Graeme Wearden 

EasyJet issues Brexit warning, as crisis turns UK into ‘laughing stock’ – as it happened

Rolling coverage of the latest economic and financial news, as budget airline warns of ‘softness’ in demand for travel
  
  

An EasyJet airplane is pictured at Leonardo da Vinci-Fiumicino Airport in Rome, Italy.
An EasyJet airplane is pictured at Leonardo da Vinci-Fiumicino Airport in Rome, Italy. Photograph: Alberto Lingria/Reuters

Summary

Time for a quick recap:

Low-cost airline easyJet has warned that Brexit uncertainty is hurting its business. EasyJet told shareholders that pricing pressures are building, as potential passengers are unwilling to risk booking a holiday in the current climate.

CEO Johan Lundgren pinned the blame on the non-stop flurry of Brexit news (little of it positive!):

“We had hoped for clarity around Brexit at this point of time and that hasn’t happened and that clearly has had an impact on customer demand.

“Whenever people turn on the television or they are looking up news and they go on to websites, they see uncertainty and lot of bad news. There is a waiting pattern for customers.”

The news sent a shiver through the markets, knocking shares in airlines and holiday operators. Here’s the current damage:

  • EasyJet: Down 7%
  • TUI: down 3.8%
  • Wizz Air: Down 6.7%
  • IAG: Down 1.5%

The boss of Siemens’ UK operations has also waded in, warning that the Brexit crisis has turned Britain into a laughing stock.

Jürgen Maier argued that MPs must back a customs union with the EU (something that will be on the table in tonight’s indicative votes in the Commons)

“Enough is enough. We are all running out of patience. Make a decision and unite around a customs union compromise that delivers economic security and stability.”

On the economic side, we’ve had mixed reports from the world’s manufacturers.

Britain’s factory growth has accelerated, thanks to strong demand to stockpile parts and components ahead of a potential no-deal Brexit.

The eurozone is struggling, though, with its manufacturing PMI hitting a near six-year low. German and Italian factories suffered the most.

America, though, is continuing to outperform Europe:

On the other hand... a rival survey of US factory growth, from the Institute of Supply Management, paints a stronger picture than Markit’s survey.

The ISM manufacturing PMI has risen to 55.3, up from 54.2, implying growth remains solid.

US factory growth hits lowest since July 2017

Newsflash: America’s factory sector also slowed last month, according to Markit’s monthly healthcheck.

Manufacturing bosses reported that output growth, and new orders, both slowed.

Perhaps significantly, new export orders barely rose, with some firms blaming “global trade tensions” and tariffs for dampening foreign client demand.

This pulled the US manufacturing PMI down to 52.4 for March, down from 53 in February, closer to the 50-point mark which shows stagnation.

Uh oh.... Shares in ride-sharing service Lyft are being pummelled in early New York trading.

They’ve plunged by 10%, sending the stock sliding below the $72 level at which it floated on Friday.

The initial pop, to $85, clearly hadn’t lasted long....

Canada’s manufacturers stumbled last month..... with the weakest growth in two and a half years.

Data firm Markit says exports fell sharply -- echoing the message from Brazil a few minutes ago.

Wall Street has opened higher, boosted by hopes that China’s economy had turned a corner.

The Dow Jones industrial average gained 192 points at the open, or 0.75%, with the broader S&P 500 rising by 0.7%.

Back to the economic data...and Brazil’s factory growth has weakened a little.

Brazilian manufacturers reported that exports sales fell for the fourth month running, suggesting that the global slowdown has hurt the BRIC economy.

But domestic demand remained solid, keeping the PMI solidly in growth territory (at 52.8 for March, down from February’s 53.4).

The impact of Brexit uncertainty goes beyond summer holidays, of course. Business

Over the weekend, the Centre for European Reform calculate that Britain’s economy is 2.5% smaller than it would be if voters had chosen to Remain in the EU in 2016 (this is based on comparisons with other countries’ growth).

This, CER estimate, has led to an extra £19bn of borrowing per year -- or £360m per week (close to a certain pre-referendum claim...)

Goldman Sachs has also crunched the numbers, and come to a similar conclusion - as the FT explains:

The investment bank said that Brexit has cost Britain about 2.4 per cent of gross domestic product, compared with a hypothetical “Doppelgänger” economy that did not withstand a Brexit shock.

Its estimates suggest that the UK economy has underperformed other advanced economies since mid-2016 as a result.

Sven Jari Stehn, Goldman economist in London, said the “output losses have been concentrated in investment and private consumption”.

