Graeme Wearden (until 2pm) and Nick Fletcher 

Bank of England warns of ‘pocket of risk’ from consumer credit – as it happened

UK central bank warns that £30bn of loans could turn sour if Britain’s economy falls into recession
  
  

The City of London Skyline.
The City of London Skyline. Photograph: Alamy Stock Photo

Mixed day for European markets

European investors appeared to be a little nervous following the result of the German elections. As expected Angela Merkel remains Chancellor, but the better than expected performance by the far right party AfD took some of the shine off her victory.

In the UK banks and insurance shares were under pressure as Labour unveiled proposals to cap interest rate payments on credit cards, while the Bank of England said UK banks need to set aside an extra £10bn to cover potential losses on car loans, and credit cards.

Meanwhile in the US, a fall in technology stocks Facebook and Apple sent markets lower, as did the comments from North Korea that the US had now declared war on the country. The final scores in Europe showed:

  • The FTSe 100 finished down 9.35 points or 0.13% at 7301.29
  • Germany’s Dax edged up 0.02% to 12,594.81
  • France’s Cac closed 0.27% lower at 5267.13
  • Italy’s FTSE MIB fell 0.63% to 22,389.57
  • Spain’s Ibex ended 0.86% lower at 10,216.5
  • In Greece, the Athens market lost 4.06% to 742.49

On Wall Street, the Dow Jones Industrial Average is currently down 72 points or 0.33%.

On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.

Ratings agency Fitch has opined on the German election result:

Oil jumps to highest level since July 2015

Crude is at its best level for more than two years after producers said output cuts were having an effect, and fears grew that supplies from Kurdistan could be curtailed.

Brent has jumped 2.7% to $58.39 a barrel while West Texas Intermediate added 2% to $51.77. On Friday an Opec meeting said that an agreement to cap production was helping to reduce the global supply glut.

Meanwhile Turkey threatened to cut oil flows from Iraq’s Kurdistan region in response to its referendum on independence, which Turkey does not recognise.

Updated

With markets slipping back, particularly in the US after the new North Korean comments, Chris Beauchamp, chief market analyst at IG, said:

US stocks underwent a sharp wave of selling as North Korea decided to respond to the weekend’s events by declaring that it viewed Mr Trump’s comments as a ‘declaration of war’. This looks like a fairly hefty step up in the escalation game, and one that is sure to provoke a US response of some kind. Tech stocks were hit hardest, with the Nasdaq already stumbling thanks to the poor debut of Apple’s new phone models. North Korea is clearly rattled; the bomber flights at the weekend remind Pyongyang of its inherent vulnerability and its clear disadvantages when it comes to high-tech weaponry. The risks of miscalculation have now multiplied alarmingly, and markets may well continue to respond negatively.

As for Europe, he said:

A day relatively free of big corporate news has meant that the focus is squarely on the euro.

In Brussels ECB president Mario Draghi seems to have decided that the time has come for a bit of judicious ‘talking down’ of the euro. While at the most recent ECB meeting he seemed unperturbed by the euro’s strength, today’s comments show that the rise in the single currency is clearly causing him to lose some sleep. With a nod to inflation weakness, he has suggested reminded everyone not to get too carried away with the idea of tapering, since more easing could still be needed. This is Mr Draghi carefully hedging his bets, but with Germany now somewhat distracted by coalition forming the ECB needs to keep the show on the road. If more QE is the means to achieve this, so be it.

So the pound has gained 0.7% against the euro to €1.1372.

Greece nervous after German election outcome

Back with the German election, and the results have unnerved Greece whose dependency on Berlin for emergency bailout funds has made it ever more vulnerable to developments elsewhere. Helena Smith reports:

The Greek prime minister Alexis Tsipras was among the first to congratulate the German chancellor Angela Merkel on her four-time electoral victory:

“A Europe of solidarity and democracy is today more necessary than ever before. Whoever, believes in this, should, despite differences, work together for the deepening and expansion of European values.”

