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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.

This week’s news was dominated by the G20 meeting in Seoul, increasing concern over Irish debt, Europe’s inability to agree on its 2011 budget and an EU-wide patent, problems in both Boeing and Airbus aircraft engines, and the release of Aung San Suu Kyi, the Burmese opposition leader.

Economic Backdrop

  • Global equities fell from recent highs, due to tensions in the eurozone and the increased possibility of further Chinese interest rate rises.
  • The euro dropped 2.4 per cent to $1.3691, the biggest weekly loss since August on concern that so-called peripheral European countries will struggle to repay their bondholders but made small gains at the end of the week on speculation the European Union will bail out Ireland. The yield difference, or spread, between Irish 10-year securities and comparable bunds reached 652 basis points, or 6.52 percentage points, the highest ever. The spread on 10-year Portuguese notes and bunds rose to a record 484 basis points.
  • US Treasuries rallied after the Federal Reserve Bank of New York said it would purchase $105bn of bonds by December 9, reversing an earlier sell-off. The purchase amount, the first of a massive monetary easing programme dubbed “QE2”, was in line with many analysts’ expectations but still provided a boost to US Treasuries. The $105bn includes both new purchases and reinvested cash.
  • Sugar fell 23.5 per cent at the end of the week as speculators pulled out of the market.
  • Copper prices hit an all-time high of nearly $9,000 a tonne, driven by Chinese buying.
  • Gold reached a new nominal high during the week, as Robert Zoellick, the president of the World Bank, suggested “employing gold as an international reference point of market expectations about inflation, deflation and future currency values.” and added that markets are “using gold as an alternative monetary asset today.”
  • The Bank of England increased its inflation forecast last week. In its quarterly inflation report the Bank said inflation, which hovers at 3.1 per cent as measured by the consumer price index (CPI), is expected to rise to about 3.5 per cent by the end of the year, before falling back towards the end of next year. It forecast that growth would reach about 2.2 per cent next year and then rise to three per cent by 2012. Yields on ten-year gilts jumped 14 basis points to 3.18 per cent from 3.04 per cent before the report was released and sterling rallied to over $1.60 against the dollar and to over €1.17 against the euro, as the markets priced in lower expectations of further quantitative easing (QE).

Mergers and Acquisitions

  • Mizuho, Japan’s third-largest bank by market capitalisation, is buying a 2 per cent stake in BlackRock, the world’s largest asset manager, from Bank of America for $500m.
  • Mitsubishi UFJ Financial Group is in talks to acquire a £4bn portfolio of project-finance assets from Royal Bank of Scotland.
  • Nomura is rumoured to be looking for a potential acquisition in the US.
  • Canada blocked BHP Billiton’s $39bn hostile bid for PotashCorp, the world’s biggest fertiliser producer. It now plans to toughen its foreign investment law, to force greater transparency and accountability from investors.
  • Chevron agreed to buy Atlas Energy in an acquisition worth $4.3 billion. The deal gives Chevron access to the giant Marcellus shale-gas formation that lies beneath Pennsylvania and other states.

Financial Institutions

  • Ireland’s biggest bank by market value, Bank of Ireland, forecast underlying full-year operating profit would drop by more than a quarter in 2010, knocked by lower income and the costs of government guarantees.
  • French bank Crédit Agricole said it did not plan to raise capital to meet incoming Basel III requirements as its third-quarter net profit more than doubled to €742m, driven by retail banking. The bank is seen as one of the most vulnerable in Europe to the stricter capital rules because of its cross-shareholdings with its cooperative parent group.
  • The Financial Services Authority (FSA) said it is seeking feedback on whether to close the loophole that exempts banks based outside the European Economic Area from disclosure rules on remuneration: in which case foreign banks operating in the UK could be forced to disclose the pay packets of their senior bankers.

Credit

  • The main news of the week in the credit markets concerned Ireland. Irish government bonds plunged, sending yields to record levels, as fears grew that the country would be forced to restructure its debt. The International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn, who is attended this weekend’s Asia-Pacific Economic Cooperation forum, told reporters that the IMF stands ready to help Ireland if needed, and that Ireland’s debt problems are mostly linked with “one big bank” and are different from those of Greece. The Irish government nationalized Anglo Irish Bank Corp. in January 2009 as loan losses spiralled. Ireland could draw on the 60 billion euro ($82 billion) segment of the broader 750-billion-euro fund set up by the European Union and International Monetary Fund in May. The country’s gross funding need for 2011 will be 23.5 billion euro, falling to 18.6 billion euro in 2014, according to the nation’s debt agency.

Trade finance

  • Some of the biggest trade finance providers, led by HSBC and Standard Chartered, are lobbying to have tough capital rules toned down, warning that if they are not, world trade could be severely hampered. Under the Basel III rules, due to be phased in by 2019, banks would be forced to hold five times the amount of capital – 100 per cent of a lending commitment, up from 20 per cent currently – to back trade finance business.

