In Case You Missed It: Business News Round-Up

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

Weak US employment data – non-farm payrolls unexpectedly fell by 95,000 last month – emphasized the fragile nature of the economic recovery in the US. Talk of currency wars resulted in high volatility in foreign exchange markets and protectionism as countries are trying to boost their exports at the expense of others. The dollar weakened against the yen – the most closely watched indicator of the week. The B of E, the ECB, and the Reserve Bank of Australia kept rates on hold – and the Bank of Japan lowered rates.

Economic Backdrop

Low demand in rich countries is prompting fears of a global currency war. The Bank of Japan intervened to hold down the yen in foreign exchange markets. Brazil doubled taxes on capital inflows to stop the real surging. India and Thailand warned that they too might act. Washington and Brussels identified undervalued currencies such as the renminbi as a prime cause of global macroeconomic imbalances. Wen Jiabao, the Chinese prime minister, retorted that an unstable yuan put the global economy in peril. Dominique Strauss-Kahn, managing director of the International Monetary Fund, voiced his concern during IMF meetings in Washington at the weekend. Finance chiefs including U.S. Treasury Secretary Timothy F. Geithner and Brazilian Finance Minister Guido Mantega said the IMF should help formulate initiatives on how countries can promote their economies without damaging others.
In the US there was more speculation that the Federal Reserve would announce a further round of quantitative easing (QE) at the November 3 Federal Open Market Committee meeting, after Friday’s weak US employment report highlighted the fragile nature of the economic recovery. Non-farm payrolls unexpectedly fell by 95,000 last month – while private sector payrolls, seen by many people as a better gauge of the health of the labour market, rose by 64,000, against a rise of 93,000 in August and below expectations. The unemployment rate held steady at 9.6 per cent.
A survey by Citigroup published this week showed that 90 per cent of investors expect the Fed to announce a second asset purchase scheme on November 3. It showed that, on average, investors expect the central bank to increase its balance sheet by $535bn.

Last week the Bank of Japan announced that it would embark on a fresh asset purchase scheme, earmarking Y5,000bn ($60bn) as part of a “comprehensive monetary easing policy”. The Bank also lowered its main interest rate from 0.1 per cent to a range of 0.0 per cent-0.1 per cent. The yen did ease back initially, but then rallied to fresh 15-year highs against the dollar. The dollar, now only Y2 away from its all-time low of Y79.70, was weaker across the board. It lost 1 per cent over the week against the euro and was down 0.8 per cent against sterling.
The Bank of England’s Monetary Policy Committee voted to hold rates steady at 0.5 per cent and retain its quantitative easing programme at the £200bn already committed, as was widely expected. However, inflation, as measured by the consumer price index, is well above its 2 per cent medium-term target. One independent MPC member, Andrew Sentance, has voted in recent months for a quarter-point rate rise to signal determination to head off the risk of an inflationary spiral. But other MPC members fear growth is too weak to create jobs or to boost asset values.
The European Central Bank left its main interest rate unchanged at the record low of 1 per cent for the 17th consecutive month. German economic growth is thought to have slowed in the third quarter, after an exceptional second quarter performance, but to have remained positive. There is, however, the much weaker performance in eurozone “peripheral” economies such as Greece and Ireland, where economic activity continues to contract. The ECB’s main interest rate is not expected to rise until well into 2011. But the ECB could announce in December that from next year it will return to a system of auctioning liquidity it provides to the financial system – instead of matching banks’ demands in full. That would mark a step back to its pre-crisis operational system.
The Reserve Bank of Australia also held its rates steady last week.
U.S. stocks advanced this week, sending the Dow Jones Industrial Average above 11,000 for the first time since before the May 6 crash, on speculation the Federal Reserve will buy more debt to boost the economy. US Treasury notes rallied for a fourth week. The yield on the 10-year note dropped to 2.3302 percent at one point, the lowest level since January 20, 2009.
The benchmark index of raw materials prices rose to its highest level in two years as agricultural commodities and metals surged to records on the back of supply disruptions and investment demand for raw materials. Gold soared to a nominal high of $1,364.60 a troy ounce, ending on Friday at $1,345.40, up 2.1 per cent over the week.
The IMF said that the global economy had grown faster than expected in the first half of 2010 and predicted that it would grow by 4.8% over the year as a whole. The fund forecast that global growth would slow to 4.2% in 2011, and warned that recovery remained fragile.