More dependent than other EU member states on which way the election went, Greek officials are this morning trying to decode the result.

Despite Die Linke, the ruling leftist Syriza party’s official choice, posting its second best election result ever, the unexpectedly strong showing of AfD has sent shudders down the spines of many in a country where the neo-Nazi Golden Dawn party is the third biggest political force.

The strong showing of the bro-business FDP and the strong likelihood of Merkel entering into coalition with the party, is also causing consternation. It’s leader Christian Linder takes a tough line on debt-stricken Greece’s euro zone membership.

“If there was a debt cut for Greece, as the International Monetary Fund suggests, then we should be open-minded to finally solving the problem,” he said in a recent interview with Bloomberg. “Greece gets a debt cut, the money is gone, but for that Greece has to leave the eurozone, get a new currency of its own which it can devalue and increase its competitiveness in tourism.”

Greek politicians worry that Linder will be following up his rhetoric by requesting the post of finance minister in Berlin.

Meanwhile Jeroen Dijsselbloem, visiting chairman of the eurogroup ministers represening countries in the single currency, has urged Greece to implement the reforms that will enable it to make a “clean exit” from its third and current bailout program.

“There is a joint interest in getting the third [bailout compliance] review done quickly,” he said during talks with Tsipras.

Back in Europe, and European Central Bank president Mario Draghi has finished his appearance before parliament. Here is Reuters take on his performance:

The European Central Bank is growing increasingly confident that inflation will rise back to its target but patience is still needed, ECB President Mario Draghi said on Monday.

Draghi singled out currency volatility as a source of uncertainty which requires monitoring and argued that the economy still needed to absorb slack, requiring “ample” ECB accommodation.

“Overall, we are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialize,” Draghi told the European Parliament’s committee on economic affairs.

With the euro zone economy now growing for the 17th straight quarter, the ECB is expected to reduce stimulus from next year, even if inflation will remain below the bank’s near 2 percent target for years to come.

Indeed, policymakers speaking to Reuters said that the debate is now about the details of the policy shift, such as whether to keep quantitative easing open ended or whether to signal an intent to phase out bond purchases.

Updated

US markets have extended their falls after comments from North Korea ratcheted up the tensions with the US again:

The Dow is now down 0.3%, the S&P 500 is 0.17% lower and the Nasdaq Composite has lost 1%. Gold, as a haven for investors in risky times, has added $2 an ounce to $1299.

Updated

Wall Street slips

Elsewhere US markets have slipped at the start of the new week, not helped by a decline in Apple shares on concerns that the new iPhone 8 may not be as popular as hoped and a drop in Facebook stock.

The Dow Jones Industrial is down 0.04% in early trading while the S&P 500 is 0.12% lower.

David Madden, market analyst at CMC Markets UK, said:

The Dow Jones and S&P 500 are fractionally lower today as the lacklustre move in US equities continues. The American indices registered a string of fresh record-highs recently, but we saw the bullish momentum fizzle out at the end of last week.

The ground that has been handed back is small when compared with how much they have risen since August.

Federal Reserve member, William Dudley, stated he expects a gradual increase in interest rates. Mr Dudley anticipates inflation to tick up in the medium term, as the soft US dollar and robust international growth will help the US economy. Last week, the US central bank made in clear they intend to hike rates in December. Central banks should be listened to, but they don’t always uphold their pledges.

Earlier, there was more fuel for the Fed fire with a better than expected manufacturing survey from the Dallas Fed:

Updated

On the ECB’s future actions:

Draghi says it is premature to talk about what may be decided at the October meeting of the ECB.

That meeting is in the spotlight for any news on the bank deciding tapering its stimulus programme, but Draghi seems keen not to pre-empt the discussion.

Updated

A question on regulating bitcoin:

Asked about North Korea and the current tensions, Draghi says he mentioned potential downside risks for the economy, and geopolitical concerns are part of that.

Updated

On to questions.

