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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.

Economic Backdrop

  • There were broad gains for global equity markets as a result of improved economic news around the world.
  • The 10-year US Treasury yield climbed to 3.3%, one percentage point higher than its October low, following the biggest two-day sell-off this year. The move came after President Barack Obama agreed with Congressional Republicans to extend Bush-era tax cuts and combine them with a $120bn payroll tax holiday. Government bond markets across the globe followed the move up: the German Bund yield rose 10bp to 2.9%, while the 10-year UK gilt yield added 10bp to 3.5%.
  • On the currency markets, the euro was under some pressure due to unease about the outlook for peripheral eurozone nations, following fresh signs of disunity among EU leaders over the expansion of the region’s rescue fund and the question of joint European government bonds. It was not helped by news that Fitch had downgraded Ireland’s sovereign debt rating to BBB plus.
  • In commodities, gold touched a nominal record high of $1,430.95 an ounce immediately after the US tax cut announcement, before falling back with profit taking. Silver also briefly rose to a 30-year peak of just over $30 an ounce.
  • In its December monthly meeting the Bank of England’s Monetary Policy Committee left rates at 0.5% and maintained the existing level of quantitative easing at £200bn.
  • A CBI survey showed that export orders for UK manufacturers were at their highest levels in more than two years, but that the prices producers had to pay for oil and other commodities could force them to raise prices.
  • The Halifax House price Index showed the first year-on-year decline in house prices this year: the average property is now worth £164,708 – 0.7% down on a year ago.
  • The Office for National Statistics (ONS) said that Britain’s goods trade gap with the rest of the world widened to £8.5bn in October, the highest since records began in 1992.
  • U.K. retail sales climbed in November as higher food-price inflation pushed up values and cold weather boosted demand for clothing and footwear.
  • Beijing again raised the reserve ratio requirement for banks on Friday by 50 basis points, for the sixth time this year, leading to uncertainty over monetary policy in China. Though some believe the move reduces the chance of an imminent rise in Chinese interest rates, most people still expect a move before year-end.

Mergers and Acquisitions

  • Apax, the London-based private equity group, is to buy ISS, the Danish cleaning, security and catering group for around $8.5bn in what would be the biggest leveraged buy-out since the financial crisis started if it goes through. ISS, which employs 500,000 staff, was put up for sale by its private equity owners, Goldman Sachs and EQT.
  • PepsiCo agreed to pay $3.8bn for 66% of Wimm-Bill-Dann, a Russian company which produces dairy goods and fruit juice.
  • Mastercard is buying the prepaid cash card business of foreign exchange group Travelex for £290m. Travelex’s card programme management (CPM) division provides prepaid “cash passports” for overseas travellers to use at cash machines or to make purchases.
  • The five private equity owners of Danish telecoms player TDC will receive up to £2.35bn from the sale of a third of the group through a share buyback and public offering, effectively relaunching TDC on the Copenhagen bourse in one of the biggest European public offerings of 2010.
  • Standard Life has agreed to buy financial software company Focus Solutions Group for £42m, in a deal to boost its customer services. Focus Solutions handles software and consultancy work for financial services companies.

Credit

  • European officials have been discussing the future of the eurozone’s €440bn rescue fund, including the possibility of using it to aid debt-burdened economies by buying bonds of distressed governments. Jean-Claude Juncker, prime minister of Luxembourg, accused Berlin of being “un-European” after Angela Merkel, Germany’s chancellor, repeated her rejection of Mr Juncker’s proposal for jointly guaranteed eurobonds and for increasing the size of the EFSF to help finance the most debt-laden members of the currency union. There had been some hope that the proposals for systemic changes would be discussed during this week’s two-day summit of EU heads of government, which begins on Thursday. But German officials have said they want to wait until early next year to table new measures. Instead, the summit is now expected to focus on small changes to EU treaties that will allow for a permanent bail-out fund to replace the EFSF when it expires in 2013. Among the measures being considered are ways of making the €440bn fund able to lend more money without increasing its size. To gain a triple A rating, the EFSF must raise significantly more money than it can lend.
  • Eurozone banks could face problems in refinancing €1,000bn of debt due over the next two years Mario Draghi, Italy’s central bank governor, said in an interview with the Financial Times. He stated that large-scale purchases of government bonds could threaten the ECB’s freedom to act without political interference and break European Union rules. Published figures show the ECB has spent €69bn ($91bn) on government bonds since the launch of the programme in May.