Mergers and Acquisitions

Sanofi-Aventis has launched a hostile $18.5bn takeover of Genzyme, criticising what it claimed was the US biotech company’s inability to overcome manufacturing problems or launch new products on its own. The bid, at $69 a share, follows frustration from the French pharmaceutical group that Genzyme’s top management refused to enter talks despite approaches since May this year.
General Electric said that it would pay $3 billion to buy Dresser, a maker of oil- and gasfield equipment. GE has expanded its energy business over the past decade. In 2009 the American conglomerate’s energy revenues amounted to $40 billion.

Financial Institutions

The Committee of European Banking Supervisors, made up of representatives of all 27 EU countries, met in London last week to draft regulations to implement the tough pay rules agreed by the EU over the summer. While the discussions are still fluid, the group is leaning towards requiring banks to adhere to a strict ratio that would cap bonuses at a multiple of annual salary. The size of the cap would depend on the national regulator’s view on whether the bank is effectively linking pay to performance and risk. The rules will apply to the worldwide operations of all EU-based banks and the European subsidiaries of any non-EU banks. The regulators are expected to publish a draft which would then be the basis of a consultation with the industry over the coming weeks.
The Swiss banking commission wants to oblige its banks to hold extra capital above the Basel III requirements. The proposed minimum Swiss core tier one capital ratio of 10 per cent is 3 percentage points higher than Basel III’s. But the Commission wants more: a buffer of up to 9 per cent of risk-weighted assets in contingent convertibles, which automatically convert into common equity if losses become sufficiently large.
HSBC has been ordered by US regulators to overhaul its internal controls in the US after a probe found the bank’s ineffective compliance programmes created “a significant potential for unreported money laundering or terrorist financing”. Last Thursday’s actions by the Federal Reserve and the Office of the Comptroller of the Currency are the latest blow to HSBC, which announced the retirement of its top US executive in June and is under a separate investigation by the Department of Justice and the US Attorney’s Office. HSBC, which is based in London but expanded aggressively in the US over the past decade through acquisitions, neither admitted nor denied wrongdoing and was not fined.
American Express will go to court after the American Department of Justice sued it for anti-competitive conduct over the “swipe fees” that it charges merchants. Visa and MasterCard reached a settlement with the American authorities over the same charges, under which the two card companies will no longer stop retailers from steering customers to alternative, cheaper means of payment.
A French judge sentenced Jérôme Kerviel, a former trader at Société Générale, to five years in prison (two of which will be suspended). He was also told to repay the bank €4.9 billion ($6.7 billion) for losses it incurred as a result of his unauthorised trades, but SocGen said it would negotiate a reduction. Mr Kerviel said he would appeal against the decision.

Credit

The European Central Bank is to beef-up its powers to act against struggling eurozone banks in a move that could foreshadow a tougher line towards those depending on its liquidity to survive. Changes to the ECB’s operational rules, announced on Saturday, will make clearer the Frankfurt-based institution’s powers to exclude banks from receiving liquidity – or to reject some assets banks put up as collateral.
Ireland has given the first indication it may seek a voluntary renegotiation of senior bond debt owed by its two state-owned banks in a bid to recoup part of the cost of its €50bn ($70bn) bank bail-out announced last week. This comes as Ireland’s cost of borrowing rose sharply after Fitch downgraded the government’s long-term debt rating from double A minus to A plus to reflect “the exceptional and greater-than-expected” cost of recapitalising Irish banks.

Other

Two of the UK’s Big Four accounting firms are under investigation for weaknesses in their oversight of the handling by JPMorgan and Lehman Brothers of client funds. The Accountancy and Actuarial Discipline Board, the industry’s regulator, on Monday said it had begun probes into PwC and Ernst & Young for their work on JPMorgan and Lehman Brothers respectively. A report by the FSA recently detailed a litany of “serious failures” by bank auditors regarding client assets. These ranged from producing clean reports in spite of clear breaches, to late reports and ones that referenced the wrong regulations.
The International Accounting Standards Board on Thursday published final rules that require greater disclosure of off-balance sheet entities where the bank or company still has some ties, such as the buyer having a right to sell them back, or the bank itself having a right to repurchase the assets. Window dressing became a contentious issue this year when it emerged that Lehman Brothers had shifted up to $49bn off its books at the end of each quarter to reduce closely watched financial leverage ratios. The trades were specifically designed to flatter the reported accounts and had no economic rationale. The bank used short-term repurchase, or “repo”, deals and provided extra collateral – at least 105 per cent of the value of the loan – to allow it to account for the deal, under US rules, as a true sale, which removed the asset from its books until the trade was unwound after the reporting period had ended.
While international rules would not have allowed Repo 105s to be taken off the books (because they are based on a different concept to the US standards), the new rules will force banks to disclose any “disproportionate amount of transfer transactions”, such as other repo deals, that are undertaken around the end of a reporting period.

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