Graeme Wearden 

Bank of England less gloomy about Brexit; UK ‘falling into recession’ – as it happened

UK central bank has revised its scenarios for a disorderly Brexit, and says Britain is now better prepared
  
  

A view of the London skyline.
A view of the London skyline. Photograph: Neil Hall/Reuters

Afternoon sumary

Time for a quick recap:

The Bank of England has dialled back its worst-case Brexit scenarios, having concluded that the UK is better prepared for No Deal.

In updated advice to MPs, the BoE says that work at the ports and the government’s new tariff plans mean there would be less economic damage. It now only expects GDP to slump by around 5.5% under an damaging No Deal, with unemployment hitting 7% and inflation racing to 5.5%.

Governor Mark Carney warned that food prices would still rise in the event of a No-Deal Brexit, though, due to a slump in the pound.

He played down the suggestion he could stay on longer, if Brexit was to be delayed again. The governor also expanded on a recent speech arguing that the dollar’s dominance was detrimental to the global economy.

The pound has jumped, on hopes that MPs will push through legislation that blocks No Deal on 31 October.

Sterling rallied over $1.22 to its highest level of the week, recovering from Tuesday’s three-year low.

Data firm Markit has warned that Britain appears to be falling into recession. Its PMI surveys show that private sector output shrank in August, led by sharp contractions in manufacturing and construction.

Markit blamed Brexit uncertainty, saying:

“While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn. Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months.

Updated

Professor Costas Milas of Liverpool University thinks the Bank of England can take some credit for the improvement in Britain’s Brexit preparation.

He points out that future interest rate expectations are rather lower than a year ago, meaning less concerns about rising credit costs.

The Bank now thinks that the impact of no-deal Brexit will be less severe than what it thought in November 2018.

Mark Carney cites ongoing preparations by the UK government to deal with a possible no-deal scenario. Although this is fair, there is another possible reason for the less severe outlook. Back in November 2018, markets expected the policy rate to rise to 1% in 2019 and even higher to 1.2% in 2021 and 1.4% in 2022. Markets now expect the policy rate to drop to 0.5% in 2020, remain at this level in 2021 and rise slightly to 0.6% in 2022.

Arguably then, expectations of a looser monetary policy might have also contributed to the less severe no-deal Brexit outlook. The Governor might not want to blow his trumpet but the expectation of monetary easing has arguably helped.

The session ends with Steve Baker appearing to suggest that Mark Carney should run the International Monetary Fund.

Baker, a leading Brexiter MP, has clashed with Carney over the years. But he seems genuinely impressed by Carney’s speech about ending the dollar’s dominance.

In a final question, directed at Andy Haldane, Baker says the world needs leadership to handle the upcoming changes in the monetary system.

Q: So, should the IMF be led by a politician, or by someone who really understands these issues in detail and can articulate what should be done to address these root causes?

It’s rhetorical question, which Haldane has no trouble evading.

But Baker’s point is that Carney had, it seems, been interested in succeeding Christine Lagarde. However European politicians have nominated Kristalina Georgieva, a former EC vice-president and current CEO of the World Bank.

The session wraps up with interim chair John Mann thanking the BoE for their “exemplary” work helping the committee (although he also thinks its grasp of regional economics needs brushing up).

Carney: Dollar will lose its dominant status, eventually....

Steve Baker MP is now asking Mark Carney about his recent speech last month, warning that the dollar is too dominant and could be replaced by a digital currency.

The governor explains that the dollar has an importance in the world economy that isn’t matched by the size of the US economy.

That’s a problem when the US economy is relatively strong, meaning US monetary policy is tighter than the rest of the world.

In theory, it would make sense to shift away from relying on the dollar. But, the last time the world economy shifted (when the dollar replaced sterling as the global reserve currency) it was a “bumpy ride”. So it’s not easy to rebalance the economy.

Q: But is it possible to avoid a fundamental structural change in the monetary regime?

Carney thinks there will be a shift, but it could take ages (he cites Rudiger Dornbusch’s quote that unsustainable things last longer than you expect, then change a lot faster than you’d imagine).

Chief economist Andy Haldane says he agrees with Carney that the problem of the dollar’s dominance is more acute, as more countries have issued dollar-denominated debts.

More reaction to the Bank’s new Brexit scenarios:

Q: Will the UK economy get a boost from Brexit supporters once Britain leave the EU? Might they raise their spending, helping growth?

BoE policymaker Gertjan Vlieghe says there is evidence that people in leave-supporting areas are more optimistic, but this doesn’t manifest itself in higher spending.

Labour MP Wes Streeting arrives late, after listening to (or possibly enduring) today’s spending review.

He asks why consumers are more confident about their personal finances than the wider economy.

Mark Carney says consumer confidence is benefitting from low unemployment and solid wage growth. Those rising incomes are driving consumption.

The bigger the firm, the more likely they are to be ready for Brexit, says governor Carney.

But then it depends how well the ports function -- a major carmaker could be totally prepared, but still reliant on factors outside their control.

On Brexit preparations, Mark Carney says that 75% of companies think they are as ready as they can be.

But many still expect their output to fall.

He also says some firms who thought they were ready are now saying they’re not prepared, partly because they’ve been given more information about what needs to be done.

Some more highlights from Mark Carney today:

Q: The UK economy shrank 0.2% in the second quarter of 2019, so do you agree with the government that the economy is “fundamentally strong”?

Mark Carney says that Q2 was probably less weak than the headline data suggests, as Brexit stockpiling dragged some activity forwards into Q1.

But he’s not jubilant, warning that “the underlying pace of growth is weak”,and just above zero.

More positively, the labour market is tight with record low unemployment, but real wages have only turned positive (with earnings outpacing inflation).

Q: What would a no-deal Brexit mean for food bills?

It is likely that food bills will rise, overwhelmingly because the pound would fall and push up import prices, Mark Carney replies.

Domestically-produced food prices would also rise, in line with pricier exports, he adds.

He repeats his earlier point that tariffs would have a limited impact on food prices, as the government’s “temporary tariff regime” doesn’t include significant increases.

Whatever form Brexit takes, it will mean a “material change” to the UK’s trading relationships, Mark Carney tells the Treasury committee.

Every major trade deal in recent decades has taken at least 18 months, some took four years, he points out. That’s why the BoE favours a transition period, to help companies adjust.

Q: Would the impact of Brexit be worse if it happened just before or after a general election?

“Pass “ smiles Mark Carney.

Q: What would happen if Britain suffered a no-deal Brexit and a trade-war induced global downturn, at the same time?

Mark Carney says the Bank believes a global trade war could knock 1% off UK GDP. But he doesn’t want to simply add that to the ~ 6% fall in a worst-case Brexit.

Carney: US-China trade war creating factory recession

Asked about the global economy, Mark Carney says world growth has not reaccelerated as fast as expected.

He says this is because there is now a full-blown trade war between the US and China, which is also hurting business confidence worldwide.

Carney warns :

We are close to a manufacturing recession across the advanced economies, and important parts of the emerging world, which has had a knock-on impact on trade.

But he doesn’t think we face a global recession, as the fundamentals in the major economies are still quite strong.

Q: Would Mark Carney possibly consider staying on longer at the Bank of England?

The governor reminds the committee that he has extended his tenure twice already, to help to UK prepare for Brexit.

Q: You’re due to leave on 31st January -- that could be the same day as Brexit (if another extension is agreed).

Currently I’m leaving months after the Brexit day, points out Carney - reminding the committee that the existing deadline is 31 October.

Q: But if there was to be a cliff-edge on 31 January, could you stay on to help?....

The appointment of a new governor is a matter for the government, Carney replies.

Q: Has the Brexit crisis made the governorship less appealing?

MPC member Jonathan Haskell says not - it’s just part of the job.

Fellow MPC member Gertjan Vlieghe says Brexit makes the role “more challenging”, but any suitable candidate should relish that...

The BoE's new, less severe Brexit forecasts

Mark Carney has also provided this chart, showing how the Bank has scaled back its forecasts for a worst-case Brexit.

Back in November, the BoE warned that a disorderly Brexit could wipe 7.5% off Britain’s economy.

It now believes GDP would only decline by around 5.5% -- still a big shock, but a less damaging one. Unemployment would double to 7%, and inflation would more than double to 5.5%.

In the letter to the committee, Carney cites several reasons for the new, less severe forecasts, including border preparations and the UK’s new tariff plans.

Q: How would the Bank of England protect the economy after a no-deal Brexit?

Carney says the Bank stands ready to intervene to provide liquidity into the financial system if needed.

It could cut the requirements on banks to hold capital, potentially releasing up to £300bn of balance sheet firepower.

And on monetary policy, the Bank would have to decide whether to cut interest rates to stimulate growth, or raise them to tackle inflation.

Q: Do you still think food prices would jump by 10% after a no-deal Brexit?

Mark Carney says the tariff schedule laid out by the government earlier this year show that tariffs on food from Europe would be lower than the Bank thought last November.

Previously, the Bank thought tariffs would add 5% to food prices, while a weaker pound would add another 5%, adding up to 10%.

It now thinks almost all the impact will come from exchange rate moves -- so food prices would be 5% to 6% higher.

Carney: No deal would hurt economy and weaken the pound

Q: How would your forecasts change if there was a no-deal Brexit, not a smooth transition?

Mark Carney says the economy would slow, the exchange rate would fall further, and inflation would rise in a no-deal scenario.

BoE governor: Worst-case Brexit scenario now 'less severe'

Parliament’s Treasury Committee are questioning the Bank of England about its latest inflation report, and Brexit.

They’re hearing from governor Mark Carney, chief economist Andy Haldane, and two members of the Monetary Policy Committee - Professor Jonathan Haskel and Dr Gertjan Vlieghe.

John Mann MP, who is interim chair, kicks off: Is the UK economy stagnating?...

Mark Carney says that there has been disruption to the economy recently, due to Brexit preparation, stockbuilding, car factory shutdowns.

If you look through the underlying trend our judgement is that the economy is growing very weakly, positive but very close to zero.

Mann says that Carney has sent the committee a letter about Brexit preparations, saying that the Bank’s worst-case scenario for a no-deal Brexit is now ‘less severe’.

Would a further delay help?

Governor Carney replies that various preparations taken since last November (including work at the ports and improvements on derivatives contracts) have “reduced the worst case scenario”.

This is the worst case scenario, he insists, not the most likely outcome. And he also indicates that another Brexit delay would be helpful.

There is more preparation that can be done, both in terms of public preparation and preparation by businesses.

It stands to reason that if there was more time, more would be accomplished.

Updated

US trade deficit with China hits six-month high

As well as Brexit, Britain’s economy has been hurt by the shockwaves from the US-China trade war.

And new figures just released shows that Donald Trump is failing to narrow the trade gap with either China or Europe.

The US Commerce Department reports that the goods trade deficit with China rose by 9.4% to $32.8bn. Imports jumped by 6.4% despite the imposition of tariffs at the US border, while exports to China fell 3.3% in July.

The goods trade deficit with the European Union jumped to a record high.

Overall, the US trade deficit dipped by 2.7% month-on-month in July to $54bn. But overall, the gap between what America imports and exports is 8% higher than a year ago. Trade Wars aren’t as easy to win as you might hope....

Significantly, Sajid Javid has also said he will review the UK’s fiscal framework.

That’s a strong hint that the government could tear up its current tax and spending rules, allowing it to borrow more.

Over in parliament, chancellor Sajid Javid is laying out the government’s spending plans for the next year.

In between tickings off from the Speaker for deviating into political theatre, Javid has promised more than £13bn in new spending, on health, education, and infrastructure projects such as faster broadband networks.

