Wow. The pound has now gained nearly one and a half cents against the US dollar this morning, to a seven-week high of $1.2465.
This means it’s gained five whole cents since hitting a three-year low at the start of September.
Michael Brown, senior analyst at Caxton FX, suggests caution:
Sterling has rallied to its highest levels against the euro and dollar since late-July this morning, having gained more than 1% in reaction to the news that the DUP may be softening their stance on the Irish backstop.
However, the pound remains vulnerable, with politics set to continue dominating and the Brexit landscape shifting as quickly as ever.
Credit Suisse turns bullish on UK stocks
The strength of the pound is pulling the FTSE 100 down this morning. It’s lost 22 points or 0.3%, because a stronger sterling hurts multinationals’ overseas earnings.
But otherwise, now could be a good time to buy UK shares, according to analysts at Credit Suisse.
They’ve turned bullish on UK stocks this morning, arguing that valuations look relatively cheap now that a no-deal Brexit looks more likely.
They told clients:
“Given the most recent developments (…), we believe that investors should now be overweight of the UK, but more importantly in US dollar terms and still selectively.
“We would buy UK international earners in dollar terms that are cheap versus their peer group.”
Credit Suisse predict the FTSE 100 could have risen to 7,600 by the middle of next year – up from 7,329 today.
They suggest specialty chemical firm Johnson Matthey, pest controller Rentokil and cigarettes maker British American Tobacco as attractive stocks.
Pound hits $1.24 on Brexit hopes
The pound has hit its highest level since late July this morning, on growing optimism that a no-deal Brexit can be avoided.
Sterling has jumped by three-quarters of a cent to $1.2406, a seven-week high.
The rally comes as investors grow more confident that a Halloween Brexit horror can be avoided.
The Times has caused a stir this morning, reporting that Northern Ireland’s DUP is softening its position – and could accept Northern Ireland accepting some EU rules after Brexit. That might allow a reshaping of the current Backstop agreement.
However, DUP leaders Arlene Foster has rubbished the idea….
But there have been rumours for several days that Boris Johnson could be considering a Northern Ireland-only backstop to replace the current UK-wide one [this is the insurance policy in case a UK-EU free trade deal isn’t reached].
Another development: cabinet ministers have been urging Johnson to ask Brussels for an extension, rather than disobey the parliamentary vote instructing him to seek more time if a deal can’t be reached (the Telegraph reports here).
Our Politics Live blog has all the action:
European bank stocks are rising this morning, lifted by the ECB’s new stimulus package.
Financial companies are the top risers on the Stoxx 600, up 0.8% on average. This backs up the argument that the new two-tiered system for negative rates, and the more generous TLTRO loans programme, will help the banks.
Mark Haefele, chief investment officer at UBS Global Wealth Management, also has doubts about the ECB’s firepower.
The ECB has committed to keeping rates at current levels or lower until it sustainably achieves its inflation target. But the effectiveness of forward guidance rests on central bank credibility. The ECB’s inability to achieve its inflation target a decade after the global financial crisis may undermine its credibility.”
Kit Juckes of Société Générale writes that Mario Draghi is going out swinging, but perhaps not connecting as he used to:
Mario Draghi reminds me of an ageing boxer, still up for the fight but unable to pack the same punch as he used to. The currency fell yesterday on the news of a rate cut and an open-ended bond-buying programme, but it’s clear that it isn’t open ended unless the ECB can widen the pool of bonds they buy.
It’s not at all clear that the impact on the economy will be significant and it’s crystal clear that the baton needs to be handed to fiscal policy sharpish.
“Dracula” Draghi accused of sucking savers’ money away
German newspapers are horrified that the European Central Bank is launching a new stimulus programme.
Bild, the tabloid, has dubbed Draghi a ‘dracula’ who has sucked billions of euros from thrifty German savers (they claim).
The horror for German savers continues: ECB chief Mario Draghi (72) wants to tighten the zero interest rate policy even more!
It’s not surprising to see such concerns. Saving rates are at record low levels, which is clearly unpopular in Germany where the savings rate is double that of the UK.
But analyst Fred Ducrozet argues that today’s criticism is misplaced. He says the ECB actually helped German banks yesterday (by changing how its negative interest rates will be applied to bank reserves).
Austrian central bank chief criticises stimulus package
Boom! The newest member of the ECB’s governing council has gone public with his concerns over Draghi’s stimulus package.
Governor Robert Holzmann, the new chief of Austria’s National Bank, has confirmed that some eurozone central bank governors pushed back against the moves agreed yesterday. He believes the plan could be a mistake.
According to Holzmann it was a “very intensive but also very constructive council meeting” in Frankfurt yesterday.
Some policymakers clearly felt that monetary policy had done about as much as it could.
Essentially it was the question about how effective will a new monetary easing be.
And in a clear challenge to the departing Draghi, Holzmann suggests that his successor, Christine Lagarde, could amend the stimulus.
“As things change — also this forward guidance and the policy may change — not tomorrow, not the day after tomorrow, but I wouldn’t think it’s there for the next decades.
One problem with that theory: Lagarde, like Draghi, is certainly on the dovish wing of global policymakers.
Introduction: ECB’s stimulus package lifts markets despite backlash
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Shares are advancing higher this morning after the European Central Bank delivered a wide-ranging, and controversial, stimulus package yesterday.
In his last major act as ECB president, Mario Draghi restarted the Bank’s quantitative easing programme, with a new plan to buy €20bn of bonds each month.
He also cut its deposit rate (paid on commercial bank deposits at the ECB) deeper into negative territory, and introduced a new two-tiered system to protect bank profits.
The ECB also sweetened its cheap loans programme, to encourage banks to lend to the real economy, and made a new, tougher, pledge to leave borrowing costs at record lows until inflation has risen.
The move pushed equities and bond prices higher, as investors welcomed these fresh measures to ward off a recession.
Japan’s Nikkei has jumped 1% overnight, and European markets are expected to nudge new six-week highs too.
But the move was also controversial — with Draghi facing a revolt from several members of his own governing council.
France’s Francois Villeroy de Galhau, the Netherlands Klaas Knot and Bundesbank President Jens Weidmann of Germany all pushed back against parts of the programme – in vain.
As Bloomberg explains:
Those three governors alone represent roughly half of the euro region as measured by economic output and population.
Other dissenters included, but weren’t limited, to their colleagues from Austria and Estonia, as well as members on the ECB’s Executive Board including Sabine Lautenschlaeger and the markets chief, Benoit Coeure, the officials said.
This backlash suggests that some central bankers believe monetary policy is reaching the end of the line.
Draghi himself warned that governments need to raise their spending to lift economic growth, rather than relying on monetary policy to do all the heavy lifting.
With the eurozone economy looking weak, and Germany possibly in recession, he declared:
It is high time for fiscal policy to take charge.
European finance chiefs are meeting in Helsinki today – we’ll see if they respond to his call.
- All day: Informal Ecofin meeting of EU finance ministers in Helsinki
- 10am BST: Eurozone trade balance for July
- 1.30pm BST: US retail sales for August
- 3pm BST: University of Michigan sentiment survey for September