Draghi is asked about China and the prospects of its debt situation affecting the global economy. He says he is confident the Chinese monetary authorities can cope adequately and have started to act.

And he said it was a different situation to two years ago, when there was a serious concern about a downturn in the Chinese economy. Now the eurozone is stronger and “an unfavourable change in external economic conditions would not have the same negative impact is would have done two years ago.”

Draghi concluded with another call for government’s to also take action:

While a cyclical adjustment has been taking place, there are still structural issues which impede sustainable economic convergence.

In the years to come, a higher degree of sustained convergence and strengthened resilience will be necessary in order to achieve a better-functioning Economic and Monetary Union.

This requires, on the one hand, policy actions by national governments aimed at unlocking the productive potential of our economies. On the other hand, further decisive steps are needed to make Economic and Monetary Union’s economic governance truly fit for purpose.

Draghi defended the ECB’s policy and its bond buying programme:

The package of monetary policy measures that we have phased in sequentially since June 2014 has led to a significant easing in financing conditions. What is very apparent today, and very difficult to dispute, is that this monetary policy impetus is increasingly leading to stronger economic activity, higher incomes and better employment prospects for people in the euro area.

One key factor has been our ability to activate non-standard instruments that can transmit additional stimulus to the productive sector. In fact, transmission through the banking system has become increasingly effective since we began adopting credit-easing measures. I am referring here specifically to the expanded asset purchase programme (APP), but a similar case can be made for our targeted longer-term refinancing operations....

Thanks to our corporate bond purchases, firms in the euro area have witnessed significant improvements in their financing conditions when issuing bonds.

Updated

ECB must be "patient and persistent" on monetary policy - Draghi

The European economy still needs the ECB’s stimulus package despite its recent recovery, according to the central bank’s president Mario Draghi, who also expressed concern over the recent volatility of the euro. Speaking to the European parliament (live here), he said:

The firm economic recovery still needs to translate more convincingly into stronger inflation dynamics. As I reported already in the past, deflation risks have essentially disappeared. Nevertheless,measures of underlying inflation have picked up only moderately over recent months.

Headline inflation, which was 1.5% in August, is expected to temporarily decline towards the turn of the year, driven mainly by base effects in the energy component. Afterwards, it is expected to pick up gradually, reaching 1.5% in 2019, according to the ECB staff projections.

Overall, we are becoming more confident that inflation will eventually head to levels in line with our inflation aim, but we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialise. Moreover, we still see some uncertainties with respect to the medium-term inflation outlook.

Most notably, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.

We therefore need to be patient and persistent. An upward adjustment of headline inflation that is durable and self-sustained requires a further absorption of economic slack. This, in turn, still requires a very ample degree of monetary policy accommodation.

With this in mind, we will decide later this year on a re-calibration of our instruments that maintains the degree of monetary support that the euro area economy still needs to complete its transition to a new balanced growth trajectory characterised by sustained conditions of price stability.

He did say the economic was now firm and broad-based across eurozone, while “the latest information indicates continued momentum in the period ahead.” He added:

According to the September ECB staff macroeconomic projections, the economic expansion will continue at growth rates above potential over the projection horizon.

Updated

German elections: What the experts say.

Back with yesterday’s German general election, here’s a round-up of the best City reaction.

Asset management firm BlackRock say:

  • Merkel wins a fourth term but faces tricky coalition talks after mainstream parties posted their worst results since the 1940s
  • · We see the outcome slowing momentum behind a Franco-German drive to promote deeper eurozone integration
  • · The powerful position of German finance minister could be key in coalition talks and the future of the eurozone

Jeremy Cook of World First reckons the euro has been weakened by AfD’s success in yesterday’s election, saying:

Critics are wondering what this means for German domestic politics, and the German economy as a whole.

He also suspects the new coalition government probably won’t be assembled until December.

