Time for a recap

The Bank of England has concluded that the UK financial sector is strong enough to withstand a trade war and a disorderly Brexit, even if they occurred at the same time.

But, in its latest Financial Stability Report, the BoE also fears that a no-deal Brexit would cause significant disruption in the markets.

Sweeping aside claims that a no-deal Brexit would be easily managed, BoE governor Mark Carney warned:

Being ready for financial stability does not mean market stability. Markets will adjust, potentially quite substantially if there is a no-deal Brexit,

It also doesn’t mean economic stability. Even with a smooth adjustment it would still be a major economic adjustment, a major economic shock, virtually instantaneously.

The Bank fears that open-ended funds are a growing threat to financial stability. It is taking a closer look, following the suspension of redemptions from Neil Woodford’s Equity Income fund.

The Bank will work with the Financial Conduct Authority on the review, looking at the risks caused by funds that let investors pull money out immediately despite being backed by assets which are difficult to sell quickly. The mismatch “has the potential to become a systemic issue” according to the Bank’s Financial Policy Committee.

The BoE is also pressing banks to face the cost of climate change. Its next stress tests will examine how financial institutions would cope under a range of scenarios.

Carney warned that those are prepared for a low-carbon future would thrive; the rest won’t last long.

Carney himself twice refused to comment on whether he wants to become the next head of the IMF. He refused to reveal his thoughts until there is a formal vacancy (once Christine Lagarde is confirmed as the next ECB president).

Carney, who is due to leave the Bank in January 2020, pledged to ensure an “orderly transition” to his successor. He also hopes for an “open, transparent and merit-based” process to replace Lagarde.

The Bank also fired a warning shot at Facebook over its plans for a Libra cryptocurrency. Carney said Libra must satisfy regulatory that it is extremely solid, secure and reliable - otherwise it won’t be allowed.

Analysts at Royal Bank of Canada now believe the Bank of England is likely to cut interest rates this autumn, once Brexit deadlock forces a general election.

During the press conference, Mark Carney was asked whether the cost of a no-deal Brexit were “vanishingly inexpensive”, as Boris Johnson breezily claimed this week.

The governor suggested not.

Even though the banks could withstand a disorderly Brexit, the process could be very volatile.

Carney said:

Being ready for financial stability does not mean market stability. Markets will adjust, potentially quite substantially if there is a no-deal Brexit,

It also doesn’t mean economic stability. Even with a smooth adjustment it would still be a major economic adjustment, a major economic shock, virtually instantaneously.

Q: The Financial Stability Report mentions Facebook’s Libra cryptocurrency - what are your concerns?

Mark Carney explains that G7 countries have created a working group to understand Facebook’s proposition, and consider the risks and opportunities.

The issues are very broad-based, he warns.

1) It’s either successful or it isn’t. If it’s successful, it becomes systemic. So it’s 5-sigma, it has to be on all the time. It can’t have teething problems. People can’t be losing money.

The standards are in a different zipcode than in other forms of technology.

2) The second issue: the actual design of the stable coin. There can’t be any basis risk, or rebalancing risk, to moving money in and out of the coin. That could create speculation in something that has to be absolutely stable.

3) Managing the underlying assets will be a challenge, given the flows in and out.

4) Fundamentally there are issues about money laundering and terrorist financing.

Carney’s broad message to Facebook: Libra needs to be right, or regulators won’t let it get near customers:

This is not ‘learn on the job’ stuff. It needs to be rock solid right from the start, or it’s not going to start.

Having said all that, the governor also thinks Libra could be valuable to consumers.

It is way too expensive and slow to do domestic payments,and far too expensive to send money across borders.

So if Libra isn’t the solution to financial exclusion, we need to identify something else that is, he adds.

My colleague Larry Elliott bowls a tempting delivery at the governor....

Q: Are you interested in becoming the next head of the International Monetary Fund?

Mark Carney says it is an “absolute privilege” to do his current job.

He praises Christine Lagarde’s work at the IMF, citing structural changes she’s driven including adding China’s Renminbi to the Special Drawing Rights Basket used by the IMF to fund its work.

Carney says we must respect the process. Lagarde has been nominated to be president of the ECB - she is “extremely well-suited” to that role, but she’s not been appointed yet.

Once she is, there will be an “open, transparent and merit-based” process to replace her... and that’s the right time to answer that question, he concludes, tucking his bat behind his pad carefully.