Legal

  • Many of the UK’s leading law firms are on course to report increases in revenue over the first half of 2010-11, as the economic recovery continues to gather pace. Allen & Overy posted a 3% growth in revenues for the six months ending 31 October. Norton Rose, meanwhile, has seen its H1 revenues rise by 9% over the period to just above £155m, on the back of strong performances in Asia and the Middle East. However, a handful of firms have seen revenues dip in H1. Eversheds expects to see a 3% drop from last year’s figure of £178m, with magic circle firm Freshfields Bruckhaus Deringer also expected to be slightly down.

Retail

  • Sir Philip Green’s Arcadia retail empire, which owns high-street fashion retailers, including BHS, Topshop, Dorothy Perkins, Miss Selfridge, Evans, Burton and Topman, could close between 150 and 200 stores over the coming three years as the group reconfigures its property portfolio.
  • Marc Bolland, Marks & Spencer’s new chief executive, announced the firm’s strategic review. Mr Bolland plans to accelerate growth by investing an extra £300m a year for the next three years – an 80 per cent increase in the rate of capital spending. A third will go on international expansion and its online offering; the rest is earmarked for the UK.
  • Sainsbury delivered £332m profit for the six months to 2 October, an eight per cent increase attributed to a rise in sales in its luxury Taste the Difference ranges. The chief executive, Justin King, revealed that the company – which opened its biggest store ever earlier this year – was planning to create 1.5m square feet of new space next year, up from the previous target of 1.25m square feet.

Accounting

  • The Financial Services Authority is exploring enforced auditor rotation to strengthen competition to the “Big Four” – Deloitte, Ernst & Young, KPMG and PwC. The Big Four currently audit the accounts of 99 companies in the FTSE 100, and many large companies do not change auditors very often. The European Commission is also examining the pros and cons of mandatory rotation as part of its own broad investigation into the audit profession in the wake of the financial crisis.

Other

  • Microsoft and Saxo Bank of Denmark launched MSN Trader, a new platform which will allow individual investors to trade 11,000 shares on 23 exchanges globally: it will also offer FX options, over 7,000 CFDs, futures, exchange-traded funds and bonds. MSN Trader will start operating in Britain but will be expanded across Europe later.
  • General Motors reported a quarterly profit of $2 billion. Sales in its North American market continued to improve.
  • An engine failure on a Qantas Airbus A380, possibly caused by an oil leak, forced the plane to make an emergency landing. After the airline grounded its fleet of six A380s, Rolls-Royce said that the cause of the incident was specific to its Trent 900 engine.
  • Boeing suspended test flights of its new 787 Dreamliner after a fire broke out in the electronics compartment of one of the jets.
  • Vodafone decided to sell back its interests in Japan’s SoftBank for £3.1 billion ($5 billion), as it continues to review the minority stakes it holds in various telecoms companies.
    David Cameron, the British PM, led a top-level trade delegation to China in a bid to boost trade with the world’s second largest economy. US President Obama visited India and publicly backed the proposal for India to have a permanent seat on the UN Security Council.
  • There was violence at the UK Tory Party’s headquarters after students protested against planned increases in university tuition fees.
  • Aung San Suu Kyi, the Burmese opposition leader and Nobel laureate, has been released after more than seven years under house arrest: she has spent 15 of the last 20 years imprisoned in her villa.

Outcome Of The Seoul G20 Summit

  • The gathering was marked by clashes over whether Chinese or U.S. policies were more to blame for economic imbalances that endanger the global recovery. President Barack Obama attacked China’s policy of undervaluing its currency, and China criticised the Fed’s quantitative easing policy. However, agreement was finally reached in the following areas:
    • Global Imbalances
      The summit produced an agreement to develop early-warning indicators and to draw up “indicative guidelines” to measure large current account imbalances, in consultation with the IMF: the details are to be discussed in the first half of next year.
    • Currencies
      The leaders promised to move towards market-determined exchange rates and avoid competitive devaluations.
    • Financial Regulation
      The leaders signed off on the “Basel III” agreement to raise the quality and quantity of bank capital; they also endorsed the Financial Stability Board’s proposals to tighten supervision of the over-the-counter derivatives market and reduce reliance on credit rating agencies.
    • Trade
      The leaders pledged not to pursue protectionist policies and to work towards concluding the Doha round of trade liberalisation talks.
    • IMF
      The leaders endorsed a package of reforms agreed last month to reform the International Monetary Fund to reflect a shift in the balance of global economic power. Under the deal, more than 6 per cent of voting shares at the Fund will shift to dynamic developing countries such as China, which will become the third-which will become the third-biggest member of the 187-strong organisation.

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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