It was not an auspicious end to the week for sterling. The failure of technical support on Friday afternoon coincided with uneasiness about Brexit and a general rush for safety. The pound emerged as the biggest loser, down by an average of 0.9% on the day and 1.5% softer on the week.
In a week that saw stock markets around the world falling by 10% or more and oil dropping 12%, it is scant consolation that the Australian and NZ dollars had an even more torrid time than the pound, falling 0.3% and 0.5% respectively. Those two are economically close to China while Britain’s problems are mainly domestic. The obvious one on Friday was the government’s stance on trade negotiations with Europe, and the EU’s response. The talks begin today and Britain says it will walk away if they are not making progress in three months’ time. Brussels cannot believe that to be the case.
The BBC and the Financial Times have both expressed concern that the two sides underestimate the commitment of the other, such that they expect concessions that will not be forthcoming. Investors take a similar view, and once again see the risk of a no-deal Brexit.
35.7 and 29.6
China’s purchasing managers’ indices for manufacturing and services fell to 35.7 and 29.6 in February. They were the lowest readings on record and the services figure was much worse than expected. The questions now are how other countries will be affected and what central banks and governments will do to keep their ships afloat.
At the end of last week, the US Federal Reserve took the unusual step of making an unsolicited statement. Whilst the language was predictably woolly (“the Fed is closely monitoring developments”), analysts took it as a sign that a rate cut is looming, maybe even ahead of the FOMC’s next scheduled meeting. There is speculation that rate cuts from Australia, New Zealand and Canada are also on the cards. The Bank of Japan and the Bank of England have both said this morning that they will take all necessary steps to protect financial and monetary stability.
It would be no surprise to see globally-coordinated rate cuts. Of greater importance, however, is what governments will do to fend off a broadly-based downturn. Cheap money alone will not do the job.
None of today’s other manufacturing PMIs is likely to be as awful as the one from China at the weekend. However, with almost nothing else on the agenda, investors will have to decide how much importance to attach to numbers that could well look worse in a month’s time.
Paradoxically, the downturn in China could well inflate the PMIs of its trading partners. The longer delivery times that result from loss of production send a false signal that demand is strong and that, in turn, artificially boosts measurers of activity.
Perhaps as a result of that, readings this morning from Spain and Switzerland were both better than forecast at 50.4 and 49.5. Britain is pencilled in for 51.8. The Bank of England’s money supply and lending data at the same time are expected to show modest growth in mortgage approvals.