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In Case You Missed It: Business News Round-Up

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

In the UK last week, the Bank of England, lowered its growth forecast, saying recovery will be “choppy” and warning that inflation will remain above target. And In the US the Federal Reserve downgraded its outlook for US economy, signaling its intention to continue quantitative easing to maintain liquidity and to keep interest rates low for a “significant period”, and confirming that US trade gap is continuing to widen. In Europe, politicians emphasized the strong German performance while economists worried about a “two-tier” Europe, and sovereign debt default of weaker economies.

Economic Backdrop

  • Markets are looking ahead to fiscal tightening in Western economies in 2011, and the global economic picture is still very unsettled. The Bank of England has cut its output forecast for the next two years; the Federal Reserve has revealed that it will reinvest more than $150bn from the proceeds of maturing mortgage-backed securities to maintain the level of liquidity from earlier quantitative easing operations; and in Europe, despite the strong growth of the German and French economies, economists fear that this will not be sufficient to counter balance the poor performance in Italy, Spain, Portugal and, most worryingly, Greece.
  • The B of E has revised its outlook for GDP growth for the rest of this year to be down slightly, but has lowered its forecast for 2011 to fall to 2.7% from 3.4%, and now predicts slower growth in 2012 too. The Bank cited as causes the new government’s fiscal austerity programme and a slow recovery in credit and lending markets at home. The Bank also believes inflation will not fall below its 2% target until the end of 2011, largely because of the planned increase in VAT. However, its predictions are still more optimistic than the consensus of private sector economists. The FTSE lost 1% over the week.
  • Following a number of dismal economic reports in the US, the Fed announced that the pace of recovery had slowed in recent months. The monthly trade gap grew by 18.8% between May and June: imports from China are the highest they have been since October 2008. The markets were not reassured when the Fed indicated that it would maintain its current balance sheet of $2,300bn by buying Treasuries and investors turned instead to safe-haven investments. The DJIA lost 2% over the week, and the 10-year Treasury yield hit a 16-month low of 2.68% at one point before finishing the week at 2.69% with a loss of 14 bp. Gold also rose to a one-month high of $1,218 before finishing the week slightly lower.
  • Although the German economy grew by 2.2% in Q2 (3.7% in 12 months), this was mostly the result of an increase in exports, mainly due to the weakness of the euro at the beginning of the quarter. The fact that Spain and Portugal grew by only 0.2%, while Greece contracted by 1.5%, reignited fears of sovereign debt default in these countries and revived worries over the survival of the monetary union. Consequently, the euro sank 3.9% to a three-week low against the dollar.

Mergers and Acquisitions

Financial Institutions

  • Goldman Sachs has bought a 12.5% stake in a new financial trading platform, called LMAX, created by Betfair, the online gambling group. LMAX will allow users to trade “contracts for difference”. The venture has the approval of the Financial Services Authority.
  • Pre-tax profits fell 60% at Bank of Ireland in H1, after losses of €1bn related to its commercial property portfolio. Bank of Ireland is 36% state owned.
  • ING, the Dutch banking and insurance group, reported a tripling of operating profits in retail banking and lower loan loss provisions. This resulted in a net gain of €2.4bn for H1, up from a loss of €722m last year, due to write-downs of its bond and property portfolios. It also announced that it was on track to divest its insurance arm to comply with European rules on state aid.
  • Barclays Capital is expected to announce redundancies in its back office staff across its global operations, in an effort to cut costs to compensate for a sharp fall in market activity in Q2.
  • Credit Suisse announced that it would cut 75 jobs in London in both back office and front office functions.
  • Agricultural Bank of China completed the world’s largest initial public offering, raising a total of $22.1bn.
  • Hypo Real Estate, the German property lender that was taken into government ownership after the financial crisis, revealed a reduction in H1 losses.

Credit

  • The spread of the yield of government bonds of countries on the periphery of the eurozone – such as Ireland, Spain, Portugal and Greece – widened over the German bund benchmark.
  • Companies with credit ratings below investment grade sold a record amount of $14.3bn of new high-yield or “junk” bonds last week, as investors turned to credit markets and away from equities, due to rising uncertainty over economic growth.
  • The big Spanish banks, including BBVA and Caja Madrid, are applying to become members of LCHClearnet, the London based bond and repo clearer. Repo transactions allow financial institutions to offer or obtain short-term liquidity using government bond holdings as security. Spanish banks carried out these transactions mainly in Spain previously, but that market now has reduced liquidity.

Other

  • The European Commission is considering an EU-wide levy on financial transactions, domestic aviation and carbon dioxide emissions, to raise money. Both Germany and the UK said they would oppose any attempt to introduce a pan-European tax.
  • Mortgage lending giant Freddie Mac is seeking $18.bn in aid from the US government after bad home loans prompted its fourth consecutive quarterly loss.

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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