Mark Carney says the Bank is “disappointed” that there hasn’t been enough progress globally in tackling open-ended funds.

The problem is that they promise instant liquidity, but can’t provide it if investors rush to the exits at once.

Carney says the shuttering of Neil Woodford’s Equity Income fund is an investor protection issue, not a financial stability one. But it is symptomatic of a broader problem.

Our sense is that the financial stability risks from such funds are increasing, he adds.

Mark Carney begins by pointing out that Brexit is the single most important determinant of the UK’s economic outlook.

Material risks still remain, he warns, even though firms are more prepared for Brexit.

Carney also warns that there could be disruption to cross-border financial links unless EU regulators do more -- that would hurt EU-based families and businesses, and possibly those in the UK too.

The Bank of England is holding a press conference now to discuss the Financial Stability Report.

You can watch it online here (unless you’re too busy following the exciting cricket....)

The Bank of England has outlined plans to test whether the UK financial system can survive the climate emergency.

It says it will publish a discussion paper in autumn 2019, and complete full stress tests by 2021.

• Financial stability risks from climate change arise both from the physical risks associated with the increased frequency of extreme weather events and from the transition to a carbon-neutral economy.
• This exercise will integrate climate scenarios with macroeconomic and financial system models. It will motivate firms to address data gaps and to develop cutting-edge risk management consistent with a range of possible climate pathways: ranging from early and orderly to late and disruptive.
• The discussion paper will cover issues such as the coverage of the test, the nature of scenarios considered, the appropriate time horizon and disclosure of results. This will allow the Bank to develop the scenarios in consultation with risk specialists from across the financial sector, climate scientists, other industry experts, and other informed stakeholder groups.

The Bank of England points out that Brexit worries have pushed the pound down, and have dragged on stock prices too.

It says:

Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate and an underperformance of UK-focused equities. In markets that are particularly dependent on foreign investors – notably commercial real estate and leveraged lending - investment into the UK was much weaker in 2019 Q1 than in recent years.

Earlier this week the pound hit a six-month low against the US dollar (a two-year low, if you ignore an odd market ‘flash crash’ in January).

But the BoE insists that the banks can cope.... even if Donald Trump unleashes a deeper trade war.

As the Bank puts it:

The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit...

Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the FPC judges that the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks.

The Bank of England also warns that Britain could suffer “significant market volatility” in the event of a disorderly Brexit.

The Financial Stability Report warns:

“Financial stability is not the same as market stability. Significant volatility and asset price changes are to be expected in a disorderly Brexit.”

That’s a warning that we could see some serious turmoil in the stock market, and on the foreign exchanges, if the UK leaves the EU without a deal.

Breaking! The Bank of England believes the UK banking sector is strong enough to withstand a disorderly Brexit, and an intensified trade war.

Its latest financial stability report has just been released, showing that the UK’s banks have enough capital to ride out a double-whammy of disruption at home and abroad.

The BoE’s Financial Policy Committee says:

“The perceived likelihood of a no-deal Brexit has increased since the start of the year,”

“The UK banking system remains strong enough to continue to lend through the wide range of UK economic and financial shocks that could be associated with Brexit.

More to follow...

You can sign the petition urging the Bank of England to help decarbonise the economy and support investment in low-carbon companies and technologies here.

The letter recognises that BoE governor Mark Carney has spoken out about the issue -- including in a speech in March, urging governments to deliver coherent and credible policies. But more action is needed to drive the UK’s “green transition”.

Rather than buying bonds from oil companies, for example, the Bank could help support a Green New Deal by deterring banks from funding environmentally damaging projects.

Addressed to Carney, the letter says:

Your recent warning about the “devastating effects” of climate change has provided a much-needed wake-up call to the world’s banks, investors and regulators. It’s brilliant to see you set a powerful example by announcing that the Bank of England will disclose its own climate risk.

But we know you can and must go further. You rightly acknowledge that meeting even the modest targets of the Paris Agreement will require a “massive reallocation of capital”. But this is unlikely to happen unless central banks play a leading role.

A group of campaigners have assembled outside the Bank of England, demanding it does more to tackle the climate emergency.

They will hand over two A1 postcards signed by hundreds of members of the public during the recent Glastonbury festival, addressed to governor Mark Carney with the text:

“We the undersigned urge you to use the Bank of England’s powers to unleash green investment now!”

