Contributed by Beth Collinge of CTG – a division of ILX Group plc.
Tough rules to clamp down on the use of privately-traded derivatives and speculation in shares by short-selling were unveiled by European Commission in bid to tame the “wild west” of financial markets. The central bank in Japan intervened to force the yen lower. Mixed economic data in the US and talk on a further quantitative easing pushed gold prices to record highs.
- Economic data from the US were mixed last week. Positive numbers from US initial jobless claims were then offset by downbeat Philadelphia Fed data, which showed factory activity on the US east coast contracting for a second month. US consumer sentiment unexpectedly fell to its weakest level in more than a year in September, while the consumer price index showed that inflation was muted in August. The equity markets were driven by speculation about further asset purchases by the US Federal Reserve.
- In the UK the number of people in employment for the quarter rose by 286,000 to 29.16m. This is the biggest quarterly rise since 1971. The figure was boosted by 166,000 part-time jobs, continuing a trend during the year for employers to rely increasingly on part-time workers. Part-time workers now account for 27.2 per cent of total employment.
- The annual rate of consumer price inflation remained at 3.1 per cent in August, having declined from a peak of 3.7 per cent in April. Inflation as measured by the retail price index fell from 4.8 per cent to 4.7 per cent. Core inflation, which cuts out volatile food, tobacco, alcohol and energy prices, rose to 2.8 per cent from 2.6 per cent, as price pressures in consumer services grew to their highest in 18 months. Retail sales on Britain’s high streets unexpectedly fell in August after strong growth earlier in the summer, fuelling fears of a slowdown in the sector.
- The eurozone’s economy (as measured by gross domestic product)will grow this year at at 1.7 per cent in 2010 up from the 0.9 per cent forecast in May, according to the Economic and Financial Affairs directorate of the European Commission, mostly because of the growth spurt the region experienced in the second quarter. However, European Union economists warned of “a moderation of growth” in the second half of the year.
- Gold prices hit an all-time high, rising 16.35 per cent since January, due to investor concerns about the global economy, rising fiscal deficits, renewed US dollar weakness against the euro and talk of another round of quantitative easing by the US Fed. This also led to a further fall in 10-year US bond yields, to 2.74 per cent.
- The Japanese stock market rose after the Japanese central bank intervened unilaterally to force the yen lower: the yen fell nearly 2 per cent against the dollar.
Mergers & Acquisitions
- Hewlett-Packard has agreed to buy high-end technology security company ArcSight for $1.5bn to profit from its customers’ increasing concerns about protecting their data from hackers. Earlier this month, HP won an intense bidding war for storage gear maker 3Par.
- Sanofi Aventis sees a reasonable chance of buying US biotech Genzyme at a fair price, but expects it will take some time to agree a deal that would further diversify the French drugmaker and strengthen its US foothold.
- The asset management arm of Credit Suisse is paying $425m for a minority stake in York Capital Management, a hedge fund firm that invests in credit products and “event-driven” strategies, such as betting on the likelihood of announced mergers taking place.
- Bank of Ireland is facing potentially higher funding costs after Standard & Poor’s lowered its credit rating outlook on the back of concerns about the Irish economy. S&P on Tuesday reaffirmed the bank’s rating at A-/A-2 but said it was revising the outlook – a measure of a bank’s two-year prospects – from stable to negative to reflect the “considerable challenges” it faces to restore profitability.
- Lloyds Banking Group yesterday confirmed plans to rebrand its retail banking business, including the dropping of the historic TSB name. The move, first announced last November when Lloyds agreed its restructuring plan with the European Commission, will see the retail operation renamed Lloyds Bank over the next three years.
- Polish regulator KNF is to probe Spanish group Banco Santander’s deal to buy Zachodni WBK, the Polish arm of Allied Irish Banks, to see if confidential information was exchanged. On Friday, Santander said it was to buy Allied Irish’s 70 per cent holding in BZ WBK for €2.9bn.
- Greece successfully tapped the capital markets for over €1bn (£836.6m) in a debt auction: the bonds were short-term six-month Treasury bills, for which Greece had to pay a high yield of 4.82 per cent, compared to 4.65 per cent at its last auction in July.
- Lloyds Banking Group launched a rare 30-year senior sterling bond yesterday, capitalising on the upbeat tone of the credit markets and on demand from pension funds and insurers for long-dated sterling assets. The bond deal is the bank’s first ever sterling issue with a 30-year maturity, an official with the bank said.
- Spain successfully borrowed €3.97bn from the markets on Thursday, amid growing signs that the country has broken free from the so-called peripheral group of poorly performing eurozone economies. Portugal, Ireland and Greece are seen as the weak group of peripheral economies, with Spanish bonds now trading in a similar way to those issued by Italy.
- The Financial Reporting Council, the accounting watchdog, told Deloitte, Ernst & Young, KPMG and PwC, the four biggest auditors, to do more to avoid conflicts of interest and be more sceptical of management claims. In the case of KPMG, the FRC’s Audit Inspection Unit looked at 15 audits and found that in three cases the auditor’s report had been signed too soon, before all necessary work had been completed.
- The 27 member countries of the Basel Committee on Banking Supervision agreed on 12 September that banks would in effect be required to triple core tier one capital ratios from 2 per cent to 7 per cent by 2019. The deadline was not the expected 2012, but banks will have until January 1 2019 until all Basel III’s counter-cyclical provisions come into force.
- The two capital ratios that banks routinely cite are the tier one capital ratio and a subset of that – the core tier one capital ratio, also called the equity tier one ratio. Tier one is essentially top-notch capital, with core tier one a subset comprising the best of the best.
- However, both elements of the ratio are being toughened – what qualifies as core tier one capital is being narrowed to exclude lower-quality instruments. Previously accepted forms of top-notch capital, such as deferred tax assets, are being phased out. The weightings applied to banks’ assets will rise in many cases, amplifying the ratio’s denominator.
- Additionally, the treatment of banks judged systemically important will be more stringent than the standards already announced. The big four UK banks – HSBC, Barclays, RBS and Lloyds – will have to meet the higher standards. Also, a further counter-cyclical buffer of up to 2.5 per cent of common equity is to be implemented “according to national circumstances”.
- There is another meeting scheduled for September 21-22, with the possibility of further talks in October. The package will then be placed before G20 leaders in Seoul this November.
- If the European parliament and the 27 member states agree, the European Union will be introducing measures to regulate (i)short-selling and (ii)derivatives that will come into effect in 2012.
- Smaller short positions will have to be shown to the regulators while traders will be obliged to publicly post big short positions – where the value tops 0.5 per cent of the market value of the company concerned.
- If a seller cannot close a short sale after four days by coming up with the assets he promised to sell, the regulator can force him to pay the buyer cash instead. A fine can also be imposed.
- The markets watchdog will also be able to prohibit short-selling for three months at a time. Regulators can also impose a one-day ban if the price of a financial instrument suddenly dips.
- The rules also introduce tight controls for “naked” short selling, when sellers have not arranged to borrow the assets they promised to sell.
- The rules will ask derivative traders to use clearing houses (which provide a safety net should either buyer or seller to a trade go bust) to clear standard “over-the-counter” (OTC) derivatives contracts.
- The proposals make it mandatory to report all trading to central data banks or repositories, which will make it possible for regulators to keep tabs on the market.
- Industrial companies will be given exemptions, provided their use of derivatives does not pass a threshold that will be set up the new European supervisor.