Pound falls after IDS quits; European markets slip back - as it happened

The CBI, which represents Britain’s businesses, has also waded into the EU referendum debate.

In a new report, it warns that Brexit could cost....£100 billion pounds (a figure which is crying out for a Dr Evil impression)

Moneyweek’s editor in chief, Merryn Somerset Webb, argues that it’s hard to be totally confident about such a forecast:

Alastair Winter, chief economist at investment bank Daniel Stewart, is hopeful that Britain will avoid a sterling crisis.

Despite today’s losses, he predicts the pound will hover at current levels until June’s referendum is much closer.

He tells me:

I would expect sterling to loiter around $1.40 unless and until Brexit really looked like winning.

A recent Reuters poll found that City economists were split 50:50 over whether the pound would really slump if the public vote to leave the EU.

A total of 35 out of 69 predicted a full blown sterling crisis, which would have very serious implications for the Britain’s ability to handle its balance of payments deficit.

Winter also doesn’t believe Iain Duncan Smith’s resignation will shake the City too much.

IDS was a disaster as Tory leader and is no firebrand. Many people believe he was out of his depth in implementing Universal Credits. I also doubt he is a market-mover.

George & Dave are undoubtedly wounded, but this profits Boris* more than Labour (except Sadiq Khan who was set to win the London mayoralty race anyway).

I think investors will keep calm as they know Boris does not really believe in Brexit!

* - that’s chancellor George Osborne, prime minister David Cameron and outgoing London mayor Boris Johnson (a Brexit supporter and front-runner to succeed Cameron one day)

Richard Benson, head of portfolio investment at currency managers Millennium Global in London, also believes the pound is suffering from the aftermath of Iain Duncan Smith’s resignation.

He told Reuters:

“Sterling does not normally react strongly to UK politics so this is probably due to Brexit.

“The referendum is just making people focus on issues like this a lot more. It is down in response this morning.”

Sterling has been falling this morning, after work and pensions secretary Iain Duncan Smith sensationally resigned late on Friday.

The pound fell by almost one cent against the US dollar, hitting a low of $1.4377. It is also down 0.4% against the euro, at €1.2803.

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Although the moves aren’t huge, the City is taking note of Duncan Smith’s shock decision to quit, and his attack on the ‘deeply unfair’ budget announced last week.

It has exposed serious splits at the heart of the government, with some MPs supporting his criticism.

IDS has denied that his resignation is motivated by June’s referendum on Britain’s membership of the European Union. But he is one of the most senior Brexit supporters, so his move to the back benches could intensity the battle over the EU.

Kit Juckes, top foreign exchange strategist at French bank Société Générale, says the Tory infighting could hurt the pound (which had rallied last week).

The resignation of Iain Duncan Smith, the work and pensions secretary, will simply add another layer of political risk to sterling’s prospects. ‘Brexit’ continues to dominate conversations, and the most alarming comment I’ve heard so far was from a business student at a talk I gave last week: “I’d quite like the Uk to leave the EU, just to see what happened’.

Young educated Londoners are natural in favour of Europe and if they’re torn between rebelling and not bothering to vote at all (older voters are much more likely to turn up at the ballot box, but also more likely to vote to leave the EU), that doesn’t bode well.

The row has also put Chancellor George Osborne under particular scrutiny.

The opposition Labour party are calling for his resignation, after he cut disability benefit while also offering tax cuts to wealthier citizens.

Our politics liveblog will have all the action, here:

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European Central Bank policymaker Benoît Cœuré is urging eurozone politicians to create closer economic and monetary union, or risk seeing the European project unravel.

Speaking in Paris right now, Cœuré says European member states much achieve closer convergence, and create “a euro area treasury” to manage financial stability and implement fiscal tools.

He also warns that the ECB can’t be expected to solve Europe’s economic problems on its own - something ECB chief Mario Draghi has been repeatedly warning too.