Nick Peters, multi asset portfolio manager at Fidelity International, said despite the surprises in the German elections, European shares should benefit from a stronger economic backdrop:

Europe’s equity market has lagged other developed markets (excluding the impact of currency) and so offers some potential for catch up, particularly given valuations do not looked stretched relative to recent history and with earnings per share growth the fastest among developed markets. The backdrop also supports the rationale for small cap eurozone equities which should benefit most from the growing expansion of domestic demand and any agreement to cut corporate taxes.

Merkel’s governments have promoted German growth mainly through external competitiveness and, although there is a need to re-balance the economy somewhat, it is unlikely the new government will significantly change tact with Markel still Chancellor. This should be positive for export orientated sectors, such as industrials and healthcare, though the auto sector faces some stronger specific challenges that will be important for relative performance.

And Kathleen Brooks, research director at City Index believes Spain is more of a threat to the euro than Germany. This weekend Catalonia is proposing to hold a referendum on independence, which the Madrid government had stated is illegal:

If Catalonia votes for independence, even if the vote is deemed illegal, then it could put pressure on Madrid to allow the people of the region to have a legal vote, which could increase the chance of a break up of Spain.

It could also have ramifications for the EU, would an independent Catalonia be allowed to join? Would it spur other nations to seek independence, not only from other countries’ but also from the EU?

Overall, referendums in recent years have not been good news for a currency. Back in 2014, when Scotland held its unsuccessful independence referendum, the pound dropped 6% from July to September, before bouncing 2% when the referendum failed, then it resumed its downtrend.... Thus, if the Catalonia referendum goes ahead we expect this to be a disruptive event for the euro, with the potential for a sharp decline of up to 5% initially in the single currency if the separatists win.

Back to the Bank of England’s warnings on consumer credit....

....and Capital Economics have issued a note, pointing out that the BoE isn’t actually forcing banks to tighten their lending.

UK economist Ruth Gregory says:

In today’s Statement, the Bank of England’s Financial Policy Committee (FPC) fired a warning shot to banks over consumer credit, suggesting that banks would need to increase the amount of capital they hold by £10bn in order to protect against losses. But it stopped short of attempting to rein in lending....

Overall, then, today’s action goes further than the red-flag waving we’ve seen from the FPC up until now. But it is unlikely to slow the economy significantly, or delay the first hike in interest rates, which we think will be in November.

Uber’s apology (see earlier post) appears to have broken the ice with London’s authorities.

Sadiq Khan, the Mayor of London, has just welcomed Dara Khosrowshahi’s open letter -- and asked Transport for London to meet with the Uber boss.

Khan says:

“I welcome the apology from Dara Khosrowshahi, the Uber CEO. Obviously I am pleased that he has acknowledged the issues that Uber faces in London.

Even though there is a legal process in place, I have asked TfL to make themselves available to meet with him.”

My colleague Nick Hopkins has a cracking scoop - Deloitte, one of the world’s largest accountancy firms, has recently been hacked, exposing emails from some its major clients.

Nick writes:

One of the world’s “big four” accountancy firms has been targeted by a sophisticated hack that compromised the confidential emails and plans of some of its blue-chip clients, the Guardian can reveal.

Deloitte, which is registered in London and has its global headquarters in New York, was the victim of a cybersecurity attack that went unnoticed for months.

One of the largest private firms in the US, which reported a record $37bn (£27.3bn) revenue last year, Deloitte provides auditing, tax consultancy and high-end cybersecurity advice to some of the world’s biggest banks, multinational companies, media enterprises, pharmaceutical firms and government agencies.

The Guardian understands Deloitte clients across all of these sectors had material in the company email system that was breached. The companies include household names as well as US government departments.

Here’s the full story:

Updated

Shares in UK banks and insurers have dropped this morning, amid the warning that a recession could create £30bn of consumer credit losses.

Virgin Money has shed almost 2%, Barclays are down 1% and Prudential have lost 1.5%, as traders digest this morning’s report from the Bank of England.

