Manhattan-New York

In Case You Missed It: Business News Round-Up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.

Financial markets fell this week. In the US, the Fed froze rates on Wednesday and financial reform legislation was passed Thursday. The UK will introduce a levy on banks, which is expected to raise £2bn a year. This weekend China ended the peg of the yuan at about 6.83 to the dollar.

Economic Backdrop

  • The financial markets this week were dominated by growing doubts about the strength of the global recovery, with the FTSE and the DJIA both losing more than 3 per cent.
  • Sterling rose to a six-week high against the dollar on Wednesday after minutes of the Bank of England‘s monetary policy committee meeting this month revealed one member had voted to raise interest rates. The news allowed sterling to build on the strong gains sparked by Tuesday’s emergency Budget. The pound finished the week at a high of $1.498 against the dollar, its strongest level since May 12. Sterling also rose against the euro.
  • On Friday the spot gold price rose to $1,244.55 a troy ounce, just short of the all-time nominal high of $1,264.90 set on Monday.
  • The yield on the 10-year US Treasury tumbled 13 basis points over the week to 3.14 per cent, with the 10-year UK Gilt yield sliding to 3.40 per cent.

Mergers and Acquisitions

  • BASF, the world’s biggest chemical company, diversified its business by agreeing to buy Cognis, which makes ingredients for food and cosmetics, in a €3.1 billion ($3.8 billion) deal.

Financial Institutions

  • The Federal Reserve froze rates on Wednesday, saying that “underlying inflation has trended lower” as it awaits a clear outcome to the fiscal crisis in Europe. Analysts suggest that the Fed has become more concerned about risks to the economic recovery because of Europe’s fiscal woes and some weak recent data. The federal funds rate will remain in its current range of 0-0.25 per cent.

Credit

  • Portuguese banks borrowed €35.8 billion ($44.9 billion) from the European Central Bank in May, double the amount in April, as the eurozone crisis made it increasingly difficult for the banks to raise funds through capital markets.
  • The cost of insuring against a Greek sovereign debt fault hit a record high.
  • The massive £113bn fiscal tightening unveiled by George Osborne earlier this week should ensure Britain retains its AAA credit rating, according to Moody’s.

Other

  • The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) issued a revised workplan, ahead of the G20 meeting in Toronto this weekend. The IASB and FASB said they would concentrate on completing some projects seen as related directly to the crisis and which are considered important to providing a basis for banking reform by June 2011. The projects now to be focused on include convergence of financial instruments, leases and the use of fair value, or market-to-market accounting.
  • In a separate development, which may also reflect a warming of relations between international accounting bodies, a long-running stand-off between the EU and the US over audit inspections standards could be overcome on Friday when the EU’s audit committee votes to relax rules barring the exchange of audit working papers.
  • In the USA, Financial Reform legislation was passed in the early hours of Thursday morning, on the following:
    • Consumer Protection – A new independent Consumer Financial Protection Bureau to be set up. It would tackle mis-selling of mortgages, credit cards and other loans.
    • Derivatives – Derivatives that are traded in “over-the-counter” bilateral deals would be forced through central clearing houses and on to electronic exchanges to increase transparency.
    • Resolution Authority – The government would be able to seize and wind up an institution if it faces impending failure and poses a risk to the broader financial system.
    • Systemic risk regulation – A Financial Stability Oversight Council of regulators chaired by the Treasury secretary would identify systematically significant companies and monitor markets for bubbles.
    • Volcker rule (named after Paul Volcker, a former Fed chairman) – Banks would be forced to spin off proprietary trading arms but could retain arm’s length ownership of hedge funds and private equity firms.
    • Bank levy – The government would levy up to $19bn over five years on banks with more than $50bn in assets and hedge funds with more than $10bn.
  • The Chancellor George Osborne, in his emergency Budget on Tuesday, announced the following:
    • Introduction of a levy on bank’s balance sheets from 1 January 2011, intended to encourage banks to move to less risky funding profiles. It is proposed that the levy will be set at a rate of 0.07 per cent, with a lower initial rate of 0.04 per cent in 2011. Final details will be published later this year, following consultation. This is expected to raise £2bn a year.
    • Costs and benefits of a Financial Activities Tax will be explored.
    • Confirmation that the Bank of England will be given control of macro-prudential regulation and oversight of micro-prudential regulation.
    • Confirmation of the establishment of an independent commission on banking to be chaired by John Vickers. The
      commission will make recommendations to the Cabinet Committee on Banking Reform by the end of September 2011.
    • The impact of the levy on banks is mitigated by the reduction in the rate of corporate tax, also announced in the budget, so that for many banks the net impact of the levy on earnings will be minimal. Only the struggling Royal Bank of Scotland (RBS) will see much of a dent in profits—perversely for taxpayers, who own 68% of the bank. But the new tax is aimed less at raising revenue than at changing banks’ behaviour, by encouraging them to go for less-risky funding. Mr Osborne plans to consult during the summer before the tax is set in stone, giving banks plenty of time to lobby for changes.
    • Countries that did not suffer widespread bank failure in the crisis, such as Canada and Japan, strongly oppose the concept of such a levy. However, Britain is not alone in wanting to impose a levy on banks. French President Sarkozy is preparing a national bank levy for his next Budget. Germany’s Chancellor Merkel published a framework for a similar tax at the end of March and is due to present draft legislation in July or August. US President Barack Obama, in January, proposed a levy of 15 basis points on balance sheets to raise $117bn (£79bn) over 10 years.
    • The Chancellor said he was also in talks with world finance ministers over a separate financial activities tax on banks’ profits and bonus payments, set to be discussed at the G20 summit in Toronto starting 26 June.
    • China surprised markets last weekend, by ending the peg of the yuan at about 6.83 to the dollar, a policy that was reintroduced in July 2008 during the financial crisis. The yuan’s movement is restricted to a rise or fall of no more than 0.5% against the dollar in a single day—it appreciated modestly soon after the announcement. Against a broad basket of currencies, the yuan has already risen this year: against the euro it has strengthened by 17%. The currency forwards market expects the yuan to appreciate by only 2.2% over the next 12 months, a slender return given the problems of getting money in and out of China.
    • BP’s shares continued their fall last week hitting a 13-year low as the embattled oil major admitted that the “financial consequences of the spill will be severe”.

    Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

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