Financial Institutions

  • The U.S. Treasury Department sold its remaining stock of 2.4bn shares in Citigroup Inc. for $10.5bn, bringing the country’s third-biggest bank a step closer to independence from the government following a $45bn bailout in 2008. The sale raises the profit for taxpayers on the government’s stake to about $6.85bn.
  • Bank of America Corp. agreed to pay $137m to federal and state authorities for municipal bid-rigging practices in the late 1990s and earlier this decade.
  • J.P. Morgan Chase & Co. has bought more than $1bn of copper, accounting for more than 50 % of all the metal stored in official London warehouses and creating fears about an impending shortage in supply.

Other

  • The Committee of European Banking Supervisors (CEBS) agreed tough new rules on pay and bonuses, which financial services firms operating in the European Union must implement by the start of next year. The new rules will require banks to defer as much as 60% of top bankers’ bonuses over three to five years and impose a separate “retention period” on all share-based incentives. For banks based in the EU, such as Barclays, Royal Bank of Scotland and Deutsche Bank, the rules are likely to apply to staff worldwide, rather than just those working in European financial centres.
  • Following a meeting of EU finance ministers in Brussels on 7 December Olli Rehn, the European commissioner for economic and monetary affairs, announced a further set of tests on Europe’s banks, which would be “more comprehensive and more rigorous” than the first round in July. He said discussions on the scope and methodology of the talks were still continuing but they would include an assessment of banks’ liquidity, and that the new process would be held in the “fullest transparency”.
  • Britain’s biggest banks could be forced to pay 50% more than expected towards an industry levy after the Treasury increased the burden on larger, riskier institutions. The refinements will generate an additional £400m over the next four years for the Treasury. A number of exclusions that benefit smaller institutions and those that are more reliant on retail deposits mean that large banks are expected to be hit harder by the changes. The tax, now expected to raise £2.6bn a year by the end of the parliament, will be set at a rate of 0.05% next year and 0.075% from 2012.
  • The International Accounting Standards Board’s latest proposed rules on hedging broaden the definition of a hedge, thereby allowing companies to report profits that are more in line with economic reality. Under the current standard, only precise hedges can be used to offset cost volatility. Sir David Tweedie, chairman of the IASB, said the changes would provide “a much simpler model that better reflects risk management practices whilst providing more useful information to investors.” The IASB is still to specify how the rules will apply to banks, particularly those that hold portfolios of loans and other financial products where risk is hard both to quantify and to offset. IFRS standards are followed by listed companies in the EU and a growing number of other countries, including Australia and South Africa. The US is considering whether to adopt the system in place of its Generally Accepted Accounting Procedures (GAAP) rules.
  • US authorities continued their investigation into insider trading on Wall Street, issuing more subpoenas to hedge funds and other investment firms last week. Their investigation focuses on funds that did business with so-called expert network firms: firms help investment managers meet industry experts to research a specific industry.
    The Irish parliament narrowly passed a plan to deliver €6bn of budget cuts next year in return for its €85bn bailout.
  • China is suffering from rising inflation: prices rose 5.1% in November, up from 4.4 per cent in October, according to a statement released after an annual economic policy meeting in Beijing. This is above the government’s 3% inflation target and will increase pressure on the authorities to raise interest rates and further rein in the huge monetary stimulus of the past two years.
  • A new “green fund” to help poor countries adapt to the effects of global warming was agreed at the end of the climate change conference in Cancún on Saturday. Governments have agreed that the fund should eventually supply $100bn a year to developing countries, but the question of how the money for it will be raised remains unanswered.
  • At the Nobel Peace Prize ceremony in Oslo, Liu Xiaobo, the Chinese dissident who is serving an 11-year sentence in China for subversion, was represented by an empty chair – only the fifth time in the 109-year history of the award that the winner has been absent.
  • Irving Picard, the trustee representing the victims of Bernard Madoff Ponzi scheme, has filed a $19.6bn lawsuit accusing almost 60 people and institutions, including the Italian bank, UniCredit, and Bank Austria and Bank Medici, another Austrain bank, of participating in a “conspiracy”. In the past two weeks, Mr Picard has sued more than a dozen banks, including HSBC, Citigroup, JPMorgan, UBS and Natixis, seeking money for Madoff’s investors. Most say they plan to fight the claims but Union Bancaire Privée has agreed to pay up to $500m to settle the allegations.
  • Bernard Madoff’s son Mark Madoff, 46, was found dead in his downtown New York City apartment from an apparent suicide early Saturday morning.
  • Lord Turner, chairman of the Financial Services Authority, defended the FSA’s decision last week not to take action against the directors of Royal Bank of Scotland – whose £24bn loss in 2008 was the biggest in British corporate history and saw the government take a 70 % stake in the bank.
  • Iceland has struck a fresh deal with Britain and the Netherlands to repay nearly €4bn lost in the failed Icesave online bank.

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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