Jasper Lawler, LCG Head of Research, explains:

A downturn in bank and insurance company shares meant a difficult start to the week for the FTSE 100. The Bank of England is sounding the alarm on rising consumer debt levels.

Any restriction on lending, particularly unsecured lending like credit cards and car loans would be a direct hit to a big profit centre for banks and insurers.

It’s official, Labour are calling on the UK government to change the law so that credit card customers don’t pay more in interest repayments than their original loan (as flagged up at 10.30am).

And if they don’t, John McDonnell says he’ll do it when Labour win power.

John McDonnell just brought the Labour conference hall to its collective feet, with a pledge to bring Britain’s energy, water, rail, and the Royal Mail back into public ownership and control.

No immediate reaction on the stock market, but I’ll keep an eye....

Over at the Labour party conference in Brighton, shadow chancellor John McDonnell is criticising Britain’s “rentier economy”.

McDonnell is also blasting the City for failing to support high value businesses, and promising a new “Strategic Investment Board” to improve productivity. Plus, extra investment on transport links outside London.

Our Politics liveblog has full details:

Updated

The Bank of England’s warning about consumer credit comes as the City braces for the first UK interest rate rise since 2007.

The BoE is widely expected to hike borrowing costs by early next year, quite possibly in at its November meeting.

Millions of home owners and borrowers have never seen interest rates go up, thus the concern that the rapid growth in Britain’s consumer credit could end in tears.

The Bank of England’s hawkish stance has already hurt speculative investors, such as hedge funds. They have been forced to ditch their bets that the pound would weaken, since the BoE hinted earlier this month that a rate rise was close.

Reuters’ Jamie McGeever has tweeted the details:

Uber CEO Dara Khosrowshahi’s apologetic open letter to London strikes a more conciliatory tone.

His promise to change the taxi hire company is a clear sign that Uber could compromise to persuade TfL to reverse last week’s decision, and let it keep operating in the capital.

Here’s the key section:

“While Uber has revolutionised the way people move in cities around the world, it’s equally true that we’ve got things wrong along the way. On behalf of everyone at Uber globally, Iapologise for the mistakes we’ve made.

We will appeal the decision on behalf of millions of Londoners, but we do so with the knowledge that we must also change.”

Uber to London: We'll make things right

In other news, Uber has issued an open letter confirming it will appeal the decision to remove its licence to operate in London.

CEO Dara Khosrowshahi has apologised for the mistakes made by Uber (he doesn’t specify what, exactly) and promised to listen to its critics.

Khosrowshahi has also thanked the hundreds of thousands of people who signed a petition urging Transport for London to reverse the move (which has split opinion in the media and on the streets of the capital).

Uber’s communications chief, Alex Belardinelli, has tweeted the letter:

TfL ruled last Friday that Uber was not a “fit and proper” private car hire operator, citing concerns over its approach to reporting serious criminal offences and checking the background of its drivers.

Updated

Hannah Maundrell, editor in chief of money.co.uk, has sent over some tips for consumers to protect themselves from getting overwhelmed by debt.

  • Borrowing as little as possible – and only ever for a specific reason
  • Checking your credit report is correct before you apply
  • Finding the cheapest way to get the cash you need – this could be a 0% credit card or a low cost loan
  • If you’re looking for a credit card go to a comparison site to check your chance of acceptance upfront so you can apply with confidence
  • Being clear about what’s affordable for you now as well as if your circumstances change
  • Always having a plan to pay back what you’ve borrowed upfront
  • Treating credit card borrowing like a loan and setting up regular payments to clear it.

She addsL

“The Bank of England’s Financial Policy Committee statement means more for banks than it does for borrowers right now. It’s the highest financial power telling lenders they need to be careful and set aside an extra £10bn if they want to sail through Brexit unscathed.

The Bank of England’s consumer credit warning comes as the opposition Labour party turn up the pressure on lenders.

Later today, shadow chancellor John McDonnell is expected to promise more help for people struggling with their debts.

