The City Of London skyline. Britain’s business community welcomed Brexit progress on the Irish border but urged the government to move swiftly ahead with the more complex matter of a trade deal with the EU Photograph: Alamy Stock Photo
The City Of London skyline. Britain’s business community welcomed Brexit progress on the Irish border but urged the government to move swiftly ahead with the more complex matter of a trade deal with the EU Photograph: Alamy Stock Photo
A couple of positive political developments helped push European markets higher, while Wall Street benefitted from the stronger than expected US jobs data.
The Brexit breakthrough was welcomed by investors, and even the pound losing its early gains helped the UK market, packed as it is with overseas earners which are helped by a weak sterling. In Germany, hopes that the current impasse in forming a coalition government could be resolved lifted the Dax higher. The final scores in Europe showed:
The FTSE 100 finished up 73.21 points or 1% at 7393.96
Germany’s Dax rose 0.83% to 13,153.70
France’s Cac closed 0.28% higher at 5399.09
Italy’s FTSE MIB climbed 1.4% to 22,773.80
Spain’s Ibex ended 0.57% better at 10,321.1
In Greece, the Athens market added 1.64% to 740.72
On Wall Street, the Dow Jones Industrial Average is currently 102 points or 0.42% higher.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back next week.
The early excitement in the pound following the morning’s Brexit news was well and truly short lived, and sterling is now down 0.7% against the dollar at $1.3370. In the wake of the deal news it climbed as high as $1.3519.David Madden, market analyst at CMC Markets UK, said:
At the start of the session, sterling was gaining ground on the back of the announcement that the UK and the EU had made sufficient progress in the first phase talks, so it can now move onto the discussions about trade. The early positive momentum in sterling, ran out of steam and it then the pound turned negative – which propped up the FTSE 100.
Part of the reason for the fall was the EU telling the UK that trade talks would not start until February.
Ratings agency Fitch has also opined on the Brexit news from this morning, and like S&P, says it has no immediate effect on its AA rating and negative outlook:
The agreement between the UK and the EU to move to the next phase of Brexit negotiations is a step towards a potential agreement on Brexit and trade, but the process remains lengthy and challenging, and the deal leaves many key uncertainties unresolved...
The progress report’s carefully crafted language fails to clarify how the UK can achieve all three of its commitments to leave the EU single market and customs union, ensure Northern Ireland retains “unfettered access” to the UK internal market, and avoid a hard border between Northern Ireland and the Republic of Ireland. It states that “in the absence of agreed solutions, the UK will maintain full alignment with those rules of the Internal Market and Customs Union which... support North-South cooperation”. This would appear to maintain the status quo if a trade deal is not agreed, but we think it would be politically very difficult for the UK government to guarantee regulatory equivalence between Northern Ireland and the Irish Republic in this event.
More broadly, the negotiation process leading up to today’s announcement has strained UK domestic politics, highlighting how June’s general election has weakened policy cohesion, reflecting divisions in parliament and among the UK public regarding the desired post-Brexit relationship with the EU, and meaning the final outcome of negotiations remains uncertain.
Fitch concludes:
Overall, today’s announcement does not alter the view we expressed when we affirmed the UK’s ‘AA’ sovereign rating in October, that the complexity of the issues, the magnitude of national interests at stake, the lack of a clear UK position, the EU’s negotiating stance, and the limited timeframe will make it challenging for the UK to secure a favourable trade agreement. The Negative Outlook on the rating reflects the uncertainty and corresponding downside economic and fiscal risks.
Any bursting of the Bitcoin bubble is unlikely to have a major impact on the global economy, says Capital Economics. The consultancy’s Andrew Kenningham says:
Unlike the bubbles in the tech sector in the late-1990s and in US residential property a few years later, a bursting of the bitcoin bubble should not have systemic, macroeconomic implications. The total value of bitcoin is (still) too small, and it has few links with the wider economy.
...As with many start-ups, the “true” value of bitcoin is unknown because it is unclear whether it has a long- term future. But we doubt that any cryptocurrency will become a serious rival to the dollar or other major fiat currencies, many of which have centuries of history behind them and the backing of governments and central banks. Also, technological problems, fraud or tighter regulation may undermine bitcoin. And even if cryptocurrencies in general have a future, one of bitcoin’s numerous competitors, or a central bank digital currency, could kill it off just as plenty of early rivals to Facebook and Google were sunk without trace.
