Closing summary
UK markets have largely welcomes Rishi Sunak as the incoming prime minister, seeing him as a steady pair of hands to deal with an economy headed towards recession.
UK bond yields fell this morning on the prospect of Sunak winning the Tory leadership contest, signalling growing confidence in the UK’s long-term economic outlook and the country’s ability to pay its debts.
Meanwhile, the FTSE 100 was trading higher by nearly 0.9% at 7028 points.
But Sunak will take over at a difficult economic juncture.
PMI data showed UK business activity contracted for a third month in a row in October, and fell to its lowest level since January 2021, signalling that the UK could be on course for a deep recession.
Meanwhile data from retail experts Springboard showed consumer demand weakening further, with shopping footfall dropping another 2.3% last week.
Businesses are now crying out for help. Whether Sunak is able to support them ahead of what is likely to be a tough winter, remains to be seen.
Our other main news today:
Thank you for reading. We’ll be back tomorrow from 8am. -KM
The incoming PM is set to tighten government purse strings, according to Capital Economics.
Senior UK economist Ruth Gregory says:
Sunak’s chosen Chancellor (Jeremy Hunt is expected to remain in post) will still need to set out a new set of fiscal rules and achievable policies to fill the hole in the public finances.
In a note published last week, we estimated that even after Chancellor, Jeremy Hunt, wiped from history most of Truss/Kwarteng’s tax policies, a fiscal hole of around £34bn remained.
The latest market moves have reduced some of the increase in debt interest payments since the mini-budget on 23rd September and may mean that the remaining fiscal gap to plug is now closer to £30bn.
We will know more as the dust settles and Sunak’s fiscal strategy is announced.
Overall, the news that Rishi Sunak will be the next PM means that the big downside risks to the economy posed by a prolonged period of political instability and a significant fiscal tightening have receded. But with a fiscal tightening still on its way, the risk is that the recession will ultimately be deeper or longer than we currently expect.
Business reaction to Sunak’s prime ministership is starting to roll in.
The British Chambers of Commerce’s director general Shevaun Haviland urges Sunak to be a steady hand for the UK economy, given recent turmoil.
Haviland says Sunak needs to set out “fully costed plans” to deal with issues like labour shortages and and surging energy bills to help struggling businesses:
The political and economic uncertainty of the past few months has been hugely damaging to British business confidence and must now come to an end. The new Prime Minister must be a steady hand on the tiller to see the economy through the challenging conditions ahead.
This means setting out fully costed plans to deal with the big issues facing businesses; soaring energy bills, labour shortages, spiralling inflation, and climbing interest rates.
We cannot afford to see any more flip-flopping on policies - the UK’s businesses need a sustainable, long-term economic plan they can believe in.
The British Chambers of Commerce are now writing to Sunak to set out the “action needed to tackle the main challenges facing business.”
They say that must include:
Providing more certainty on the energy support package for businesses and quickly communicate how the system will work from April.
Fixing the extremely tight labour market by increasing the number of skilled people in the UK (not clear whether they means boosting immigration
Setting out a strategy to boost international trade and exports.
Not a lot of change on UK government bond yields either since their initial drop this morning.
The yield – or interest rate – on 10-year UK government bonds is still around 3.8%.
A lower yield signals confidence in the UK’s ability to repay its debts.
Meanwhile, the yield on the 30-year gilt is hovering at similar levels.
The pound is in negative territory versus the US dollar, down around 0.1% at $1.129.
Versus the euro, it has pared gains to trade around 0.15% higher at €1.148.
FTSE 100 hits session high as Sunak set to become PM
While markets have largely priced in Sunak’s victory, the FTSE 100 has risen to its highest level this session.
The blue chip index is up nearly 0.7% at 7015 points.
With Sunak now set to become UK prime minister, former Bank of England rate setter Danny Blanchflower says the hard work is just beginning:
Penny Mordaunt withdraws from Tory leadership race
Back to to the eurozone purchasing managers’ index, the survey which showed that business activity across the bloc had fallen at the fastest pace in two years this month.
Saloman Fiedler, an economist at Berenberg, says the data shows a eurozone recession is “underway”:
The gas supply shock after Russia’s invasion of Ukraine and the resulting exorbitant energy prices are pushing Europe into recession this winter.
The downturn in the UK will likely be deeper and may have started earlier (in Q3) than in the Eurozone (likely Q4).
He notes that in most eurozone countries, PMIs are below 50, which is the threshold that separates contractions from expansions. Except France:
The sole exception is France, where resilient, albeit slowing, business activity in the services sector is still keeping the composite index teetering on the edge – but most likely France will tip over into recession as well.