Under Labour’s proposals, debt repayments would be capped at twice the original borrowings (similar to existing protection for payday loans).

McDonnell is expected to tell the Labour party conference that:

“It means that no one will ever pay more in interest than their original loan.

If the Tories refuse to act, I can announce today that the next Labour government will amend the law.”

Full story: Bank of England warns consumer credit crash could cost banks £30bn

Our City editor Jill Treanor has studied today’s report from the BoE’s Financial Policy Committee, and reports:

Britain’s banks could incur £30bn of losses on their lending on credit cards, personal loans and for car finance if interest rates and unemployment rise sharply, the Bank of England warned on Monday.

After assessing the fast growth in the consumer credit market, Threadneedle Street is requiring the banking system to hold an extra £10bn of capital as protection against any future losses after finding that lenders are underestimating their exposure to bad debts in an economic downturn.

Publishing its latest assessment of risks to the financial system, the Bank of England also spelt out specific concerns about the impact of Brexit on £20tn of derivatives contracts used by companies and financial firms to manage their risks.

The UK’s withdrawal from the EU also raises questions about whether banks will able to hold consumer data in Britain and poses questions about the ability of insurance companies to make payments to consumers across the union.

Chart: Britain's consumer credit problem

The Bank of England says that UK consumer credit is growing ‘rapidly’, at 9.8% in the 12 months to July 2017.

It singles out “strong growth of dealership car finance, credit card debt and other borrowing, such as personal loans”.

This chart, from today’s report, shows how car finance has swelled in recent years.

This is mainly due to the boom in personal contract purchase deals, which let a consumer pay a small regular payment for a new car and then either buy it or walk away after a few years.

Last week, my colleague Richard Partington explained how PCPs are encouraging people into debt.

He wrote:

There is no suggestion the sales practices are illegal or that any rules have been broken, yet they illustrate a significant shift in the way cars are bought in the UK. Salespeople at three dealerships visited by the Guardian offered vehicles on the road with little or no deposit. One suggested a £1,000 downpayment to secure a 1.5l Mini Cooper, with a top speed of 127mph, which could be refunded when the car was collected from the showroom a few days later. Deposits can even be paid for by credit card, adding to the debt pile......

Britons previously paid cash or took out a loan from a high street bank. Now, they’re increasingly turning to finance packages, with a package known as the personal contract purchase (PCP) among the most popular.

One salesman said: “Most people come in here and they’re just thinking ‘Ah, they’re looking’. And then they tend to walk out with a PCP agreement.”

Updated

The Bank of England seems to have turned up the volume today:

As City AM’s Jasper Jolly puts it:

The Bank of England today issued its strongest warning yet on the fast-expanding consumer credit sector, with financial stability experts at Threadneedle Street saying banks may not be adequately prepared for losses.

In a nutshell, the Bank of England is concerned that lenders, both in the UK and beyond, aren’t being prudent enough.

It fears that reckless borrowing will come back and bite banks, painfully, if the world economy weakens, financial conditions worsen, and borrowers find they’ve overstretched themselves.

As the FPC puts it:

There are signs in some markets, globally and domestically, of excessive weight being placed on recent benign conditions as an indicator of future risks. This behaviour encourages greater risk taking, potentially building up greater vulnerabilities.

The FPC singles out the “pronounced” financial vulnerabilities in China, where corporate borrowing has outpaced economic growth, and “corporate leverage in the United States”.

The Bank of England is also concerned that Brexit poses a risk to UK economic stability.

It ha singled out the City of London’s huge market in derivative contracts (such as options to buy or sell financial assets at a certain price in the future.

The Financial Policy Committee says:

The FPC is considering in particular risks arising from: discontinuity of cross-border contracts, in particular insurance and derivatives; restrictions on sharing of personal data between the European Union and United Kingdom; and restrictions after Brexit on cross-border banking, central clearing and asset management service provision.

