Contributed by Beth Collinge of CTG – a division of ILX Group plc.
The US Federal Reserve confirmed a much-anticipated expansion of its asset purchase programme with a second round of quantitative easing – dubbed QE2 – when it said it would buy $600bn of longer-term Treasury securities by mid-2011. Interest rates rose in both Australia and India, while the Bank of England, the Bank of Japan, and the European Central Bank left interest rates unchanged.
- Improving economic data from the US, China and the UK were released this week.
- America’s economy grew by an annualised rate of 2% in the third quarter, according to the first official estimate, up from 1.7% in the second quarter. Consumer spending, the biggest component of demand in America, also rose again but still at a much slower rate than after previous deep recessions. Data from the Institute for Supply Management, also showed the manufacturing sector growing faster, as the PMI rose from 54.4 in September to 56.9 in October. Factory goods orders climbed by 2.1 per cent in September, the biggest increase since January.
- The US jobs market showed signs of improvement in October, with total non-farm payrolls (which excludes public sector workers) rising by 151,000, higher than the 70,000 increase expected. The unemployment rate, however, remained at 9.6 per cent for the third consecutive month.
- In Europe, the UK also published strong PMI figures. It reported a rise from 53.5 to 54.9, suggesting that growth was unlikely to slow further this year. ‘Flash’ indicators from the eurozone last month also showed an improvement in business activity among manufacturers, especially in Germany.
- The European Central Bank (ECB) left its monetary policy unchanged on Thursday and Jean-Claude Trichet, ECB president, made relatively hawkish comments. The Bank of England and the Bank of Japan also left interest rates unchanged.
- The official PMI measure released by the China Federation of Logistics and Purchasing, rose to a six-month high of 54.7 in October from 53.8 in September, beating economists’ expectations of a slowdown. Indian manufacturing PMI data were also strong.
- Investors have started putting money back into equity funds in the US and Europe in a tentative sign of risk appetite increasing. Last week, global equity and commodity prices reached multi-month peaks. The FT 100 finished at a 29-month high, and the S&P 500 reached a two-year high. Gold soared to an all-time nominal high of $1,397.85 a troy ounce – up 2.9 per cent on the week. Silver, platinum, palladium and copper hit their highest prices in years. The rubber price has tripled in two years and major tyre companies have raised their prices by 5-15 per cent. Orange juice prices reached their highest point in three years, after news that the Brazilian orange crop will fall, and sugar is at 30-year high, also due to forecast reduced crops. Oil touched its highest level since 2008.
- Over the week, the dollar dropped 0.9 per cent to $1.4079 against the euro and lost 1.2 per cent to $1.6240 against the pound. The Australian dollar surged through parity against the US dollar to hit its highest level since it was floated in 1983, when the Reserve Bank of Australia unexpectedly raised interest rates by 25 basis points to 4.75 per cent after its policy meeting on Tuesday.
Mergers and Acquisitions
- BHP Billiton’s $40 billion bid to buy the world’s largest potash producer, based in Saskatchewan, was dealt a blow when the Canadian government provisionally rejected the deal.
- Spain’s Banco Bilbao Vizcaya Argentaria made its first big acquisition outside the Spanish-speaking market by acquiring a 24.9% stake in Garanti, Turkey’s second-biggest bank. BBVA launched a €5 billion ($7 billion) rights issue to help fund the deal.
- Royal Bank of Scotland (RBS), which is 84 per cent owned by the taxpayer, has announced pre-tax losses of £1.38bn for the three months to the end of September with underlying operating profits up from £250m to £726m. Since October 2008, the bank has announced 23,000 job losses worldwide, including 17,100 in the UK. Mitsubishi UFJ Financial Group, Japan’s largest banking group, is poised to buy a £4bn ($6.4bn) portfolio of project finance loans from RBS, in the latest move by the part-nationalised UK bank to offload legacy assets.
- Europe’s biggest bank HSBC said profits so far this year were “well ahead” of 2009 levels with losses on bad loans hurting less than at any point since the onset of the credit crisis in 2007. HSBC, which named a new chairman and chief executive six weeks ago after a damaging boardroom power struggle, said loan impairments in the third quarter fell to their lowest quarterly level since early 2007.
- Lloyds Banking Group shares fell as Britain’s biggest high-street bank toned down its previously upbeat rhetoric on growth and gave a cautious summary of its performance in the third quarter of the year. Nevertheless, investors are likely to be heartened by news that Lloyds has begun to pay back voluntarily part of the £132bn it had under UK government-sponsored schemes as at the end of June.