In contrast, industry and gas dependent Germany is doing worse than its European peers.
The PMI survey paints a similar picture across countries: Input price inflation remains very high. Energy prices are the major driver, but other costs, including wages and financing costs, are rising markedly as well
High input costs are leading to ongoing output price inflation, as firms pass on costs to consumers. This likely contributes to the declining volumes of new business for firms.
The one saving grace is high levels of employment across the bloc:
Despite the bleak near-term outlook, employment growth remains relatively robust, which could support the economic recovery once Europe has made it through the painful winter.
Brent crude futures have slipped 1.3% to $92.33 per barrel after Chinese data showed a drop in demand in September.
China’s September crude imports were 2% lower compared to a year earlier, at 9.79m barrels per day, according to customs data released on Monday.
It adds to a mixed picture in China, which also revealed a 3.9% rise in GDP for the third quarter. While that was above analyst forecasts for a 3.3% rise, it is below government targets of 5.5%.
Just a little over an hour until markets open in the US and futures are pointing to a positive start for American stocks:
Dow futures are up 0.8%
Nasdaq futures are up 0.5%
S&P 500 futures are up 0.7%
Charlotte Sallabank, a partner and head of tax at lawfirm Katten UK, says Rishi Sunak is unlikely to tinker with existing economic plans set out by current chancellor Jeremy Hunt if he wins the Tory leadership race and ends up in Number 10:
As Jeremy Hunt’s mini budget effectively restored the fiscal policy to that which Rishi Sunak had proposed in his last budget as Chancellor in March 2022, Sunak is unlikely to make many changes to fiscal policy.
He may set a date for the reduction of income tax basic rate to 19% - in his March budget Sunak set it to reduce to 19% on 6 April 2024 and in his leadership battle with Liz Truss in August he promised a reduction of 1% in 2024 with it reducing to 16% by the end of the next parliament (around 2029, potentially).
Jeremy Hunt, in his reversal of Kwarteng’s IT basic rate reduction, did not set an anticipated date for a reduction, just that it would be under review.
Sallabank says that Sunak will “hopefully” provide further stability by keeping Hunt in Number 11 Downing Street.
She adds that it could mean the Treasury could then turn attention to other issues that were buried amid recent chaos:
After such a rapid turnaround in Chancellors and PMs hopefully Sunak will keep Hunt in post.
Hopefully, assuming his appointment and policies bring back stability to the market, this will allow Treasury and HMRC to focus on some of the other tax issues that were in focus before Liz Truss became PM and whilst Rishi was Chancellor (e.g. re-domiciliation of companies, changes to the investment manager exemption to encompass crypto assets and various other consultations that have lost airtime in all the upheavals).
It would be good, too, to see the Office for Tax Simplification be given a reprieve.
Updated
The FTSE 100 has bounced back into positive territory, just as the pound turns negative against the dollar (a move which is positive for multinational firms that make a chunk of profits overseas, since a weaker pound boosts their foreign income).
The FTSE 100 is up 0.5% at around 7006 points.
The pound meanwhile is down 0.2% against the US dollar at $1.128 but is still trading nearly 0.3% higher versus the euro at €1.149.
Parliament launches inquiry into pensions crisis that led to £65bni ntervention
The Work and Pensions Committee has announced an inquiry into the pensions market crisis, in which defined benefit schemes involved in liability driven investments (LDI) were put under severe pressure after the mini-budget.
LDI funds were blamed for magnifying the recent market turmoil, which was triggered by fears over the government’s mini-budget and resulted in a severe drop in UK bond prices.
The fall triggered collateral calls on pension funds’ hedging contracts, forcing them to sell assets at speed to raise cash, but resulting in a further drop in prices.
The Bank of England stepped in with an emergency two-week, £65bn bond-buying programme to halt the rout.
Updated
Springboard data: Shopping demand drops amid cost of living squeeze
Shopping across the UK fell further last week, dropping 2.3% from a week earlier.
Retail experts at Springboard, which produced the data, said the drop “indicates consumer nervousness” amid the cost of living crisis and recent political turmoil.
The drop was experienced across high streets (down 3.3%), retail parks (down 1.5%) as well as shopping centres (down 0.7%).
Scotland was the only region where footfall rose, rising 1.1% overall. The biggest drop was seen in the West Midlands, where footfall tumbled 5.9%
Diane Wehrle, Springboard’s insights director, says:
There are several factors at play in terms of what is driving consumer activity; however, the most evident is the squeeze on household incomes as a consequence of inflation and increased mortgage rates.
This, mixed in with the current political uncertainty, inevitably makes consumers cautious and then rail back on shopping trips.