Given this uncertainty, it makes sense that bitcoin is often compared to the famous Dutch tulip bubble. Like bitcoin, tulips became popular “because of their strangeness and rarity” and because they were new, having arrived from the Ottoman Empire in the late 16th century. Their prices rose astronomically between 1634 and 1637 and then collapsed. But the crash apparently had little impact on the Dutch economy.
There are several channels through which a bursting asset price bubble can, in principle, have macroeconomic consequences, but none are a major risk in the case of bitcoin.
Photograph: Capital Economics
First, there may be a hit to household spending as people who have invested suffer losses. But bitcoin’s market capitalisation is too small for this to be a worry. It is currently around $240bn, which is much smaller than the total value of gold outstanding ($8trn) or the value of Apple ($0.9trn). If the price of bitcoin fell to zero today, the paper losses would be equivalent to a 0.6% fall in US equity prices. As most investors have bought bitcoin at much lower prices, the relevant losses would arguably be smaller.
While a bursting bubble can affect the economy via the banking sector, this is not much of a risk either, precisely because bitcoin is held and traded outside the banking sector. Also, there is no evidence that people are taking out huge, sub-prime mortgages to finance their speculation in cryptocurrencies.
A slump in bitcoin prices should not have much effect on wider investor and business confidence either. As we have pointed out elsewhere, there is no correlation between the prices of bitcoin and other risky assets, so a fall in its price should not affect wider financial conditions. And nor would it tell us anything about wider market sentiment.
US consumer confidence has slipped back compared to last month, partly due to Democrat voters concerned about the effects of the proposed tax changes.
The University of Michigan’s initial consumer sentiment reading for December has come in at 96.8, compared to November’s 98.5 and expectations of a rise to 99.
Photograph: University of Michigan
The survey’s chief economist Richard Curtin said:
Consumer sentiment has remained quite favorable although it continued to slowly recede in early December from its October cyclical peak. Most of the recent decline was concentrated in the long-term prospects for the economy, while consumers thought current economic conditions have continued to improve.
Importantly, the largest decline in long-term economic prospects was recorded among Democrats, which reflected their concerns about the impact of the proposed changes in taxes.
Perhaps the most important changes in early December were higher income expectations as well as a higher expected inflation rate in 2018. Income gains have been slowly improving during the past year, and the data indicate that trend has continued. In contrast, the rise in inflation expectations in early December was a surprise, and confidence in this finding must await confirmation in the months ahead before any inferences are drawn. Buying plans for durables have improved in early December, largely due to attractive pricing, in contrast to the rise in the expected inflation rate. Overall, the data signal an expected gain of 2.7% in real consumption expenditures in 2018.
Greek finance minister Euclid Tsakalotos is about to begin a round of talks in the US aimed at the debt-stricken country re-accessing markets next year. Helena Smith reports:
After eight years of being exiled from international capital markets, Greece hopes to refinance itself for the first time in nearly a decade when its third international bailout programme expires next August. The politics of regaining market access are expected to dominate discussions Tsakalotos is to have in the US, starting today. Auditors representing the European creditors that have kept Greece afloat are also there.
The Marxist economist, who has allowed pragmatism to prevail over ideology in his job as finance minister, will be the keynote speaker in the annual Capital Link Invest in Greece Forum on Monday. Interestingly, he has been selected to ring the closing bell at the NYSE on Tuesday. Insiders are interpreting the move as an incipient signal of renewed optimism in the Greek economy.
The better than expected jobs data has seen a positive opening on Wall Street, while European markets continue to be buoyed - partly - by the day’s Brexit news.
The Dow Jones Industrial Average is currently up 70 points or 0.29%, with a US rate rise next week now seen as virtually inevitable despite the weaker than expected wages growth. Meanwhile the S&P 500 opened up 0.37% and the Nasdaq Composite rose by 0.7%
Elsewhere the FTSE 100 has climbed 0.87%, Germany’s Dax is up 1% and France’s Cac has climbed 0.44%.
