Pound could 'hit parity' with US dollar after no-deal Brexit; London house prices slide - business live

Talk of an early general election has also hurt the pound.

Nomura analyst Jordan Rochester said:

“Election talk is why the pound is underperforming again, not much of a surprise to hear given the working majority is close to no majority at all.

Hence why suspending parliament talk is in the air still. It’s hard to see any possible positive news for the rest of this week to stop the current trend.”

Capital Economics also predict further losses for the pound, pushing it towards dollar parity.

Analyst Hubert de Barochez points to Brexit worries, and recent weak economic data.

He told clients today:

As far as the outlook for Brexit is concerned, bookmakers’ odds indicate that investors have now all but ruled out the possibility that the UK leaves the EU with a deal before the end of 2019. They still suggest that the most likely outcome is that the UK has not left at all. And for all the talk of no deal, they give it a chance of only one in three.

Therefore, sterling could still fall a lot further in the event of no deal, as this outcome is far from being fully discounted. In fact, they are assigning it about the same probability as they did a vote to leave the EU in the original referendum – something which came as a huge shock when it actually happened.

Meanwhile, even if a deal is reached, we doubt that sterling would do very well this year. This is because we expect appetite for risk to wane across the globe as the world economy slows, prompting the dollar to strengthen against most currencies, including sterling.

The upshot is that, in our view, the near-term risks for the currency are still skewed to the downside. But there is a chance that the pound will rebound in 2020 or 2021, if inflation rises and the BoE tightens monetary policy as a result

Time for a quick recap

Analysts have warned that the pound could slump towards parity against the US dollar, if Britain crashed out of the EU without a deal.

Morgan Stanley warned:

The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the U.K. may be heading towards a harder Brexit.

Should this scenario materialize, pound-dollar could fall into the $1.00-$1.10 range.”

The pound hit a fresh 27-month low against the dollar this morning, amid growing fears that Boris Johnson or Jeremy Hunt could trigger a disorderly Brexit.

Sterling hit $1.2382 for the first time since March 2017, and also scraped a six-month low against the euro at €1.1075.

The IMF has warned, meanwhile, that the US dollar is already overvalued, while Germany is benefitting from an unduly-weak euro.

UK house prices continue to be hurt by Brexit uncertainty. In London, they plunged by 4.4% year-on-year in May, the worst decline since the financial crisis.

Across the country, growth slowed to 1.2%.

Consumer price inflation stuck at 2% in June, hitting the Bank of England’s target for the second month running.

The pound is struggling back from this morning’s 27-month low, to around $1.243 to the US dollar.... but there could be worse to come.

US investment bank Morgan Stanley has warned that sterling could slump to parity against the US dollar if the UK leaves the European Union without a deal.

That would be a record low, even worst than the $1.05 level plumbed in 1985 during the Thatcher-era sterling crisis.

In a research note published today, Morgan Stanley warn:

“The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the U.K. may be heading towards a harder Brexit.

Should this scenario materialize, pound-dollar could fall into the $1.00-$1.10 range.”

The IMF is also concerned by the gap between countries who run a trade surplus, and those who run a deficit.

Gita Gopinath, head of the Fund’s research department, says politicians need to do more to improve their fiscal position while also boosting growth:

Many countries are now near full employment and have limited room to maneuver in their public budgets. So, governments need to carefully calibrate their policies to achieve domestic and external objectives.

Countries with excess current account deficits, like the United Kingdom and the United States, should adopt or continue with growth-friendly fiscal consolidation, while those with excess current account surpluses, like Germany and Korea, should use fiscal space to boost public infrastructure investment and potential growth.

View image in fullscreen

The International Monetary Fund has declared that the US dollar is overvalued, a development that may cheer Donald Trump.

In a new report, the IMF estimates that the dollar’s effective exchange rate is between 6% and 12% too high, based on economic fundamentals.

Conversely, it believes that the euro is up to 18% undervalued for Germany, but up to 4% too valuable for France.

The Chinese yuan and Japanese yen, the Fund adds, are trading at levels that are “warranted” by economic fundamentals.

Trump has long complained that other countries are taking advantage of America by devaluing their currencies, often singling out the yuan and the euro. Today’s report may bolster his argument that the US Federal Reserve should cut interest rates to push the dollar down.

The IMF’s new External Sector Report also warned that Brexit, and the US-China trade war, could threaten the global economy.