- Separately, after months of speculation, Lloyds Banking Group confirmed that it was raising £13.5bn through a fully underwritten rights issue and would swap at least £7.5bn of existing debt predominantly into a form of bond financing that can convert to equity. The bank, which is 43 per cent owned by UK taxpayers, also announced that it would have to sell a large part of its retail banking business to satisfy European state aid rules, including its Cheltenham & Gloucester and Intelligent Finance arms, as well as the TSB brand. Lloyds Banking Group has recruited António Horta-Osório, head of Santander UK, as its next chief executive , to replace Eric Daniels, who recently announced his retirement. Mr Horta-Osório, will start as Lloyds’ chief in March 2011.
- Ana Patricia Botín, the 50-year-old daughter of Emilio Botín, Santander’s executive chairman, will take over at the UK business in time to lead its London listing, due next year. She is currently executive chairman of Banesto, the domestic bank controlled by Santander. Her new post as head of Santander’s UK operations, to replace António Horta-Osório, will put her in an even stronger position to take the top job when her father retires. Banco Santander also announced a tentative timetable to list its British unit.
- Investors are increasingly reluctant to buy bonds of the countries on the eurozone periphery – Portugal, Ireland and Greece – as fears rise that these countries will have to restructure or default on their debt as they struggle to restore economic growth and pay off record budget deficits. They believe a rescue plan agreed at a recent summit of European leaders may lead to haircuts, or discounts, on the debt of these eurozone countries. The proposal would shift the burden of rescuing countries that face a sovereign-debt crisis away from richer EU members, such as Germany, and towards bondholders.
- Ireland saw the premium it pays over German benchmark interest rates rise to 4.67 percentage points, while the yield on its 10-year bonds reached 7.14 per cent, up 0.22 percentage points. Both the premium and the yield set new records since the introduction of the euro.
- The Federal Reserve announced that it would buy an additional $600 bn in Treasuries over the next eight months in a second round of “quantitative easing”. It will continue to reinvest an estimated US$250bn of principal payments from its maturing holdings of agency debt and agency mortgage-backed securities into Treasury securities over the same period. This means the Fed will buy about US$110bn of Treasury securities per month, taking its balance sheet to US$2.9tn. In a separate statement the Fed said that 86 per cent of these purchases will aim at Treasuries coming due in the next 2.5 to 10 years.
- The decision to pump more liquidity into the American economy to bring down long-term interest rates and spur growth prompted modest rises in stock markets around the world. The move is probably the last chance to boost economic growth and tackle the 9.6 per cent US unemployment rate as there is little chance that the new divided Congress will agree to further fiscal stimulus.
- Quantitative easing is a way for the Fed to boost the economy by driving down long-term interest rates when short-term rates are already at zero. QE2 of $600bn is roughly equal to an interest-rate cut of 75 basis points based on past Fed estimates. It is therefore expected to make at least a moderate difference to the economic outlook.
- The Federal Open Market Committee announced that it will maintain the target range for the federal funds rate at 0 to 1/4 percent.
- BP took an extra $7.7 bn charge related to the cost of its oil spill in the Gulf of Mexico, bringing its total charges so far to $40 bn. However, the energy company managed to make a headline profit of $1.8 bn in the third quarter, compared with a $17 bn loss in the previous quarter.
- Ambac, the US bond insurer that once provided triple-A guarantees on hundreds of billions of dollars worth of debt, said on Monday it may have to file for bankruptcy this year. The move is a further blow to the bond insurance model, in which thousands of US municipalities bought insurance to get higher credit ratings on their debt. That structure now looks increasingly unlikely to survive the financial crisis.
- The London Stock Exchange is trying to establish how a human error in possibly “suspicious circumstances” had knocked out one of its dealing platforms on Tuesday as the exchange conceded it would now have to delay switching over to a new trading system until next year. Its Turquoise trading platform, run jointly with some of the LSE’s biggest bank customers, will migrate over to a new trading system provided by MillenniumIT, a Sri Lankan company. The LSE is battling rival trading systems such as Chi-X Europe, and had managed to stabilise its share of trading in FTSE 100 stocks to around 62 per cent in recent months. But that has slipped to 54 per cent in the past two weeks amid teething troubles with new trading technology.