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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.
Flash October PMIs:
Composite 47.2 (exp 48.0, prev 49.1)
Services 47.5 (exp 49.0, prev 50.0)
Manufacturing 45.8 (exp 48.0, prev 48.4)— Simon Harvey (@_SimonHarvey) October 24, 2022
When coupled with the eurozone data we received this morning, it is not painting a pretty picture for Europe’s economic prospects:
Pretty ropey European flash PMIs this morning.
🇩🇪 not doing very well at all, 🇬🇧 not looking too hot either. 🇫🇷 doing better than both, but not exactly going great guns. pic.twitter.com/tp2FKz3bt3
— Andy Bruce (@BruceReuters) October 24, 2022
Joanna Partridge
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.
Market interest rates – yield on government bonds – have fallen sharply on Johnson’s withdrawal from the contest and the prospect of “I-warned-you” Sunak taking over. The yirld on 5-year government debt is a staggering 0.25% lower this morning. The Johnson risk premium was big
— Robert Peston (@Peston) October 24, 2022
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:
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Prudential down 6.5%
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Shell down 2.9%
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Antofagasta down 2.6%
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?).
Gosh
As of this morning, money markets are pricing in @bankofengland interest rates of (just) under 5% next year.
That’s the lowest expected peak I’ve seen since the mini-budget.
A few weeks ago the peak on this curve was up above 6%… pic.twitter.com/1LvpnsgXSb— Ed Conway (@EdConwaySky) October 24, 2022
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:
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Germany’s Dax is up 1.1%
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France’s Cac 40 is up 0.7%
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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
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9am BST: Flash PMIs Eurozone manufacturing and services sectors
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9:30am BST: Flash PMIs for UK’s manufacturing and services sectors
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2:45pm BST: Flash PMIs for US manufacturing and services sectors