Bank of England sounds new warning over consumer credit

Newsflash: The Bank of England has issued a fresh warning that consumer credit losses could spiral if the economy weakens.

The BoE says UK banks need to set aside an extra £10bn to cover potential losses on car loans, and credit cards.

The warning comes from the Bank’s Financial Policy Committee, which has just published the conclusions from its latest meeting, last week.

In it, the FPC warns that consumer credit looses could hit £30bn (!) if Britain falls into a recession. It reckons that one in five consumer credit loans might have to be written off.....

The report says:

  • Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit. This is not a material risk to economic growth, as consumer credit represents only 11% of overall household debt. It is a risk to banks’ ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default. Although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn.
  • The FPC has responded to this risk by accelerating its analysis of credit losses that banks could incur in the very deep recession encapsulated in the 2017 annual stress test scenario. The FPC and PRC judge that, in the first three years of that severe stress test scenario, the UK banking system would, in aggregate, incur UK consumer credit losses of around £30 billion, or 20% of UK consumer credit loans, representing 150 basis points of the aggregate common equity Tier 1 capital ratio of the UK banking system. This is just one element of the overall stress test and should not be used as a guide to lenders’ overall results, which will be published as planned on 28 November.

More to follow....

Updated

The fall in business confidence this month is a setback to the German economy, says Carsten Brzeski of ING.

He’s telling clients that German firms are suffering from rising geopolitical tensions,

Brzeski writes:

While Germany is still digesting the results of last night’s elections, the country’s most prominent leading indicator, the Ifo index, weakened for the second month in a row and dropped in September.

The Ifo index now stands at 115.2, from 115.9 in August. Both the expectations and current assessment component dropped. While the September drop was probably a result of increased geopolitical tensions, ongoing problems in the German automotive industry and the stronger euro, the next months will tell how the German business sector looks at the results of Sunday’s poll.

Updated

The drop in German business confidence suggests that Europe’s largest economy is slowing, says IFO.

IFO also reckons that a second German election is possible....

German business confidence unexpectedly falls

Just in: German business confidence has deteriorated unexpectedly this month.

The monthly survey of investor morale, from the IFO institute, has dropped to 115.2 from 115.9. Investors had expected it to maintain its recent rally and hit 116.0.

IFO found that German firms are less optimistic about current business conditions, and their future prospects. But still, the IFO index is at a pretty solid level:

Mehreen Khan of the Financial Times also reckons the German election results are a blow to Emmanuel Macron’s push for a eurozone budget.

Here’s a snapshot from her Brussels Briefing:

She warns that it could take months to hammer out the “Jamaica” coalition.

Europe’s major stock markets have all dipped in early trading.

Mike van Dulken of Accendo Markets says political concerns are weighing on the markets:

The negative European open follow a mixed session in Asia in response to a less convincing Federal election win for German Chancellor Merkel and French President Macron struggling in Senate elections - both denting the euro – coupled with a UK sovereign debt downgrade by Moody’s on Friday, just hours after PM May’s Brexit speech, and aggressive rhetoric from North Korea’s foreign minister at the UN on Saturday.

The pound is shaking off Moody’s decision to downgrade Britain’s credit rating last Friday night.

Sterling has risen by almost half a cent against the US dollar at $1.3533, despite Moody’s warning that the UK’s “medium-term economic strength” would be weakened by Brexit - a claim the Treasury have rebutted.

Kit Juckes of French bank Société Générale suggests Moody’s are playing catch-up (any serious trader will have their own views on Brexit too):

Beware a short-lived slide, but the longer-term depends on the economy, monetary policy the public finances and all that normal jazz.

Ratings agencies can have a temporary impact but they are mostly telling us what we already know and have priced-in long ago.

There’s little reaction in the bond market either:

Updated

Investors are piling into German government debt this morning, at the expense of riskier assets such as Italian bonds.

This has pushed the gap between Italian and German borrowing costs to its highest level since early September:

We’ve collected the full German election results here.

