
|Nordea Bank AB||64||67||-4.5%||75||73||+2.7%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||118||135||-12.6%||1.89||1.84||+2.7%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||86||87||-1.1%||3.88||3.81||+1.8%|
|Shawbrook Group plc||n/a||n/a||n/a||1.66||1.67||-0.6%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||109||123||-11.4%||6.13||6.00||+2.2%|
|Svenska Handelsbanken AB||62||64||-3.1%||103||104||-1.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3211||3164||+1.5%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||92||96||-4.2%||n/a||n/a||n/a|