“The outsized impact on investment suggests that political uncertainty associated with the Brexit process may, indeed, be one of the major sources of the economic cost of Brexit,” he said.

EasyJet CEO: Brexit news is bad news

EasyJet’s CEO, Johan Lundgren, has blamed the torrent of Brexit news for scaring customers away from booking flights.

Speaking to reporters this morning, Lundgren said potential passengers were stuck in a virtual ‘holding pattern’, reluctant to commit to a holiday until they know more about Britain’s future.

Explaining today’s gloomy trading update, Lundgren says:

“We had hoped for clarity around Brexit at this point of time and that hasn’t happened and that clearly has had an impact on customer demand.

“Whenever people turn on the television or they are looking up news and they go on to websites, they see uncertainty and lot of bad news. There is a waiting pattern for customers.”

Newsflash: Two former Barclays bankers have been jailed after being convicted of conspiring to manipulate global Euribor interest rates.

Carlo Palombo, formerly Barclays vice president of euro rates, was sentenced to five years imprisonment at Southwark Crown Court today. Colin Bermingham, a former Barclays managing director, received four years.

Both men were found guilty last week after a retrial. They were accused of conspiring to rig the benchmark rate for borrowing between commercial banks, which is used to set the rates on global financial contracts and loans.

A third defendant, Sisse Bohart, was acquitted.

Lisa Osofsky, Director of the Serious Fraud Office, says:

“These men deliberately undermined the integrity of the financial system for personal gain and to advantage the banks they worked for.

“We are committed to bringing those who defraud others to justice, regardless of how long ago the offences took place.”

Oil is also rising this morning -- boosted by the news overnight that China’s factories returned to growth last month.

Brent crude has gained one dollar per barrel to $68.68, its highest level of 2019, as traders anticipate higher demand.

That’s another blow to airlines, as it will push their transport costs higher (unless they’re hedged against fuel costs).

Professor Costas Milas of Liverpool University points out that the pound usually suffers when Brexit worries start rising... and here’s the proof:

He explains:

Daily movements of the sterling rate follow developments in UK policy uncertainty (as measured by discussion of policy uncertainty in 11 UK newspapers) very closely.

There is a clear negative impact of policy uncertainty on the sterling rate (correlation =-0.40). What is also interesting is that policy uncertainty drops and sterling picks up immediately after the meaningful votes of the 15th of January and the 12th of March on the ground that there will always be another attempt by Mrs May to push her deal over the line. Sterling is also rising slightly today on the ground that tonight’s vote(s) will provide a possible solution for the way forward. If, instead, the voting process is inconclusive, uncertainty will spike and sterling will record a free fall.

Brexit compromise hopes push pound higher

Hopes that a no-deal Brexit can be avoided are pushing the pound up this morning.

Sterling has just nudged $1.31, which means it’s clawed back a cent since Theresa May lost the latest vote on her Withdrawal Deal on Friday.

MPs will hold further indicative votes later today, and there’s speculation that plans for a softer Brexit could win more support.

However, this would surely split May’s cabinet, with many ministers arguing that crashing out without a deal would be better.

Europe’s stock markets are shaking off the deepening gloom in the eurozone’s manufacturing sector.

The main indices are all positive, led by Germany’s DAX which has gained 1.2%.

At first glance that’s quite remarkable, given German factories just suffered their sharpest contraction in almost seven years (see here).

But... it appears that stronger Chinese factory data overnight is driving investors to snap up shares in German manufacturers. They’re wagering that the recent slump in global growth may have bottomed out.

So industrial giant Thyssenkrupp are up 4%, with car typer maker Continental up 3.8%. Auto firms such as Daimler (+3.5%) and VW (+2.8%) are also gaining.

Fawad Razaqzada, market analyst at Forex.com, says:

Stock index futures gapped higher overnight, while copper prices and risk-sensitive currencies such as the Australian dollar also rose in response to the latest Chinese data, which pointed to a surprise rebound in activity at the world’s second largest economy.

The positivity has carried forward to Europe where the markets were sharply higher at the time of writing, despite the release of some mixed-bag data here.

Here’s our news story on the split between British factories (slogging away stockpiling), and their eurozone rivals (weakening month by month).

Updated

EasyJet warning: What the analysts say

City experts have been pondering easyJet’s warning that Brexit uncertainty is hurting its business, and pushing down prices.

AJ Bell investment director Russ Mould says investors are afraid that other airlines are also struggling.

“EasyJet’s warning about softer ticket prices has sent shockwaves across the airline industry, adding to problems already voiced by tour operators and suggesting that 2019 could be a washout for the travel sector.

“People have been worried about the impact of Brexit on the aviation sector and there is lots of chatter that individuals are holding off from booking flights and holidays.

“If you’re going to hand over a large sum of money for a trip abroad, you want to be reassured that the flight will actually happen and will take off as scheduled. At the moment travellers don’t seem to have that reassurance.

George Salmon, equity analyst at Hargreaves Lansdown, says people are resisting booking flights until they have more certainty about Brexit’s impact on travel regulations and currency rates.

The group reckons demand will pick up later in the year, but a more pragmatic observer would say it’s difficult to put a timeframe on when Westminster and the EU 27 will solve the Brexit puzzle. This uncertainty means easyJet requires some blue sky thinking just now.

Ian Forrest, investment research analyst at The Share Centre, thinks easyJet is still a good investment (especially as shares are 7% cheaper this morning!):

While the lowering of expectations for the second half is a negative for investors, it should be noted the CEO also pointed out recent government measures means it will be flying as usual after Brexit whatever the outcome.

While there was always likely to be some turbulence in the run-up to Brexit, the company’s relatively strong balance sheet and opportunities for growth in Germany alongside a healthy dividend mean we continue to recommend the shares as a ‘buy’ for investors willing to accept a medium level of risk.”

The surge in Brexit stockpiling really is unprecedented -- suggesting that UK warehouses are packed tightly with supplies ahead of supply disruption.

UK factories boosted by Brexit stockpiling

Newsflash: Brexit uncertainty is driving demand at UK factories, who did much better than their eurozone rivals last month.

Data firm Markit has just reported that UK manufacturing grew at its fastest pace in 13 months in March.

It says UK companies stepped up production to build-up inventories in advance of Brexit. They also benefitted from a surge in new orders from clients who have been scrambling to stockpile goods.

Many factories hired more staff to tackle this demand -- a boost for the labour market.

But it’s not all good news... companies also reported longer delays to get raw materials and components, as the rush to stockpile goods puts pressure on supply chains.

Rob Dobson, Director at IHS Markit, says:

“Manufacturers reported a surge of business activity in March as companies stepped-up their preparations for potential Brexit-related disruptions. Output, employment and new orders all rose at increased rates as manufacturers and their clients raced to build safety stocks. Stocking of finished goods and input inventories surged to new survey-record highs.

“The stock-building boost introduces a major headwind for demand, output and jobs growth moving forward. Manufacturers are already reporting concerns that future trends could be constrained as inventory positions across the economy are unwound.

The survey is also picking up signs that EU companies are switching away from sourcing inputs from UK firms as Brexit approaches. It looks as if the impact of Brexit preparations, and any missed opportunities and investments during this sustained period of uncertainty, will reverberate through the manufacturing sector for some time to come.”

The eurozone’s manufacturing sector is in its steepest downturn since the height of the region’s debt crisis in 2012, warns Chris Williamson, Chief Business Economist at IHS Markit said:

He says today’s weak PMI report suggests the euro economy could keep weakening in 2019:

New orders are falling at a rate not seen since 2012, and disappointing sales mean warehouses are filling with unsold stock. The orders-to-inventory ratio – a key indicator of the future production trend – is at its lowest for almost seven years. Expectations of output for the coming year are also the gloomiest since 2012.

“Concerns over trade wars, tariffs, rising political uncertainty, Brexit and – perhaps most importantly – deteriorating forecasts for the economic environment both at home and in export markets, were widely reported to have dampened business activity and confidence.

Eurozone suffers biggest monthly slump in six years

Newsflash: Eurozone factories just suffered their sharpest contraction in six years.

Data firm Markit has reported that manufacturing operating conditions in the eurozone deteriorated sharply in March, at the fastest rate since 2013.

Factory bosses reported that new orders shrank, forcing them to cut production and badly hurting business confidence.

Europe’s biggest member, Germany, had a particularly grim month, Markit says:

The overall downturn was led by Germany, where operating conditions deteriorated to the greatest degree in over six-and-a- half years. Italy fared little better, with its PMI at a near six-year low.

This pulled the overall eurozone manufacturing PMI down to 47.5 -- any reading below 50 shows that the sector shrank.

This reinforces concerns that the eurozone economy has stalled in recent months, hurt by the slowdown in the global economy (and the US-China trade war).

Siemens: Brexit is turning UK into a laughing stock

The UK chief of German manufacturing group Siemens also has a timely warning for UK politicians -- Brexit is turning Britain into a laughing stock.

In an open letter published on Politico, Juergen Maier warned that the political rows and deadlock over Brexit is wrecking the UK’s reputation for business stability.

He warns:

The U.K. Office for National Statistics on Friday confirmed investment is in its worst slump since the last recession, and we already know 80 percent of businesses say Brexit has damaged investment decisions. Worse, the damage this is doing to the country’s hard-won reputation as a serious and stable place to do business is now all too real.

The world is watching, and where the U.K. used to be beacon for stability, we are now becoming a laughing stock. I personally can no longer defend the action of our parliament when reporting to my managing board, making it hard to win support for finely balanced investment decisions that in the end have an impact on U.K. jobs, innovation and the competitiveness of our activities here.

A no-deal Brexit would be “hugely damaging”, Maier adds, pleading with MPs to reach a consensus and back a customs union with the EU.

“Enough is enough. We are all running out of patience. Make a decision and unite around a customs union compromise that delivers economic security and stability.”

Updated

EasyJet’s warning is actually good news for passengers. Given consumer uncertainty, airlines will struggle to put prices up this year.

Something to bear in mind when booking your summer holidays, as Karen Tso of CNBC tweets:

Updated

Liberum analyst Gerald Khoo explains (via Reuters) why easyJet’s statement has worried the City:

“The outlook is the challenge, with management having less confidence on the second half - the summer.”

“Brexit uncertainty is the main issue, but management sees macro uncertainty beyond the UK too.”

EasyJet is the worst-performing stock on the FTSE 100 this morning.

Other airlines are also suffering from its warning. IAG (which owns British Airways) are down 2%. Wizz Air has lost 1.5%, while Ryanair fell 5% at the open.

EasyJet shares fall 6%

Ouch! EasyJet’s shares have slumped by 6% at the start of trading in London.

Investors aren’t impressed by its warning that Brexit is creating “increased softness” in ticket prices.

Shares have shed 68p to £10.49, the lowest level since mid-December.

Updated

Some snap reaction to easyJet’s statement, from investment manager Robert Barron.

Here’s the BBC’s Clodagh Rice:

Updated

EasyJet has also been hit by higher oil costs in recent months, and by currency moves, saying:

It is expected that easyJet’s unit fuel bill for the six months to 31 March 2019 will be around £37 million adverse, while headline foreign exchange will have an adverse impact of around £8 million

Updated

EasyJet: Unanswered Brexit questions are hurting us

Budget airline EasyJet has fired a warning that the Brexit crisis is hurting its business, and spooking potential customers from buying flights.

EasyJet told shareholders this morning that it is now more cautious about its prospects for the next six months, due to “increasing softness” in prices.

It singled out the many ‘unanswered questions’ about Britain’s departure from the European Union as a key factor.

It’s a timely warning, as MPs prepare to hold another round of indicative votes on Brexit, amid swirling speculation that Britain could face another general election.

Johan Lundgren, easyJet chief executive, warns the City:

“For the second half we are seeing softness in both the UK and Europe, which we believe comes from macroeconomic uncertainty and many unanswered questions surrounding Brexit which are together driving weaker customer demand.

EasyJet expects to have made a £275m loss for the last six months, so could do without Brexit confusion clouding the crucial Easter and summer holiday season.

More encouragingly, easyJet says it’s “well-prepared” for Brexit, whatever the outcome.

Now that the EU Parliament has passed its air connectivity legislation and together with the UK’s confirmation that it will reciprocate, means that whatever happens, we’ll be flying as usual. I am pleased that we have also made progress on our European ownership position which is now above 49%.

Updated

Introduction: Global manufacturing in focus

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

Happy April! A new month means a new flurry of economic data, showing how the world’s factories sector fared in March.

These Purchasing Managers Index reports (PMIs), from IHS Markit, are expected to show that eurozone manufacturing contracted in March, while the UK slowed (but kept growing).

David Madden of CMC Markets points out that Germany is struggling.

Italian, France, German and UK manufacturing PMI reports will be in focus this morning, and traders will be paying close attention to the German report seeing as the flash reading was 44.7 – its lowest since July 2012.

Weak readings could fuel concerns over Europe’s economy; conversely, traders will be hoping to see signs of green shoots.

Overnight, China’s factory PMI has beaten expectations, with manufacturing bosses more upbeat about growth and output.

Shane Oliver, chief economist of AMP Capital explains:

European stock markets are expected to open higher.

The agenda

  • 9am BST: Eurozone manufacturing PMI report for March
  • 9.30am BST: UK manufacturing PMI report for March
  • 10am BST: Eurozone inflation for March
  • 3pm BST: US manufacturing PMI report for March

Updated

 

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