The chancellor claims he’s not writing blank cheques, but he certainly seems to be loosening the fiscal purse strings -- taking advantage of current record low borrowing costs.

More details here:

And here:

Cathal Kennedy of Royal Bank of Canada says today’s PMIs show “a picture of broad weakness” across the UK economy.

He agrees that the data imply the economy is shrinking, but is hopeful that a recession could be avoided.

Kennedy says there are three reasons to be optimistic that the economy will return to growth this quarter, namely:

  • with a number of car plants having brought forward their summer shutdowns, some of the ‘lost’ car production of 60k m/m seen in April should instead be pushed into August this year;
  • consumer spending remains relatively solid thanks to rising employment and wages and should support growth into Q3;
  • the potential return of stockpiling by firms toward the end of the quarter ahead of the new Brexit date of 31 October (for contingency planning, while the odds of a no-deal Brexit appear to be receding, that possibility has not been removed entirely).

Full story: UK moves closer to recession

My colleague Richard Partington explains why August’s PMI reports are so worrying:

Britain has taken a step closer to suffering its first recession since the financial crisis, according to a closely watched survey that showed the private sector failed to grow in August.

IHS Markit and the Chartered Institute of Procurement and Supply said the UK economy was on track to contract by 0.1% in the three months to September, as the growing likelihood of a no-deal Brexit serves as a handbrake on growth and damages business confidence across the country.

The warning comes after the economy shrank in the three months to June, marking the first quarterly decline since 2012. Economists view two consecutive quarters of falling output as a technical recession.

According to the survey, which is monitored by the government and the Bank of England for early warning signs from the economy, meagre growth in the service sector failed to offset sharp declines in manufacturing output and construction activity last month.

Here’s his full story:

This chart, from Capital Economics, shows how the UK PMIs have deteriorated this year, as prolonged Brexit uncertainty hurt the economy.

As you can see, it shows the factory and construction sectors are both shrinking (with a PMI below 50) while the services sector is stalling.

The pound has now risen over $1.22, up more than a cent today,

This is sterling’s best day since 22 August, lifting the currency to its highest level this week.

Traders are betting that the risk of a no-deal has receded, with the latest developments in Hong Kong also boosting sentiment.

BBC economics journalist Dharshini David suspects the weak PMI survey is showing the deep anxiety among UK businesses about Brexit.

If so, that might not mean the economy actually falls into recession this autumn, but could still show that firms are too scared to invest (which will wound the economy down the line)

With a recession looming, and the country’s government losing its majority, you’d expect to see the pound being pummelled today.

But actually, sterling is rallying. It just hit $1.219 against the US dollar, its highest point of the day, up a cent.

That means it’s gained two cents since its slump yesterday morning, when fears of a No Deal Brexit swept the City.

The recovery comes as MPs prepare to vote on legislation that would force the government to seek a new Brexit extension beyond 31 October if a deal isn’t agreed in time.

Opposition MPs are making it clear that they won’t give Boris Johnson the two-thirds majority he needs for an early election, unless No Deal is off the table.

Andy Sparrow’s Politics Live blog has all the action:

Updated

If you’re just tuning in, these tweets show how the closely-watched UK PMI is now flashing warning lights of a recession (details start here).

Not everyone in the City thinks Britain will fall into recession, though.

Thomas Pugh of Capital Economics hopes that the UK will return to growth in the current quarter, partly thanks to Brexit stockpiling.

The car industry could provide more growth than usual, as factories shifted their usual summer shutdown to April (to cover the original Brexit deadline).

Updated

Why the PMI surveys are signalling a recession

Markit’s PMI reports aren’t an infallible guide to the economy, but they’re a good guide to how companies are faring.

They’re based on interviews with purchasing managers across the country, who feed back details of their order books, staffing levels, general activity, and business confidence.

That generates a PMI index, which usually rises and falls broadly in line with the wider UK GDP. Any number over 50 show rising activity, while a sub-50 reading implies falling activity.

So, the news that the overall UK PMI lurched down to 49.7 is a worry, especially given the deterioration among factories and building companies.

Here’s the details:

  • Services PMI: Down to 50.6, the lowest since June, showing weak growth
  • Manufacturing PMI: Down to 47.4, a SEVEN YEAR low, showing a contraction
  • Construction: PMI: Down to 44.6. a TEN YEAR low, showing a sharp contraction

Updated

Some snap reaction to today’s worrying PMI reports:

Markit have also produced these charts, showing clearly how UK business activity has slowed in recent months and is now shrinking.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, also believes the Brexit crisis is hurting the UK economy badly.

Here’s his take on August’s PMI reports:

“The services sector clung on by its fingertips this month remaining just above the no-change mark as domestic and export clients abandoned spending in favour of a wait and see approach and the political environment became increasingly murky.

“There was also no respite from the increasingly lacklustre UK economy and sterling’s performance did little to help as service providers reported the fastest rising costs since January for salaries and fuel which they were then unable to pass on. As competition for dwindling orders stepped up, some firms resorted to cutting prices instead to tempt customers through the doors.

“All these forces combined, was a blow to confidence, as future business expectations from service companies fell to July 2016 levels. There’s only so much companies can do to absorb costs before UK consumers notice the impact to their wallets, and only so much Brexit indecision the sector can take before it is tipped into contraction.”

Markit: Gloomy political situation has hit companies

Chris Williamson, chief business economist at IHS Markit, says the UK economic outlook is darkening, as Brexit uncertainty ravages business confidence.

He believes this week’s worrying PMI reports (based on interviews with purchasing managers across the UK) show Britain is sliding into recession:

“Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers. So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services.

“After surveys indicated that both manufacturing and construction remained in deep downturns in August, the lack of any meaningful growth in the service sector raises the likelihood that the UK economy is slipping into recession. The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.

“While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn. Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months. With the exception of the slump in sentiment after the 2016 referendum, August saw service sector firms at their gloomiest since the height of the global financial crisis in early 2009.

“Overall jobs growth has meanwhile also ground to a halt as worries about deteriorating order books and the gloomier outlook took their toll on firms’ appetite to hire, pointing to a weakening labour market and adding to the darkening outlook.”

UK falling into recession as Brexit hits companies

NEWSFLASH: Britain’s private sector contracted last month, fuelling fears that the UK could be lurching into a Brexit-induced recession.

Service sector companies, which make up the bulk of the economy, have reported that new business growth slowed sharply in August. Many blamed Brexit-related uncertainty, which led to subdued corporate spending.

New exports stalled, despite the boost from the weak pound, as some European clients delayed spending decisions until there is more political uncertainty.

This has hit business confidence too, which fell to its lowest level in three years (since the EU referendum in 2016).

This is according to Markit, the data provider, whose Services Sector PMI has fallen to just 50.6 in August, down from 51.4 in July. That’s a bigger fall than expected, showing meagre growth.

Alarmingly, Markit’s All Sector Output Index has plunged to 49.7 in August. That indicates that the private sector shrank last month, due to heavy falls in construction and manufacturing [any reading below 50 shows a fall in activity].

Markit fears that the UK economy will shrink by around 0.1% in the third quarter of 2019. That would plunge Britain into its first recession in a decade, as GDP shrank by 0.2% in April-June.

More to follow....

Europe’s economy remains subdued, according to the latest healthcheck of eurozone companies.

Data firm Markit’s latest composite PMI has risen to 51.9 from 51.5 in July. That shows weak growth, with a slump in factory production holding the economy back.

Chris Williamson, Chief Business Economist at IHS Markit said:

“The eurozone remained mired in a fragile state of weak and unbalanced growth in August.