“An intensification of trade tensions or a disorderly Brexit outcome - with further repercussions for global growth and risk aversion - could .... affect other economies that are highly dependent on foreign demand and external financing.”

Many economists and commentators are alarmed by the slowdown in America’s building sector.

Here’s some early reaction:

America’s housing market is also slowing.

The number of permits granted to build a new home plunged by 6.1% in June, new government data shows. It hit an annual rate of just 1.22 million units, the lowest since May 2017.

That suggests a drop in demand, or that builders are nervous about taking on new projects.

The number of actual housing starts also slowed, down 0.9% to an annual rate of 1.253 million, according to the Commerce Department.

View image in fullscreen

America’s housing market has looked lacklustre for several months -- this may bolster the case for US interest rate cuts.

Britain’s financial watchdog has faced the wrath of UK citizens who have lost money from various scandals.

The Financial Conduct Authority’s chief executive, Andrew Bailey, received a rough ride at the FCA’s annual meeting.

He was challenged over Royal Bank of Scotland’s Global Restructuring Group (which drove small firms into bankruptcy) and the London Capital & Finance scandal (which collapsed owing money to cost thousands of customers).

Attendees at today’s meeting blasted the FCA for not doing a better job -- some even accused its top managers of being “crooks” who belonged in jail.

My colleague Kalyeena Makortoff reports:

Paul Smith, chief executive of Haart estate agents, agrees that London house prices have further to fall:

“The Tory leadership battle is soon to come to a head. Whilst Boris’ proposals to cut stamp duty are attractive, the constant uncertainty and political instability is impacting property markets across the UK, with price growth slowing to just 1.2% this month.

This reduction is largely being driven by price falls in London which tends to feel the impact of political unrest more acutely than other regions of the UK. As we edge ever closer towards the October 31st deadline, and indeed the prospect of a potential no deal scenario, we can perhaps expect a further decline to London house prices over coming months, but thereafter more positive headlines.”

More expensive London houses have suffered the biggest price hit.

The price of a detached home has slumped by 6% in the last 12 months, while terraced homes are only 2.9% cheaper.

London’s Evening Standard newspaper is splashing on the capital’s house price slump:

Ironically, the Standard’s editor played a role in London’s house price boom.

When he was chancellor, George Osborne introduced the Help To Buy scheme that helped people borrow more money for a house. This drove prices higher - boosting housebuilders’ profits rather than making property affordable.

This is a neat way of showing how the UK housing market has cooled (green = strong growth, while red = weak)

Here’s our economics editor Larry Elliott on the house price slowdown:

House prices in London have fallen at their fastest pace since the financial crash a decade ago as the capital bears the brunt of the nationwide torpor in the property market.

Amid a dearth of potential buyers, the cost of a home in London was 4.4% lower in May than a year earlier, according to the latest official snapshot of the market from the Office for National Statistics.

The ONS said it was the biggest drop in London prices since the 7.0% annual fall recorded in August 2009 – a period that included the near-meltdown of the global banking system in the autumn of 2008....

More here:

With Britain just three months away from a possible no-deal Brexit, you need strong nerves to consider signing up for a large mortgage.

Paul Stockwell, Chief Commercial Officer of Gatehouse Bank (a Sharia-compliant challenger bank) says economic uncertainty is keeping potential buyers out of the market:

“Falling house prices in London have become the norm, but the small annual decline in the North East points to low transaction volumes having an impact on the market across England.

“It isn’t the first time prices fell in the North East this year, they also took a small dent back in February and March, but declining buyer activity is almost certainly forcing sellers to drop their prices.

“Brexit uncertainty is playing a role, with buyers still in the dark over which way the wind is going to end up blowing, but affordability is almost certainly dampening price growth.

“If the annual price growth drops any lower, we will see the lowest figures in six years, and with price falls registering outside London and the South East, this is starting to look more likely. Further price falls may be needed to bring buyers back to the table, especially while they wait on Brexit to be decided.”

There’s a big difference between ‘more affordable’ and ‘actually affordable’.

Despite the recent slowdown, getting onto the UK housing ladder - or shimmying up a few rungs - is a real challenge.

That’s because house prices accelerated much faster than earnings in the last decade, creating a huge affordability gap that will take a long time to close (unless wages really boom or prices crash).

The Resolution Foundation thinktank have tweeted the details: