Graeme Wearden 

UK factories suffer worst quarter on record amid coronavirus lockdown – as it happened

Rolling coverage of the latest economic and financial news
  
  

The Vauxhall car factory at Ellesmere Port during the lockdown
The Vauxhall car factory at Ellesmere Port during the lockdown Photograph: Colin Mcpherson/The Guardian

Closing summary

Time for a quick recap.

UK factories have suffered their worst quarterly slump in activity since at least the 1970s, as the coronavirus lockdown hit the economy. Manufacturers are also anxious about their prospects for the coming months, with export orders down sharply.

Investors continue to fret about the possibility of a second wave of Covid-19 infections as Western economies reopen. Several US states have reported a rise in cases in recent days, while a local infection in Germany has pushed its R-rate sharply higher.

The FTSE 100 is down 47 points, or 0.75%, in late trading in London at 6251 points, while Wall Street has opened lower.

Drinks firm Diageo (-3.6%), jet engine maker Rolls-Royce (-3.5%) and medical equipment firm Smith & Nephew (-2.8%) are the top fallers on the FTSE 100.

US home sales have fallen to their lowest level in some eight years, as property transactions were curbed by the pandemic.

Consumer confidence across Europe is also weak, although not as bad as in April and May.

Bank of England governor Andrew Bailey has revealed that the UK government could have been left temporarily unable to borrow during the March market panic, before the BoE stepped in.

Bailey has also suggested that the Bank could unwind its QE bond-buying programme before raising interest rates from their record lows.

The London Stock Exchange boss Nikhil Rathi has been appointed chief executive of the Financial Conduct Authority, making him the first BAME leader of the UK’s City regulator.

Ian Mason, head of UK Financial Services at Gowling WLG, thinks Rathi is a good choice to replace Bailey at the FCA:

“Mr Rathi will join the FCA with a full in-tray, but his previous background and experience suggest that he is well equipped to make a flying start. His work at the Treasury on EU and international markets will be important in working with the Government to navigate a workable regulatory outcome on Brexit for the UK.

His CEO role at the London Stock Exchange will have provided commercial experience at the sharp end of the financial markets. Another major challenge will be dealing with post COVID-19 planning, including the accumulated consumer and corporate debts, which are building up. His relative youth should provide the energy and impetus required at the time, and as we have seen with Rishi Sunak, who appointed him, age is no barrier to ability in high profile positions. As an external appointment, he will also bring a new perspective to the FCA’s culture and priorities.”

Thanks for reading, We’ll be back tomorrow... GW

This is why US realtors are optimistic, despite sliding home sales last month.

US home sales hit eight-year low

In another unsurprising development, sales of homes across America have fallen sharply.

Sales of existing homes (rather than new builds) crashed last month to an annual rate of just 3.91m units, which is the lowest since 2012. Potential buyers were kept away by lockdown restrictions, and the surge in unemployment across the US.

But estate agents are hopeful that sales could recover as the economy returns to more normal conditions....

EC consumer confidences inches back

Consumer confidence across the eurozone has risen slightly, but remains extremely weak as the pandemic rumbles on.

The EC’s gauge of consumer morale has risen to -14.7 this month, according to provisional data just released, up from -18.8 in May. That’s a little better than feared, but still lower than average (understandably!).

New figures show that UK shops are still rather quieter than a year ago, despite a surge in visitors after some lockdown restrictions were lifted.

Our economics editor Larry Elliott explains:

Shoppers flocked back to the high streets in England over the past week as non-essential stores reopened but numbers remained well down on a year earlier, according to the latest survey of retail footfall.

Springboard, a company that measures the number of potential customers at retail outlets across the UK, found that footfall in the week starting 15 June was up 45% on the previous week.

But with numbers influenced by later reopenings in Scotland and Wales, restrictions on pubic transport and a shift to online shopping, footfall was down 54% on the same week in 2019.

Wall Street opens lower

The US stock market has dipped in early trading, as investors weighed up the recent increase in Covid-19 cases in some American states.

The Dow has lost 193 points, or 0.75%, at the open to 25,678, matching the small losses in Europe earlier today.

The broader S&P 500 has lost 0.5%, while the tech-heavy focused Nasdaq is 0.2% lower.

Edward Moya of OANDA says investors are watching the Covid case numbers closely, but aren’t panicking.

While the number of new COVID-19 cases is noticeably higher in the southeast regions, that is being attributed to reopening before seeing their cases come down to low levels.

Despite the surge in new cases, risk appetite is holding up because confidence is higher with how doctors can treat the virus and now that the virus is working its way through younger individuals. If the seven states that hit record highs with daily cases continues to grow exponentially, that should start to weigh on risk appetite.

The BBC are reporting that sandwich chain Pret a Manger could cut jobs early next month, after suffering a slump in sales under the lockdown.

They say:

A leaked video revealing how sales have plunged at Pret a Manger during the coronavirus crisis has raised fears about job cuts at the sandwich chain.

Boss Pano Christou told staff in a recent online meeting that an announcement about the “job situation” would be made on 8 July.

He said Pret’s global weekly takings had fallen to £3m, just 15% of what they would normally be.

In an encouraging sign, the Chicago Federal Reserve’s index of economic activity across the US has climbed into positive territory.

The Chicago Fed’s national activity index has risen to 2.61 for May, from -17.89 in April as US states locked down.

This index measures production, employment, consumption and sales, so this suggests economic growth increased substantially in May after a terrible April.

The record slump in UK factory output in the last three months is “very disappointing,” says Howard Archer, chief economic advisor to the EY ITEM Club

It suggests that the economy is still struggling, several weeks after the government started to relax some of its lockdown restrictions to get people back to work.

Archer says:

  • The June CBI industrial trends survey is still extremely weak overall indicating that the manufacturing sector is still struggling hugely despite the progressive easing of lockdown restrictions since mid-May.
  • There have been signs that the economy started to recover in May from April’s lows, and the expectation is that June will see further improvement in economic activity as lockdown restrictions have been eased further. However, the disappointing June CBI industrial trends survey highlights the fact that major uncertainty remains as to just how robust the recovery will be
  • We suspect that the economy will likely contract around 17% quarter-on-quarter in the second quarter. We expect the economy to return to clear growth in the third quarter with GDP expanding close to 10% quarter-on-quarter. This assumes a further easing of lockdown restrictions, including a relaxation of social distancing rules. We expect GDP to contract around 8.0% over 2020
  • The CBI survey showed only a slight pick-up in orders in June from May’s lowest level since October 1981, as foreign demand fell to an all-time low. Output over the past three months contracted at a record rate
  • Prices over the next three months are expected to fall markedly, clearly reflecting manufacturers’ perceived need to discount to try to gain business by discounting
  • Output expectations for the next three months picked up modestly for a second month running in June from April’s record low, although they remained extremely low and well in contraction territory

Bank of England governor Andrew Bailey is certainly making headlines today.

He’s been interviewed by Sky News, and warned that Britain’s government could have been unable to finance itself without the Bank’s stimulus packages.

Bailey explained that the core financial markets came “pretty near” to meltdown in March, adding:

“We had a lot of volatility in core markets: the core exchange rate, core government bond markets.

“We were seeing things that were pretty unprecedented, certainly in recent times. And we were facing serious disorder.

And if the Bank hasn’t intervened by cutting interest rates and boosting its QE programme? Bailey says Britain could have been in deep trouble....

“I think the prospects would have been very bad. It would have been very serious.

“I think we would have a situation where in the worst element, the government would have struggled to fund itself in the short run.”

More here: Governor says Bank of England saved Britain from effective insolvency

Former FCA board member Mick McAteer says Nikhil Rathi’s appointment as the new City watchdog CEO is a “very big statement” on the regulator’s priorities post-Brexit, given his background in international financial services.

Between 2009-2014, Rathi led the Treasury’s work on the UK’s EU and international financial services interests, and after joining the London Stock Exchange as its chief executive, also served as the group’s international development executive.

McAteer, who now runs the Financial Inclusion Centre thinktank, said:

“It sends a powerful signal that FCA is likely to become more internationally focused in the post Brexit world.

The regulator is likely to play a bigger role in protecting the City as a pre-eminent international financial centre given the potential loss of business post Brexit.”

However, McAteer worries that consumer protections might take a backseat and that Rathi may be pushed to row back on key regulations.

“I hope it does not signal that consumer protection will be relegated as a priority. For years, prior to the FCA being created, consumer protection played second fiddle to financial stability and market regulation.

Campaigners will need to be on their guard to make sure that this does not happen again. There are already concerns that industry lobbies are pushing for deregulation post Brexit.”

Here’s our news story on the latest Wirecard developments:

UK manufacturers also expect average selling prices to fall over the next quarter, reflecting weak demand.

It’s not surprise that factory output slumped since the pandemic began (it shows the lockdown is working as planned).

But the CBI is particularly concerned that factory order books are “remarkably poor”, suggesting manufacturing is still very weak.

UK factories suffer worst quarter on record

Breaking: UK factories have suffered their worst quarter on record, thanks to the ongoing lockdown.

The CBI reports that British industrial output shrank at an unprecedented pace in the three months to June as COVID-19 heavily disrupted operations.

Factory bosses also fear further declines in the months ahead, undermining hopes of a rapid recovery from the pandemic.

The CBI’s monthly Industrial Trends Survey found that output dropped in 15 out of 17 sub-sectors. The headline fall in output volumes was driven by the motor vehicles & transport equipment, mechanical engineering, and metal products sub-sectors.

This pulled its gauge of industrial output down to -57 for the last quarter, from -54 a month ago, the lowest since the measure started in July 1975.

Total order books remained poor by historical standards, the CBI adds, despite improving slightly on last month. Meanwhile, export orders books worsened on the previous month, falling to their lowest since the survey began in April 1977.

Anna Leach, CBI Deputy Chief Economist, is urging the government to keep supporting the industry until the pandemic is over:

“The UK manufacturing sector remained in a deep downturn in June due to the ongoing COVID-19 crisis. Output volumes declined at a new record pace and export order books fell to an all-time low, reflecting the significant fall in demand in the UK and abroad. Firms are again hoping that this will ease somewhat in the next three months.

“The Government has already undertaken a huge amount of work to provide financial lifelines to businesses throughout this unprecedented period. With firms having been encouraged to restart operations, the Government must continue to engage with the sector to understand their specific concerns and provide support as needed.”

German financial watchdog Bafin has described the unfolding financial scandal at payment group Wirecard as a “total disaster”, Reuters reports.

Bafin president Felix Hufeld said this morning:

“It is a scandal that something like this could happen”.

The news that €1.9bn of funds are missing, and probably never existed, is certainly a disaster for investors. Many trusted Wirecard’s denials, when the Financial Times raised serious questions about its sales and profit figures. It’s a serious blow to the reputation of Germany’s wider tech sector.

And it’s also a disaster for Bafin’s reputation. The regulator clearly missed whatever went wrong at Wirecard, and chose to file a criminal complaint against the FT in 2019 after it first reported suspicious transactions.

Nikhil Rathi to lead FCA

Just in: Britain’s City watchdog has a new leader.

Nikhil Rathi, the CEO of London Stock Exchange Plc, has been appointed as the chief executives of the Financial Conduct Authority (FCA), to succeed Andrew Bailey.

It’s a tough job -- back in March, MPs criticised the FCA’s “culture, transparency and insufficient speed of action” following recent scandals including London Capital & Finance and the Woodford debacle.

Rathi, who led UK Treasury’s Financial Services Group before joining the LSE, will be the first BAME leader of the financial watchdog. He says:

FCA colleagues can be very proud of their achievements in supporting consumers and the economy in all parts of the UK in recent months.

In the years ahead, we will create together an even more diverse organisation, supporting the recovery with a special focus on vulnerable consumers, embracing new technology, playing our part in tackling climate change, enforcing high standards and ensuring the UK is a thought leader in international regulatory discussions.

Chancellor Rishi Sunak has tweeted:

Here’s more reaction:

Shares in UK retail chain JD Sports have dropped 2.5% this morning, as its Go Outdoors division dangles on the brink of administration.

Go Outdoors, which sells camping, cycling and fishing gear, has been predictably hurt by the current ban on holidays. With sales struggling, JD Sports filed a notice of intention to appoint administrators for the business on Friday.

The move puts 2,000 jobs at risk across 67 stores.

It told shareholders this morning that:

The Group can confirm that it has considered a number of strategic options for Go and that Go’s directors have lodged the Notice in Court. This Notice creates an immediate moratorium around the company and its property which lasts for ten business days.

During this moratorium, Go’s creditors cannot take legal action or continue with any existing legal proceedings against the company without the Court’s permission.

European markets are recovering some of their earlier losses, lifting the FTSE 100 back towards parity at 6,290 points.

But travel companies are still having a bad morning, following the pick-up of Covid-19 cases in Germany, Melbourne, and parts of the US (see opening post).

IAG, the parent company of British Airways, is the top faller (-3.7%), followed by Intercontinental Hotels (-2.2%).

Bailey: BoE might unwind QE before rate hikes

Bank of England governor Andrew Bailey has revealed that the central bank is changing its strategy on unwinding its stimulus measures (when the time comes!).

Writing for Bloomberg this morning, Bailey indicates that the BoE would reverse some of its quantitative easing programme before it considered raising interest rates from their current record lows.

As Bailey puts it:

“When the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis,”

Bailey’s predecessor, Mark Carney, had leaned towards rate hikes before cutting the stock of government debt bought by the BoE (which is now heading towards £745bn). Carney’s view was that Bank rate was a nimbler tool than tweaking its stock of reserves, so any changes could be reversed if necessary.

Of course, the Bank won’t tighten policy until the UK economy is growing again and the Covid-19 crisis is over - which could take a while.

Bailey’s comments appear to have lifted the pound - it’s up half a cent to $1.242:

Back in the UK, the government is making it harder for foreign investors to swoop on firms which are critical to public health.

My colleague Mark Sweney explains:

The changes will give the government the power to protect companies that could be critical in helping the country in future health emergencies but which may be financially struggling to weather the current coronavirus pandemic.

The new powers, introduced on Monday, will cover firms such as pharmaceutical and technology companies.

South Korea trade slump eases

South Korea has reported another slump in trade - but the downturn may be bottoming out.

Exports from South Korea slumped by 7.5% in the first three weeks of June compared to a yer ago, while imports contracted by 12%.

That’s an improvement on May, when exports fell 20.3% and imports tumbled 16.7%. June’s figures also show a small rise in shipments of semiconductors, implying a pick-up in demand for electronics.

Paul Donovan of UBS Wealth Management says this trade data shows how demand for factory goods will pick up as the pandemic cools:

The Korean data fits the likely pattern of global consumption as lockdowns ease. Trade should outperform economic growth, as services are hit more than manufacturing.

Consumers will spend forced savings on durable goods – favoring electronics, for example – but the savings are probably not enough to have a huge impact on car sales. Growth will pick up, but the level of activity will still be lower than last year.

Shares in German payment processor Wirecard have halved in early trading, as the financial crisis gripping the firm deepened.

Wirecard has admitted this morning that €1.9bn of missing funds probably doesn’t exist, telling investors that:

“There is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion euros do not exist.”

Last week, the firm’s auditors revealed that this cash was missing from its bank accounts, and not held by two Asian banks as Wirecard had claimed.

This prompted Wirecard CEO Markus Braun to resign on Friday, as the one-time star of Germany’s tech sector reeled.

The firm, whose technology underpins many e-commerce services, had previously denied that its accounting practices were faulty. Last year, the Financial Times reported that some staff appeared to have conspired to fraudulently inflate sales and profits at its subsidiaries in Dubai and Dublin, deceiving auditors EY for many years.