Euro falls as Merkel faces coalition talks

The euro is losing ground in early trading, as traders digest Germany’s election results.

The single currency has shed 0.3% against the US dollar to $1.1915. It’s suffering a sharper fall against the pound, down 0.7% at 87.9p.

Lee Wild, Head of Equity Strategy at Interactive Investor, says investors don’t like the sound of lengthy coalition talks between German parties.

“As predicted, Angela Merkel won a fourth term in office, but not without handing over a chunk of her vote to the Far Right AFD. The SDP did even worse, and the chancellor will be forced into bed with the Greens and the Free Democrats (FDP) in a Jamaica coalition. Any extended period of uncertainty poses a problem, certainly if the FDP’s dislike of Macron threatens Germany’s relationship with France. Markets won’t like that.

It’s possible that Angela Merkel becomes distracted from international politics during the inevitable horse trading following a disappointing election for her. Any sense that this weakens the EU’s position could play into the hands of UK Brexit negotiators, as a fourth round of talks with European officials begins in Brussels today.”

Introduction: Politics weighs on markets

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

There’s a risk-off feel in the markets this morning after a weekend of political drama, notably in Germany.

Angela Merkel’s achievement in winning fourth term as German chancellor is firmly overshadowed by the news that the far-right, anti-immigration AfD party has won seats in the Bundestag.

AfD’s shock success has serious implications for Europe and the eurozone. It could force Merkel to take a tougher line on migration, and probably also undermines French president Emmanuel Macron’s hopes to create more European integration.

Merkel’s likely coalition partners, the FDP, are firmly opposed to the idea of a eurozone budget in which Germany covers some of its neighbours’ bills.

Germany wasn’t the only country heading to the polls last weekend. New Zealand also held a general election, which has delivered a stalemate with neither major party securing a majority.

Matt Simpson, senior market analyst at Faraday Research, says:

Politics continues to make its mark on markets after the weekend provided news of two more coalition governments. Angela Merkel underperformed expectations of an easy victory and was awarded with the parties’ lowest vote count since 1949, whilst New Zealand is now bracing itself for a fourth consecutive coalition government.

Merkel’s underwhelming victory may have seen her cling on to a 4th term, but her job has just become harder. The rise of AFD, which celebrated its highest result of 13.5%, means they have a louder voice and will force Germany to confront anti-immigration and anti-EU issues at home.

Rumours that Japan’s prime minister Shinzo Abe might call a snap general election is also keeping traders on their toes.

Plus, there’s the Trump factor – America’s president spent the weekend extending his controversial travel ban, and attacking NFL football players as the US anthem row deepened. The City would rather see some progress on infrastructure spending and tax reforms.

So, Asian markets have mostly fallen overnight. Europe is following suit with the FTSE 100 losing 35 points in early trading.

Also coming up today.....

Consumer debt will also be under the spotlight, with the Bank of England’s expected to disclose details of its review into credit. The Bank’s Financial Policy Committee is concerned that some lender are being too reckless.

Tim Wallace of the Daily Telegraph has a good take:

Britain’s biggest banks are braced for new restrictions on consumer lending as the Bank of England prepares to unveil the results of its review of the booming sector.

Credit cards, unsecured loans and car finance deals have all surged in popularity over the past year, leading Mark Carney and his colleagues on the powerful Financial Policy Committee (FPC) to investigate if there are any growing risks in the sector.

The Bank is today expected to provide an indication of its analysis of consumer credit risks across the sector.

More here: Banks braced for Carney’s verdict on household debts

We also get a new healthcheck on German business confidence, and a report into low pay in Britain.

The agenda:

  • 9am BST: German IFO Business Climate Index survey.
  • 9.30am BST: Bank of England’s Financial Policy Committee issues statement following a meeting on September 20.
  • 9.30am BST: Office for National Statistics publishes report into “Earnings and low pay:
  • 3pm BST: ECB president Mario Draghi testifies to the European Parliament’s Economic and Monetary Affairs committee.
 

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