It is understood that the Bank of England (BoE) has given private warnings to lenders to prepare for the possibility of an interest rate cut ahead of the publishing of its latest inflation report to include Brexit risks to the economy. The BoE will this week deliver its most detailed assessment yet on the potential impact of Brexit on the economy, which appears to be slowing sharply ahead of the June referendum vote. In its inflation report this week, the BoE is expected to elaborate on the implications for UK inflation and interest rates.
Some economists have called on the BoE to produce two separate sets of inflation forecasts — one for a “leave” vote and one for a “remain” vote. Given the implications of Brexit for economic growth and the level of the pound, those two projections could be far apart. Figures last week showed a loss of momentum across the manufacturing, construction and services sectors in April, extending the weak start to the year for the UK economy, which expanded by just 0.4% in the first quarter. Governor Carney has previously said that the BoE will lower rates — possibly to zero or even to impose negative interest rates — if such a step is needed to stimulate the economy.
U.S. new job creation fell sharply in April to 160,000 and according to many analysts could have ended any chance of a further interest rate rise in June. The unexpectedly low headline figure was the weakest in seven months and sent U.S. financial markets lower amid concerns that weak economic growth may finally be hitting the labour market. The 160,000 figure undershot economists’ projections by about 40,000 and job gains for February and March were also revised down by 19,000.
The unemployment rate, which is calculated from a different survey, was unchanged at 5.0%. However, it remained low for all the wrong reasons as a fall in the number of Americans working and actively looking for a job shrank the size of the overall labour market. Most analysts now predict that the next U.S. interest rate rise will come in September by which time they expect payroll growth to be back at 200,000, unemployment to be down to 4.75 per cent, GDP growth to have rebounded and core inflation to be a bit higher.
According to the latest Sentix index, sentiment in the eurozone improved marginally in May but expectations remain subdued suggesting the ongoing stimulus from the European Central Bank (ECB) is failing to offset worries about global growth. The index which tracks morale among investors and analysts in the eurozone, rose to 6.2 from 5.7 in April. Although the eurozone remains in the range of a moderate upturn, analysts caution that a self-supporting upturn in the eurozone is not yet happening despite the ample injection of liquidity and negative interest rates. The ECB surprised many in March with a volley of interest rate cuts, additional monthly bond purchases and more cheap loans for banks designed as an incentive for them to lend more but left policy unchanged in April. An index tracking Germany showed sentiment in Europe’s largest economy rose to its highest level this year, with investors’ perceptions of current conditions rising while expectations inched up.
As expected first-quarter earnings of the UK’s major banks fell as a result of the challenging market conditions. Against the backdrop of further misconduct charges, a weak economic outlook and uncertainty over Brexit, the five biggest banks have seen their shares fall between 3.0% and 9.8% over the week with Standard Chartered the biggest loser because of its emerging market exposure and restructuring costs.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||9th May 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.81||1.88||-3.7%|
|Allied Irish Banks||66||65||+1.5%||8.20||8.11||+1.1%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.02||14.90||+0.8%|
|Aust and NZ Banking Group Ltd||107||103||+3.9%||25.14||24.27||+3.6%|
|Banco Bilbao Vizcaya Argentaria S.A.||134||115||+16.5%||5.63||5.98||-5.9%|
|Parent: Barclays plc|
|Barclays Bank plc||130||109||+19.3%||1.62||1.72||-5.8%|
|BNP Paribas S.A.||85||74||+14.9%||44.27||46.24||-4.3%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||11.86||12.12||-2.1%|
|Credit Agricole S.A.||84||74||+13.5%||9.03||9.66||-6.5%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||139||127||+9.4%||19.54||19.68||-0.7%|
|Deutsche Bank AG||177||151||+17.2%||14.74||16.47||-10.5%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||104||89||+16.9%||4.32||4.53||-4.6%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||71||64||+10.9%||10.20||10.70||-4.7%|
|Intesa Sanpaolo S.p.A.||131||115||+13.9%||2.23||2.42||-7.9%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.82||5.23||-7.8%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||107||90||+18.9%||0.65||0.67||-3.0%|
|Metro Bank plc||n/a||n/a||n/a||20.35||20.50||-0.7%|
|Nationwide Building Society||76||79||-3.8%||n/a||n/a||n/a|
|Nordea Bank AB||71||69||+2.9%||74||78||-5.1%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||134||111||+20.7%||2.14||2.30||-7.0%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||76||76||0.0%||4.07||4.42||-7.9%|
|Shawbrook Group plc||n/a||n/a||n/a||2.80||2.87||-2.4%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||149||128||+16.4%||4.98||5.52||-9.8%|
|Svenska Handelsbanken AB||63||58||+8.6%||102||107||-4.7%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3139||3287||-4.5%|
|SNR FIN ITRAX CDS 5-YEARS||100||87||+14.9%||n/a||n/a||n/a|
Flagstone has not independently verified the information or data used in the Update which is based solely on publicly-available information. Neither Flagstone nor any of its advisors, representatives, officers or agents makes, or is authorised to make, any express or implied representation, warranty or undertaking as to the accuracy or completeness of the Update.