She said the data has likely been compounded by the start of half-term holidays, which may mean that shoppers deferred some of their trips last week:
Footfall typically rises in the week of school half term as families visit retail destinations for group shopping trips and days out, so footfall this week will be a good barometer of current consumer sentiment and behaviour.
Martin Beck, chief economic advisor to the EY ITEM Club, says the poor business activity survey results – as highlighted by the purchasing managers’ index (PMI) – were “no surprise”.
Beck explains that intense cost of living pressures and mounting political uncertainty are to blame for the October reading.
Business activity across the services sector fell further to 47.5 from September’s 50.
Meanwhile, manufacturing activity fell to 45.8 from 48.4 a month earlier.
A reading below 50 indicates a contraction in activity.
However, Beck says there a silver lining in the PMI data:
The silver lining suggested by the PMIs was a decline in the surveys’ measure of cost and price pressures.
Overall input cost inflation faced by private sector firms eased to its lowest since September 2021, albeit remaining high by historical standards, and growth in prices charged moderated to a 14-month low.
Furthermore, any other signs of economic weakness and a smaller rise in inflation could reduce the size of the Bank of England’s interest rate rise next week.
More evidence of economic weakness, combined with signs of less heated inflationary pressures, should, all else equal, tone down the MPC’s appetite to raise interest rates substantially in its November meeting.
The reversal of almost all the mini-Budget’s tax cuts and the possibility of further fiscal tightening in the forthcoming fiscal statement point in the same direction.
The EY ITEM Club now expects the MPC to raise rates by 75bps in November, a position to which retreating market rate expectations (down from a predicted rise of 150bps in late September to below 100bps at present) are moving closer.
30-year gilt yields hit 3-week lows
The cost of UK government borrowing continued to fall this morning.
It comes as the yield – or interest rate – on the 30-year UK bond dropped to levels last seen on 3 October.
The yield on the 30-year gilt is currently around 3.9%.
Yields move inversely to bond prices, and a lower yield suggests investors see less risk that a government will default on their debts.
Pound pares gains against US dollar
The pound has lost a bit of strength against the US dollar, and is now nearly flat at $1.1311.
However, it remains nearly 0.6% higher against the euro at €1.1531, despite lower PMI readings across both the UK and eurozone this morning.
Joshua Raymond, director at online investment platform XTB says that Sunak’s PM prospects are notably reducing the prospect of a general election – despite calls for a country-wide vote by opposition parties.
However, he said the pound’s gains will be tempered by the fact that Sunak’s economic plans – and whether they’ve evolved since the summer – remain a mystery:
The likely arrival of Rishi Sunak as new PM helps to remove a large degree of uncertainty from the markets.
It lowers the possibility of a general election in the near term and with a strong number of MPs backing Sunak, it also reduces the chance of open hostility amongst Tory backbenchers, paving the way for a smooth transition and management of his fiscal agenda.
That will ease market tensions but it’s likely investors will wait to hear from Sunak what his financial policies will be to shore up the black hole in the UK budget, as frankly we’ve not heard much from Sunak since his electoral loss to Truss.
And it’s this aspect - alongside the small risk of a surprise jump in votes to Mordaunt - which is keeping the pound back from making further gains.
Updated
Credit Suisse has reached a settlement over yet another scandal – this time over a case launched by French prosecutors who accused the bank of helping people avoid wealth taxes.
The alleged scheme took place across several countries between 2005 and 2012, according to prosecutors.
The fine is related to allegations railed against its private bank, which helps wealthy people and businesses manage their money and investments.
Switzerland’s second largest bank will now pay €238m to settle the case, which means it has not admitted wrongdoing.
It comes ahead of Credit Suisse’s Q3 results due on Thursday, when it is set to update on its strategic plan and unveil thousands of job cuts as it slims down its investment bank and non-core businesses, in favour of a pivot towards its wealth management business.
Credit Suisse said in a statement on Monday:
Credit Suisse announces today that it has reached a settlement with the settlement with Parquet National Financier (PNF) to resolve a legacy matter in relation to an investigation into historical cross-border private-banking services.
The settlement provides for a public interest fine comprising a profit disgorgement of €65.6m and the payment of an additional amount of €57.4m. Further, Credit Suisse will pay €115m to the French State as damages.
The settlement does not comprise a recognition of criminal liability. The bank is pleased to resolve this matter, which marks another important step in the proactive resolution of litigation and legacy issues.
Commenting on the dismal UK PMIs, Jeavon Lolay, head of economics and market insight at Lloyds, says:
Firms are increasingly feeling the strain of economic headwinds.