Stock markets across Europe have also opened in the red, with Germany’s DAX down 1.1%, France’s CAC losing 1.3% and Italy’s FTSE MIB off 0.8%.

Britain’s FTSE 100 index has dropped by 63 points, or just over 1%, at the start of trading.

Mining giant Glencore is the top faller, down 5.4%, followed by Intercontinental Hotels (-3.5%), jet engine maker Rolls-Royce (-3.3%) and advertising giant WPP. They would all suffer if a second wave of Covid-19 cases triggered new lockdown measures, leading to lower economic growth and less travel.

Silver miner Fresnillo is the top riser, up 2.3%, along with UK housebuilders Taylor Wimpey and Barratt.

Gold at one-month high

Coronavirus worries have pushed the gold price to its highest level in over a month.

Bullion is changing hands at up to $1,758 per ounce, up from $1.742 on Friday night, for the first time since 18th May.

Gold tends to rise when traders are fretting about the economic impact of the pandemic -- or anticipating a jump in inflation due to central bank money-printing measures.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says:

Gold shortly jumped to $1758 per oz on the back of an intense risk sell-off in Asia. If investor sentiment deteriorates, the yellow metal could finally make the much-expected breakout to the $1800 mark. Otherwise, we should see a consolidation to $1725/1750 area.

In May gold touched $1,764 per ounce - its highest level since 2012:

Second wave fears weigh on markets

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

Anxiety over a possible second wave of Covid-19 infections is knocking investors’ confidence this morning, undermining hopes of a bounceback in growth as economies reopen.

Traders got a jolt on Friday night, when Apple announced it was shutting some US stores in four states following a jump in coronavirus cases.

Then over the weekend, Germany’s R rate jumped over the crucial 1 level, meaning the virus is spreading at a faster rate again in Europe’s largest economy. That appears to be linked to a rash of infections at an abattoir in northern Germany last week.

Over in Florida, new Covid-19 cases rose steadily last week after its economy reopened.

And in Australia, authorities are battling a coronavirus outbreak in Melbourne -- just weeks after authorities lifted restrictions.

The picture is a little brighter in Italy, where 24 Covid-19 deaths were reported on Sunday, down from 49 on Saturday. However, on Friday Italy’s top health agency flagged up “warning signs” of new coronavirus transmission, especially over outbreaks of cases in Rome.

It all reminds the markets that recent progress in curbing the pandemic in Europe and the US could unravel as policymakers try to relax lockdown rules. As a result, European markets are heading for a weak open with the FTSE 100 currently expected to fall over 1%.

Analyst Fiona Cincotta of City Index explains:

Even though the number of cases in Germany is low, the rise is unnerving. The markets will be watching developments closely here. Germany has been relatively successfully in keeping deaths low and reducing the spread quickly in the first wave, investors will need to this second wave nipped in the bud to boost optimism that a second wave won’t be as devastating the first.

Meanwhile, in the US states such as California and Florida are still seeing the number of cases rise. Apple announced that it will be shutting 11 stores owing to rising cases in some states adding to investor woes. On a positive, the recent outbreak in Beijing appears to be fading.

Globally, the pandemic is still accelerating. Yesterday, the World Health Organization on Sunday reported the largest single-day increase in coronavirus cases by its count, at more than 183,000 new cases in the latest 24 hours.

Brazil led the way with 54,771 cases, followed by the US with 36,617 and India with 15,400.

Coming up today:

Germany’s central bank publishes its latest economic assessment this morning. The Bundesbank may see some grüne Triebe of recovery, following the easing of some lockdown rules.

We also get a new healthcheck on UK factories, plus US home sales and EU consumer confidence data.

Investors are also eager to hear the government’s plan to reopen the UK’s hospitality industry. Boris Johnson is expected to announce changes to the 2m social distancing rule on Tuesday, and could also insist that customers register before going to the pub. Where do we sign up?!

The agenda

  • 11am BST: Bundesbank publishes monthly report on German economy
  • 11am BST: CBI industrial trends survey for May
  • 3pm BST: US home sales for May
  • 3pm BST: Flash estimate of EU consumer confidence
 

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