Although up on July, the latest reading indicates that GDP will rise by just 0.2% in the third quarter, assuming no substantial change in September. Official data available so far for the quarter suggest growth could be even weaker

Monex: Sterling could plunge another 7%

Ranko Berich, head of market analysis at Monex Europe, predict the pound could slump back towards $1.10 if Britain crashes out of the EU without a deal.

He writes:

“In the event of no-deal, our estimate for sterling’s losses remains another 7% from today’s levels, based on sterling’s recent price action relative to fixed income pricing and betting odds. This takes GBPUSD to the 1.12 level and EURGBP to just below parity. Any scenarios that take us closer to no-deal will therefore knock the pound towards these levels”.

Berich adds that there are two scenarios under which sterling could crumble:

  • Although blocking legislation will almost certainly clear the Commons today, its passage into law is far from assured. The Government and allies in the Lords have a range of tactics to delay or frustrate its passage into law; if any of these succeed the UK will not only be in a constitutional crisis but no-deal will be looming large, and the pound is likely to suffer.

  • A general election where polling or sentiment seems to favour a no-deal Coalition between the Conservatives and Brexit party is similarly likely to hammer sterling.

Roberto Cobo Garcia, currency strategist at Banco Bilbao Vizcaya Argentaria SA, thinks the pound could keep rallying once No Deal is off the table:

“The negative economic picture painted by the U.K. leading indicators should limit the pound upside potential ahead of the parliamentary session.

“If the bill to block a no-deal Brexit is passed the pound could have more margin to appreciate.”

Despite today’s rally, the pound ($1.216) is still worth almost 8% less than in March -- the last time MPs seized control of Commons business to prevent a disorderly Brexit.

Sterling has weakened steadily since, as Boris Johnson insisted Brexit would happen on October 31, deal or no deal.

Investors are feeling more relaxed today, although not quite as relaxed as the Leader of the House of Commons last night....

Updated

Adrian Lowcock, head of personal investing at investment platform Willis Owen, says people should still be cautious with their money while the Brexit crisis plays out....

MPs have moved to draw a line in the sand over no Brexit, with legislation expected to be passed today which prevents the UK crashing out of Europe without a deal.

“The pound has been the pressure valve for the UK markets taking most of the strain caused by Brexit uncertainty, and after yesterday’s fall it has steadied overnight post the vote in the Commons.

Whilst a fall in the pound will boost the earnings of most FTSE 100 companies (with over 2/3rds of their earnings coming from overseas) in the short term the escalation of the issue is likely to weigh on both the pound and the stockmarket.”

The pound is holding onto this morning’s gains, as the Labour Party confirm they will not give their approval for an early general election today.

The opposition won’t provide the two-thirds majority needed until a no-deal Brexit on 31 October is off the table.

Hussein Sayed, chief market strategist at FXTM, says Labour could help to push the pound higher....

Boris Johnson’s huge defeat provided some life to Sterling which recovered 1.2% from its lows to trade back above $1.21. The road from here is likely to be very tricky, especially if PM Boris Johnson takes the path towards a snap election. An early election may not necessarily provide a majority for the Conservatives, but it may still bring wild swings to the Pound with risks to the downside.

However, Mr. Johnson needs at least two-thirds of MPs to vote in favour of one, and so far, the Labour party doesn’t seem willing to take this risk. If the opposition party manages to get Brexit delayed in the outcome of no deal, we can see Sterling recover further from here.

Shares in financial stocks, consumer-focused companies and miners are leading the London stock market higher.

Europe’s luxury goods makers are also posting strong gains, on hopes that the Hong Kong crisis is easing. Burberry are up 3%.

Updated

Britain’s FTSE 100 index has jumped by 50 points, or 0.8%, in early trading on hope that a no-deal Brexit can be avoided.

Other European markets are also posting strong gains, led by Italy - up 1.5% as a new coalition government takes shape.

Hong Kong shares surge after extradition law canned

Over in Asia, stocks have surged after news broke that Hong Kong is withdrawing the controversial extradition bill that has sparked months of protests in the region.

Hong Kong’s embattled leader Carrie Lam will remove the draft legislation, government sources say, bowing to pressure from pro-democracy protestors.

This move comes as the protests against the extradition bill have become increasingly violent, with scenes of police brutally attacking demonstrators.

The South China Morning Post says:

A government source said that Lam will emphasise that the removal of the bill was to streamline the legislative agenda, with the Legislative Council set to reopen in October after its summer break and hence it was a technical procedure.

Lam had earliersuspended the bill, which would have allowed for the extradition of criminals to jurisdictions with which the city lacked a treaty, including the mainland, but critics have not been satisfied.

Hong Kong’s Hang Seng index has rallied by over 3%, on hopes that the crisis may ease.

It comes as fresh data suggests Hong Kong’s economy is on the brink of recession. The latest PMI survey shows that private sector activity slumped last month.

Updated

City investors should skip lunch today and keep a firm eye on parliament.

Boris Johnson will be facing MPs at his first Prime Minister’s Questions at noon, which could be a very bruising experience.

He’ll be followed by chancellor Sajid Javid, who will outline the government’s spending plans for the next year. This Spending Review will be overshadowed by the Brexit crisis, but could help the Conservatives lay out some policies ahead of a snap election.

The big action will come tonight, when MPs debate and vote on the bill to delay Brexit beyond 31 October if a deal hasn’t been agreed.

Updated

Sterling is also rallying against the euro, clawing back all Tuesday’s losses.

It’s up half a eurocent this morning at €1.105.

Introduction: Pound rallies on Brexit delay hopes

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

A day is a long time in the markets, as Harold Wilson might have said had he swapped Westminster for the City.

Just 24 hours after plunging below $1.20 to its lowest levels in three years, the pound has recovered all its losses. It’s the best-performing major currency so far today, sitting comfortably over $1.21 as London traders get to work.

The sight of Boris Johnson suffering a humiliating defeat in the House of Commons last night is actually providing sterling with some support. MPs have taken control of Parliamentary business, and will vote today on whether to rule out a no-deal Brexit on 31 October.

Having staged a recovery yesterday, sterling is up another half a cent this morning at $1.214.

Investors have also noted that the government’s majority is in tatters, after 21 Conservative MPs dramatically rebelled, including several highly experienced former top ministers. They’ve been kicked out of the parliamentary party -- underlining that Johnson now lacks a parliamentary majority.

Such a crisis would usually weaken a currency. But sterling is actually benefitting, as it bounces back from Tuesday’s slump.

Johnson has insisted he won’t ask for a Brexit extension, and is instead pushing for an election. The opposition, though, won’t provide the two-thirds majority required unless tonight’s bill blocking No Deal has been passed.

So it’ll be another huge day in parliament, with investors around the globe glued to the action.

Fears of a disorderly Brexit have been rising in the City in recent weeks. Yesterday, Goldman Sachs said it was a 25% chance, up from 20%.

But after last night’s political drama, investors are now hoping that such an outcome can be avoided.

Ipek Ozkardeskaya of London Capital Group believes there could be more upside for the pound:

It is worth keeping in mind that a snap election is a risky bet for Boris Johnson. If he loses, he will be the shortest serving PM in the country’s history, and more importantly, the Labour Party would opt for a second Brexit referendum to make sure this is what Brits really, really want.

An election as early as next month could give another shake to the sterling, but even a tiny hope of preventing Johnson from crashing out of the EU without a deal could help the currency.

Also coming up today

A new healthcheck on Britain’s services sector is likely to show growth slowed last month. We already know that manufacturing and construction both shrank in August.

Brexit will also be on the agenda when Bank of England governor Mark Carney and colleagues appear before the Treasury committee this afternoon.

The agenda

  • 9am BST: Eurozone services PMI for August
  • 9.30am BST: UK services PMI for August (expected to drop to 51 from 51.4, showing slower growth)
  • 2.15pm BST: Treasury Committee hearing with Bank of England over inflation report and Brexit

Updated

 

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