They have two key demands:

• That the Bank of England ‘greens’ its quantitative easing (QE) programme. With speculation mounting that the Bank could undertake more QE in response to a Brexit shock or another recession, the central bank should at the very least rule out asset purchases in high-carbon sectors, if not actively favour bonds which finance green projects
• That the Bank of England uses all of the powers at its disposal to stop financial firms it regulates pouring more money into fossil fuels. This approach, known as ‘credit guidance’, could include tools such as differential collateral requirements and targeted refinancing operations

My colleague Richard Partington is there (on his way to read the financial stability report), and sent these pictures:

Carney, incidentally, was also at Glastonbury, telling the Economist that he enjoyed the Friday night headline slot by grime artist Stormzy.

“I very much enjoyed Stormzy. He puts his money where his mouth is in terms of building a more diverse society.”

The oil price has hit its highest level since late May, after three Iranian boats “attempted to impede” a British oil tanker in the Gulf.

My colleague Bethan McKernan reports:

The incident took place in the strait of Hormuz through which the commercial vessel, British Heritage, was attempting to pass. It comes in the wake of the UK seizure of an Iranian oil tanker last week, for which Tehran had threatened retaliation.

“Contrary to international law, three Iranian vessels attempted to impede the passage of a commercial vessel, British Heritage, through the strait of Hormuz,” a UK government statement released on Thursday morning said.

The British warship, HMS Montrose was “forced to position herself between the Iranian vessels and British Heritage and issue verbal warnings to the Iranian vessels, which then turned away,” the statement said.

This has pushed the cost of a barrel of Brent crude oil up to $67.53 per barrel this morning, on fears that supplies from the Middle East could be disrupted.

America’s S&P 500 stock index surged over the 3,000 point mark for the first time ever yesterday, after Fed chair Jerome Powell signalled that a rate cut is close.

Powell’s dovishness has pushed stock markets higher across the globe. Japan’s Nikkei gained 110 points, or 0.5%, to 21,643.53, and there were gains in Hong Kong (+0.7%), South Korea (+1.1%) and India (+0.5%) too.

Konstantinos Anthis, Head of Research at ADSS, says investors believe the Federal Reserve is certain to cut borrowing costs at its next meeting.

A July rate cut seems set in stone as Powell cites geopolitical uncertainties and global growth slowdown as the reasons why an easier policy will help sustain the expansion domestically.

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

These are difficult times for the UK economy, with Brexit unresolved, the eurozone struggling, the global economy slowing and trade tensions on a knife-edge.

So the Bank of England’s latest financial stability report, released this morning, will show whether policymakers are getting more anxious that the next financial crisis is looming

The report will assess the stability of the UK financial system, and outline what the Bank is doing to remove or reduce any risks to it. The BoE will also release its Systemic Risk Survey Results, showing what investors are particularly worried about.

This is the final risk assessment before 31 October, the current Brexit date, so investors will be keen to hear the Bank’s views.

Mark Carney will face a grilling from the press at 11am. UK issues will obviously dominate, but the BoE governor may also be asked about his own prospects -- is he hoping to replace Christine Lagarde at the head of the International Monetary Fund?

Traders, meanwhile, are pushing asset prices higher as they anticipate a US interest rate cut later this month.

Yesterday, Federal Reserve chair Jerome Powell told Congress that America’s economy was suffering from a weakening global economy and rising trade tensions, a cue that policymakers will ease conditions soon.

Ipek Ozkardeskaya, analyst at London Capital Group, explains:

The US dollar gave back gains on a sharp move after the Federal Reserve (Fed) Governor Jerome Powell has been very clear that the global economic slowdown outweighs the encouraging data in the US at his speech before the congress on Wednesday.

Powell’s testimony gave yet another solid sign that the Fed is preparing to cut the interest rates in July. In the wake of Powell’s first day of testimony, the market sees a 25-basis-point cut as largely granted

That weakened the dollar, and drove Wall Street to a record high last night.

European stock markets are expected to rise this morning, pushing Britain’s FTSE 100 towards an 11-month high.

Powell is back on Capitol Hill later today to take questions from the Senate, so could double-down on his dovish message. We also get new US inflation and unemployment data.

The agenda

• 10.30am BST: Bank of England publishes financial stability report
• 11am BST: BoE press conference with Mark Carney
• 1.30pm BST: US consumer inflation data for June (expected to drop to 1.6% y/y from 1.8%)
• 1.30pm BST: US initial jobless claims figures for last week
• 3pm BST: Fed chair Jerome Powell testifies