With a jump in the base rate looking likely and tax rules toughened, they will now be calculating the long-term fallout of a tumultuous month for the country.
Inflationary pressures remain particularly acute in terms of labour. Increasing wage demands from existing workers combined with a shortage of available staff is pushing these costs up rapidly.
This is restricting recruitment, pushing prices higher and limiting investment that might support growth as the economy recovers.
There is some hope, however, that the recent drop in the value of the pound against foreign currencies will improve the prospect for export demand. Lolay adds:
Manufacturers, who are seeing input costs continue to climb despite some easing in supply chains, will hope that the relative weakness of the pound will at least give exports a welcome boost.
Retailers and consumer-facing services would traditionally be eyeing the fourth quarter as an opportunity to bolster sales. But with buyer confidence falling and household budgets shrinking, their Christmases may not be as merry as they are hoping.”
UK business activity falls to lowest level since January 2021
UK business activity contracted for a third month in a row in October, and fell to its lowest level since January 2021, signalling that the UK could be on course for a deep recession.
That is based on the latest set of UK PMIs, with the composite PMI giving a reading of 47.2 compared to 49.1 in September.
Economists had expected a reading of 48.1.
When coupled with the eurozone data we received this morning, it is not painting a pretty picture for Europe’s economic prospects:
Shares in online fashion retailer Asos have risen by as much as 4% in early trade after confirmation over the weekend that billionaire retail tycoon Mike Ashley has built up a 5% stake in the company.
Ashley’s sportswear and fashion business - Frasers Group - informed Asos on Friday that it had increased its holding in the company, making it Asos’s fourth-largest investor.
The jump in Asos’s share price made it one of the biggest risers on London’s FTSE 250.
Frasers’ purchase came after Asos’s shares plunged last week - taking the stock’s losses over the year to 80% - after the retailer said it was in talks with its lenders about changing the terms of its borrowing facility to give it more flexibility during tough trading.
The retailer is also facing slowing sales amid the cost of living crisis and reported a £32m pre-tax loss for the year to August.
Meanwhile, Asos was only one item Ashley added to his basket in recent days.
The billionaire retailer’s shopping spree has also seen him increase his stake in the German fashion house Hugo Boss.
Frasers now has a 4.3% direct holding of Hugo Boss shares, as well as an additional 28.5% through the sale of financial instruments known as put options. Frasers’ exposure to Hugo Boss now stands at approximately €960m (£840m).
Frasers said in a statement to the stock market:
Frasers Group has a long history (over twenty years) of making strategic investments to develop relationships and partnerships with other retailers, suppliers and brands, including by way of acquisitions of shares, options, contracts for difference and other financial instruments.
Eurozone business activity falls at fastest pace in two years
The purchasing managers’ index, which indicates business activity levels, in the eurozone, contracted at its fastest pace in two years in October.
The composite PMI, which accounts for both the services and manufacturing sectors, fell to 47.1 from 48.1 in September.
That was below expectations for a reading of 47.5.
A reading below 50 signals contraction.
Business activity was impacted by the cost of living crisis, which has hit consumer spending, which factories have been hard-hit by surging energy prices and supply chains still recovering from Covid and taking a further hit from the war in Ukraine.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown says that with Boris Johnson out of the running, the threats to UK political stability are waning:
He had threatened to cause fresh political instability, given that it’s less than two months since he left the job, so his retreat from the race brought a sigh of relief for sterling and an even bigger sigh of relief on the bond markets.
The pound is up by more than 0.6% to $1.136 with former Chancellor Rishi Sunak now favourite to take the top job.
There is a growing chance that Penny Mordaunt could also secure the backing of 100 MPs, the threshold needed to keep her in the running, the outcome of which could still be decided by party members.
Given her popularity among grass roots Conservatives we could see a Groundhog Day scenario emerging where the party faithful elect the candidate less popular with MPs, which could add to the clamour for an early general election.
Regardless, she says that with Truss out of office and Johnson out of the running, it’s been enough to push down UK borrowing costs, referring the drop in UK 10-year gilt yields to around 3.8% this morning.
It’s an indication that bond vigilantes have been pacified by the expectations of a calmer political horizon ahead with fiscal responsibility forecast to be the new mantra of the incoming Prime Minister.
Whoever clinches the leadership, faces a daunting task given the looming recession, volatile energy prices, continued supply chain tangles and labour shortfalls and a Bank of England determined to raise interest rates in the face of a shuddering economy to bring rampant inflation under control.
ITV’s Robert Peston reckons that the drop in UK bond yields has as much to do with the threat of Boris Johnson returning to the prime ministerial post being removed, as it does about Sunak necessarily heading for the top job.
