- Update: Six UK Property Funds Suspended – Move taken to curb unstable investor behaviour
- EUR GBP falls to opening levels – Italian banking crisis threatens EU banking rulebook
- Italian banks in desperate need of aid – Sector struggling with debts equivalent to 25% of Italian GDP
- UK construction PMI shocks markets – Sharp decline in sector activity; mild growth had been predicted
- EUR GBP exchange rate forecast – Key services PMI, BoE Financial Stability Report to Dominate
Rising tensions between EU officials and Italian Prime Minister Matteo Renzi kept the EUR GBP exchange rate around opening levels yesterday.
EUR GBP Advances as more than £15 Billion in UK Property Funds Suspended
Six property funds in total have now suspended redemptions, meaning investors can no longer withdraw their capital. Standard Life, Aviva, M&G, Henderson, Columbia Threadneedle and Canada Life have all suspended activity; collectively they represent around £15 billion worth of assets. The total size of UK property investment funds is around £25 billion. Investors are wondering which fund will be suspended next…
(Last updated 16.55 July 6th)
Euro Trending Flat against Pound as Italian PM Threatens to Break EU Regulations
The European Banking Union’s rulebook, only just released after several years in the making, risked being made obsolete already thanks to a developing banking crisis in Italy. The country’s financial institutions are currently struggling under the burden of over half a trillion Euros’ worth of bad debt, including €200 billion worth of insolvent debt. Banks have already written down these loans to around 45% of their nominal value, but the market valuation puts this at nearer 20%. Debt held by the banking sector in Italy currently totals the equivalent of around 25% of GDP.
Spectators were largely expecting upcoming stress tests to reveal that several large Italian banks are undercapitalised.
While the EU previously signed off on an additional €150 billion in short-term liquidity measures, Banking Union regulations state that governments must try and fund banking bailouts using creditors or shareholder buy-ins. However, previous attempts to raise the necessary capital have been unsuccessful. As such, news emerged that the Italian government was considering using between €40 and €60 billion worth of public funds to recapitalise the banks.
The situation was particularly precarious due to Renzi’s attempts to exploit the post-‘Brexit’ volatility. The PM needed the EU to make concessions in order to avoid a deeper banking crisis, but EU leaders were worried that doing so sets a precedent for the UK’s exit negotiations.
Pound Euro Exchange Rate Weakened by Shock UK Construction Sector Decline
Early morning strength from the Pound was quickly undone yesterday after the release of the latest Markit Construction PMI. Analysts had agreed that the index would show a weakening in the sector, as firms braced themselves for the referendum. However, it was predicted that the sector would still register minimal growth, with forecasts showing the PMI sliding from 51.2 to 50.7.
Clocking in at 46, however, put the index firmly in contraction territory, showing that ‘Brexit’ jitters in the sector had been more severe than anticipated. The result represented the worst UK construction performance for seven years, causing the FTSE 100 to plummet from its 10-month high, with shares in house builders such as Taylor Wimpey leading the decline.
In response to the report, Chartered Institute of Procurement & Supply Group Chief Executive Officer David Noble explained;
‘Gloom and fragility descended on the sector with the steepest drop in new orders since December 2012. Caused by the continuing insecurities in both the global and UK economies and the hesitancy shown by clients to commit to projects before the EU referendum, overall activity was at its frailest for seven years.’
‘Though the majority of responses, around 80% were received before the Brexit result, the continuing ambiguity and indecision has flung the sector into unknown territory. Firms will likely look towards any remedies the Bank of England and the UK Government can offer if the situation worsens post-Brexit.’
Euro Pound (EUR GBP) Exchange Rate Forecast; UK Services PMI and BoE Report to Dominate Data
The Eurozone’s low-impact run of Markit PMIs will be overshadowed by much more important data from the UK today.
First of all, the Markit UK services and composite PMIs are scheduled to show a mild weakening in June; so was the construction index, however. Investors will likely be fearing a repeat performance. If the services index falls to anywhere near contraction territory, the Pound could hit a fresh post-referendum low.
Later, the Bank of England (BoE) will release its Financial Stability Report. BoE Governor Mark Carney has already succeeded in calming the markets and fuelling a Pound recovery once since the referendum vote. If the report shows that the UK is sufficiently prepared for the currently market volatility, the Euro Pound exchange rate is likely to weaken significantly.
EUR, GBP Conversion Rates
During yesterday’s European session the Euro Pound (EUR GBP) exchange rate trended between 0.8352 and 0.8400, while the Pound Euro (GBP EUR) exchange rate traded in the region of 1.1898 and 1.1969.