Back with Brexit, and S&P Global Ratings says the UK’s credit rating at AA and its negative outlook is not immediately affected by this morning’s deal. It says:
The EC has announced that the UK has made “sufficient progress” in the first phase of the Brexit talks, which now paves the way for the EC to formally open the next phase in its summit on December 14 and 15. The EU’s chief negotiator, Michel Barnier, has signalled that a final agreement will have to be reached by October 2018. This leaves only 10 months for the UK to agree with the EU a framework for their future relationship, including a trade deal, and transitional arrangements.
A final agreement will have to be approved by 27 national parliaments ahead of the March 2019 exit date.
While sufficient progress has been made during the first phase, many issues are yet to be fully resolved. The situation is further challenged by the UK’s slowing domestic economy, the lack of a parliamentary majority, and by the absence of consensus within the government on the shape of the final relationship with the EU. Indeed, these considerations contributed to the slow progress during the first phase of negotiations. The negative outlook reflects the continued institutional and economic uncertainty surrounding the Brexit negotiations and the UK’s future relationship with the EU after the country’s departure from the bloc in March 2019.
But economists believe that wage weakness will not deter the Federal Reserve from raising US interest rates at its meeting next week. James Smith at ING Bank said:
For markets, a further disappointment in wage growth will be the key takeaway from today’s data. November’s growth in average hourly earnings came in below consensus at 0.2%, following a downward revision to October’s figure, although it’s still probably worth taking these numbers with a pinch of salt. Back in September, the job losses from the hurricanes were highly concentrated in low-wage sectors, and taking them temporarily out of the sample artificially boosted the average level of pay. November’s disappointment could simply be a further correction to this blip.
A similar logic can probably be applied to the payrolls numbers. On the face of it, a 228,000 increase in jobs during November looks good, but at least some of this is probably down to people returning to work after the disruption. Either way though, policymakers are less bothered by jobs growth these days - they know that the rate of employment growth should be expected to slow as the remaining slack in the economy erodes.
Given all the noise, the Fed will most likely write off this latest jobs report. Wage growth was disappointing, but given the sheer strength of the jobs market, we would still expect pay to accelerate gradually through next year. More broadly, we agree with the Fed’s assertion that most of this year’s inflation dip was ‘transitory’. Throw in 3% economic growth next year, as well as the hawkish rotation in regional Fed voters, and we expect a rate hike next week to be followed by three more in 2018.
US jobs report paves way for Fed rate hike next week
A stronger than expected rise in non-farm payrolls has reinforced expectations that the US Federal Reserve will raise interest rates next week.
Paul Ashwell, chief US economist at Capital Economics, gives his view:
The slightly bigger than expected 228,000 gain in non-farm payrolls in November all but guarantees another 25 basis point interest rate hike by the Fed next week, particularly with the unemployment rate unchanged at an unusually low 4.1%.
The 228,000 rise in non-farm payrolls last month was driven by job creation in professional services, manufacturing, and health care, the US Labor Department said.
The department gave some context behind its recent revisions, which it said painted a brighter picture overall:
The change in total non-farm payroll employment for September was revised up from +18,000 to +38,000, and the change for October was revised down from +261,000 to +244,000.
With these revisions, employment gains in September and October combined were 3,000 more than previously reported. After revisions, job gains have averaged 170,000 over the last 3 months.
Breaking: US jobs report stronger than expected in November
Non-farm payrolls rose by 228,000 in November, beating expectations of 200,000.
But the figure for October was revised down to 244,000 from an earlier estimate of 261,000.
The jobless rate was unchanged at 4.1%, while average earnings increased by 0.2%, following a 0.1% fall in October. It was below expectations of a 0.3% pick-up in pay.
Back to Brexit, and the Institute of Directors says firms are breathing “a huge sigh of relief” after talks progressed.
Stephen Martin, director general, adds:
The most pressing concern for UK companies has been their EU staff, who have urgently needed certainty about their future in this country. We have grounds to hope now that our members will be able to send their employees off for the Christmas break feeling more comfortable about their status here.
We call on the UK and EU to build on this positive momentum going into the new year. It is overwhelmingly in the interests of both sides to begin working on our future economic relationship - particularly in order to fully address the Irish question. And we look forward to further clarity about what the UK’s objectives are for that new relationship as well as a firm commitment on transition in the very near future.
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