That was quick.
The FTSE 100 has reversed its gains, and is now down around 0.5% at 6936 points.
That’s likely being impacted by the strength of the pound, which tends to threaten the earnings of some blue chip firms that make a good chunk of their earnings abroad.
Some of the biggest fallers on the index include:
Prudential down 6.5%
Shell down 2.9%
Antofagasta down 2.6%
Updated
As Sunak edges towards Number 10, he is being warned by Tory supporter and billionaire businessman Guy Hands to renegotiate Brexit, or face a UK economy which is “frankly doomed”.
Those comments were made to BBC Radio 4’s Today programme and have been detailed by my colleague Joanna Partridge:
The founder and chair of the private equity firm Terra Firma, said the Conservative party needed to start “admitting some of the mistakes they’ve made over the last six years, which have frankly put this country on a path to be the sick man of Europe.”
Hands said prime minister Liz Truss had attempted to follow the “dream” of Brexit and a “low tax, low benefit economy,” but added this “clearly isn’t something which is acceptable to the British people.”
“Once you accept that you can’t actually do that, the Brexit that was done is completely hopeless and will only drive Britain into a disastrous economic state,” Hands said.
On the day that Rishi Sunak is expected to become Britain’s next prime minister, the third in two months, Hands called for a Tory leader with “the intellectual capability and the authority to renegotiate Brexit” and turn around the economy.
“Without that the economy is frankly doomed,” Hands said.
Full story to follow.
More from Sky News’ Ed Conway, who notes that interest rate expectations are edging towards levels not seen since the government set out its disastrous mini-budget under ex-chancellor Kwasi Kwarteng (remember him?).
UK bond yields fall further, falling below 4%
UK bond markets are also open, and yields are edging lower as well, signalling greater confidence in the economy.
UK stocks rise as markets open ahead of leadership race deadline
UK stocks are following the pound’s lead.
The FTSE 100 is up 0.3% at 6995 points.
The rise is being led by UK banks including Barclays, NatWest and Lloyds.
Shares in the lenders, which are all set to report third quarter results this week, have been falling in recent weeks amid fears over economic stability across the UK. It seems investors are taking comfort that the leadership race could turn a page and leave recent chaos behind.
Probably doesn’t hurt that former banker Sunak is also well-known ally to the City.
Across Europe:
Germany’s Dax is up 1.1%
France’s Cac 40 is up 0.7%
Spain’s Ibex is up 1.1%
Introduction: Sterling on the rise as Sunak strides towards Number 10 Downing Street
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The deadline for the Conservative leadership – and the UK’s next prime minister – are looming, and markets are taking note.
With Boris Johnson pulling out of the race, and Penny Mordaunt still reportedly struggling to push past the nominations hurdle that requires the backing of 100 MPs, Sunak is said to be in pole position to take the top job at Number 10.
In fact, the prospect of former chancellor Rishi Sunak taking the reins is being welcomed by markets, pushing the pound up 0.4% against the US dollar to $1.13 and 0.6% against the euro to around €1.15.
As Naeem Aslam, chief market analyst of AvaTrade explains:
In the UK, the focus continues to remain on the chaos which is taking place in the UK’s government. Because Boris Johnson understood that his chances of winning the support of the Conservative Party were thin, Rishi Sunak became the favourite among bookies to lead the way out of its misery.
Sterling is likely to build more strength as Sunak is a person who comes from the finance department, and as an ex-finance minister, he knows what the country needs without harming its reputation in front of the IMF and others. All eyes are going to remain on sterling and gilts.
UK bond markets have also calmed in recent days, and yields have cooled, sitting at around 4% for both 10-year and 30-year gilts.
We’ll keep an eye on markets as the day unfolds, and as we head towards the 2pm deadline for leadership nominations.
Meanwhile, in China, third quarter GDP came in stronger than expected, with growth of 3.9% compared to a year earlier. The increase was down to more flexible Covid restrictions following a lengthy lockdown in Shanghai between March and May.
That GDP figure was better than expected, with economists forecasting 3.3% for the quarter. But it still fell short of official government targets of 5.5%, as the economy continued to battle disruption from local lockdowns linked to the country’s zero-Covid policy.
More economic data to come, of course, but this time it’s PMIs from the Eurozone, UK and US today.
Stay tuned!
The Agenda
9am BST: Flash PMIs Eurozone manufacturing and services sectors
9:30am BST: Flash PMIs for UK’s manufacturing and services sectors
2:45pm BST: Flash PMIs for US manufacturing and services sectors
Updated