Cœuré concludes his speech by warning that public against Europe is growing.

The progress of European integration has increased interdependence between Member States. But we still haven’t drawn all the necessary conclusions and European politicians still don’t have the tools that would allow them to respond to the expectations placed on them.

This shortcoming feeds popular frustration with European policies, sometimes to the point that they question European integration itself. There is nothing inevitable about the status quo, but, to move forward, we need to redefine a common project. It will take many years to implement this project. It is all the more urgent to start defining it.

The rally in Chinese shares has not fed through to Europe.

London’s FTSE 100 dropped by 30 points, or 0.3%, at the start of trading.

Natural resource stocks are leading the fallers, with Glencore and Anglo American losing 2.8%. They’re suffering because the US dollar has recovered some strength (pushing down commodity prices).

Commodities has already been a good way of losing money over the last decade:

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IMF chief Christine Lagarde has offered Beijing some support over the weekend.

Speaking at the start of the China Development Forum, Lagarde said the government’s latest five-year plan would help rebalance the country’s economy.

Lagarde also said China was going through “a historic transition” that is “good for China and good for the world,” according to the official Xinhua news agency.

Xinhua: Lagarde backs China’s 13th Five-Year Plan

China’s new encouragement for speculative stock market borrowing is part of a broader stimulus push, argues Chris Weston of IG.

He writes:

The Chinese government is clearly pining for the days of yore when domestic stocks and property investment both moved up in tandem. The China Securities Finance Corporation loosened controls on margin lending on Friday and Chinese markets have responded in kind, rallying aggressively as soon as they reopened.

Heavy fiscal spending on the government’s part has helped restart property construction in 2016, while monetary easing and weakening home purchase downpayment requirements have helped spur property sales.

Weston suspects some policymakers have their own careers in mind...

One wonders whether part of the reason behind this stimulatory push is due to the fact that top members of the Chinese leadership are positioning themselves for the five out of seven Politburo Standing Committee seats that will become available at 2017’s 19^th Party Congress.

A flurry of buying activity has ripped through China’s stock market today, after Beijing relaxed rules designed to prevent a bubble.

The Shanghai composite index has spiked by over 2% to close at 3,020 points, a gain of 64 points, despite concerns over the Chinese economy.

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The trigger was news that Beijing will resume offering cheap loans to stock brokerages, which they can pass onto traders looking to invest in Chinese companies.

Bloomberg has the details:

China Securities Finance Corp., the state-backed agency that provides funding to brokerages for margin trading, will restart offering loans to securities firms for periods ranging from 7 days to 182 days, according to a statement posted on its website Friday.

The agency will cut interest rates on the debt to as low as 3 percent, it said.

So the scent of cheap money has its predictable effect on the trading floors.

But investors perhaps shouldn’t get carried away. Over the weekend, Zhou Xiaochuan, governor of the People’s Bank of China governor, warned that corporate debt levels are too high. A hint of defaults and debt restructurings to come?

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

After the recent drama from central bankers, there’s a calmer feeling in the markets this morning. And with not much data in the calendar, it could be a bit of a drag.

Still, all isn’t lost, as two European Central Bank policymakers are out and about this morning.

France’s top man at the ECB, Benoît Cœuré, is talking about governance in the eurozone – a cause of perennial worry for those who fear that politicians aren’t doing enough to tackle the debt crisis.

And vice-president Vítor Constâncio is in a cloudy London, discussing ways of “expanding market-based finance for sustainable growth”.

So that might yield some news.

Here’s the agenda

• 7.45am GMT: Benoît Cœuré speaks in Paris
  
• 9am: Eurozone current account for January
  
• 9.30am: Constâncio speaks in London
  
• 11am: CBI survey of UK industrial trends
  

We’ll also be watching for any signs that investors are worried about the civil war raging in Britain’s Conservative party:

And there could be action in Greece, too, where negotiations over its bailout programme are dragging, again....