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U.K. 2Q Current-Account Deficit Widens; GDP Growth Revised Up

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UK Consumers
  • Current-account gap climbs to 5.9% of GDP from 5.7% in 1Q
  • GDP growth revised to 0.7% on the back of services, investment

The U.K. current-account deficit widened in the second quarter as the trade gap hit a 2 1/2-year high and Britain continued to record heavy outflows of investment income.

The shortfall — the difference between money coming into the U.K. and money sent out — was 28.7 billion pounds, the Office for National Statistics said on Friday. That equates to 5.9 percent of gross domestic product, up from 5.7 percent in the first quarter. The deficit hit a record 7 percent at the end of last year.

Brexit has thrown the current-account gap into the spotlight, with some analysts warning that foreign investors may be less willing to finance the shortfall by buying U.K. assets. Mounting concern has contributed to the sharp fall in sterling since the June 23 decision to leave the European Union.

Separately, the ONS said the economy grew 0.7 percent in the second quarter, slightly more than the 0.6 percent previously estimated. Consumers stepped up their spending and business investment increased, offsetting the biggest drag from net trade since 2013.

At 5.4 percent of GDP last year, the U.K. current-account deficit was double that of the U.S. Bank of England Governor Mark Carney has warned of a reliance on “the kindness of strangers” and credit-rating agencies highlight the gap as a key weakness. Trade Secretary Liam Fox added his voice on Thursday as he chided British companies for exporting too little.

Sterling Hopes

The total trade deficit widened to 12.7 billion pounds in the second quarter, or 2.6 percent of GDP. The gap between what British investors earn on their foreign investments and what foreigners earn on their investments in Britain narrowed but still totaled almost 10 billion pounds. The deficit on secondary income, which covers remittances and government transfers, widened.

There are hopes that a more competitive pound will help boost demand for exports and reduce spending on imports. Economists surveyed see the current-account deficit narrowing to 4 percent of GDP in 2017 from a record 5.5 percent this year.

The GDP figures paint a picture of an economy that held its own prior to the Brexit vote and there are signs of continuing resilience.

In July, services rose by 0.4 percent, boosted by retail sales, the film industry and computer programming. Industrial production rose 0.1 percent in the same month and construction stagnated. Together with business surveys for August, it suggests Britain is on course to avoid contraction in the third quarter.

No Shock

“This fresh data tends to support the view that there has been no sign of an immediate shock to the economy, although the full picture will continue to emerge,” said ONS statistician Darren Morgan.

The revision to the second quarter was due to services and investment being higher than previously estimated. Business investment rose 1 percent instead of 0.5 percent and services grew 0.6 percent, up from 0.5 percent. Net trade knocked 0.8 percentage points off growth as exports fell 1 percent and imports gained 1.3 percent.

GDP grew 2.1 percent in the second quarter from a year earlier. On an annualized basis, it expanded 2.7 percent, compared with 1.4 percent in the U.S.

Economists expect a sharp slowdown next year as Brexit hits hiring and investment and accelerating inflation saps consumer spending. Real disposable income grew 0.6 percent in the second quarter while the savings ratio fell to 5.1 percent from 5.6 percent.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Gold

Gold Prices Rise as Soft Dollar Supports Safe-haven Appeal

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gold bars - Investors King

Gold prices firmed on Monday, propped up by a subdued dollar and slight retreat in the U.S. Treasury yields, with investors gearing up for a week of speeches from U.S. Federal Reserve policymakers for cues on the central bank’s rate hike path.

Spot gold was up 0.5% at $1,759.06 per ounce, as of 0400 GMT, while U.S. gold futures were up 0.4% at $1,759.00.

While the dollar index softened, the benchmark 10-year Treasury yields eased after hitting their highest since early-July. A weaker dollar offered support to gold prices, making bullion cheaper for holders of other currencies.

“Gold is still looking slightly precarious where it is right now, and it’s probably bouncing off key technical level around $1,750,” IG Market analyst Kyle Rodda said.

“Gold remains an yield story and that yield story is very much tied back to the tapering story.”

A slew of Fed officials are due to speak this week including Chairman Jerome Powell, who will testify this week before Congress on the central bank’s policy response to the pandemic.

“There’ll be a lot of questions being put to Fed speakers about what the dot plots implied last week and weather there is higher risk of heightened inflation going forward and that rate hikes could be coming in the first half of 2022,” Rodda added.

A pair of Federal Reserve policymakers said on Friday they felt the U.S. economy is already in good enough shape for the central bank to begin to withdraw support for the economy.

Gold is often considered a hedge against higher inflation, but a Fed rate hike would increase the opportunity cost of holding gold, which pays no interest.

Investors also kept a close watch on developments in debt-laden property giant China Evergrande saga as the firm missed a payment on offshore bonds last week, with further payment due this week.

Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, increased 0.1% to 993.52 tonnes on Friday from 992.65 tonnes in the prior session.

Silver rose 0.9% to $22.61 per ounce.

Platinum climbed 1.3% to $994.91, while palladium gained 0.7% to $1,985.32.

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Crude Oil

Brent Crude Oil Near $80 Per Barrel Amid Supply Constraints

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Brent crude oil - Investors King

Oil prices rose for a fifth straight day on Monday with Brent heading for $80 amid supply concerns as parts of the world sees demand pick up with the easing of pandemic conditions.

Brent crude was up $1.14 or 1.5% at $79.23 a barrel by 0208 GMT, having risen a third consecutive week through Friday. U.S. Oil added $1.11 or 1.5% to $75.09, its highest since July, after rising for a fifth straight week last week.

“Supply tightness continues to draw on inventories across all regions,” ANZ Research said in a note.

Rising gas prices as also helping drive oil higher as the liquid becomes relatively cheaper for power generation, ANZ analysts said in the note.

Caught short by the demand rebound, members of the Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, have had difficulty raising output as under-investment or maintenance delays persist from the pandemic.

China’s first public sale of state oil reserves has barely acted to cap gains as PetroChina and Hengli Petrochemical bought four cargoes totalling about 4.43 million barrels.

India’s oil imports hit a three-month peak in August, rebounding from nearly one-year lows reached in July, as refiners in the second-biggest importer of crude stocked up in anticipation of higher demand.

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Crude Oil

Oil Holds Near Highest Since 2018 With Global Markets Tightening

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Crude Oil - Investors King

Oil held steady near the highest close since 2018, with the global energy crunch set to increase demand for crude as stockpiles fall from the U.S. to China.

Futures in London headed for a third weekly gain. Global onshore crude stocks sank by almost 21 million barrels last week, led by China, according to data analytics firm Kayrros, while U.S. inventories are near a three-year low. The surge in natural gas prices is expected to force some consumers to switch to oil, tightening the market further ahead of the northern hemisphere winter.

China on Friday sold oil to Hengli Petrochemical Co. and a unit of PetroChina Co. in the first auction of crude from its strategic reserves said traders with the knowledge of the matter. Grades sold included Oman, Upper Zakum and Forties.

Oil has rallied recently after a period of Covid-induced demand uncertainty, with some of the world’s largest traders and banks predicting prices may climb further amid the energy crisis. Global crude consumption could rise by an additional 370,000 barrels a day if natural gas costs stay high, according to the Organization of Petroleum Exporting Countries.

“Underpinning the latest bout of price strength is a tightening supply backdrop,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd.

Various underlying oil market gauges are also pointing to a strengthening market. The key spread between Brent futures for December and a year later is near $7, the strongest since 2019. That’s a sign traders are positive about the market outlook.

At the same time, the premium options traders are paying for bearish put options is the smallest since January 2020, another indication that traders are less concerned about a pullback in prices.

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