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.

Market interest remains centred around the Greek/Eurozone financial crisis, with the number of economists calling for Greece to withdraw from the Euro increasing. Goldman Sachs executives have had to defend themselves during a day-long grilling by the Senate subcommittee on investigations. An ecological disaster is growing in the Gulf of Mexico, where a massive oil slick is threatening the Louisiana coastline.

Economic Backdrop

  • The DJIA closed at 11,009, 2.22% below the 52-week high of 11,258, which it reached on 26 April 2010. It had initially risen on news of strong US consumer confidence figures and of a 3.2% quarterly growth for US GDP, and then rose again after the Federal Reserve, which is chaired by Ben Bernanke, said that rates were likely to remain low because of low inflation and elevated unemployment. The index fell back on reports that Goldman Sachs could face criminal charges relating to its mortgage derivative activity, and on continuing concerns over the banking regulatory bill.
  • The FTSE 100 in London lost nearly 3% after the shares of Barclays and BP fell, due to disappointing earnings and the Gulf of Mexico oil slick, respectively.

  • On the currency markets, the euro hit a one-year low against the dollar mid-week after rating agency Standard & Poor’s (S&P) slashed Greek government debt to junk status (BB+), downgraded Portugal to A- , and cut Spain’s rating to AA. It then pulled back to $1.33 on reports that a rescue package for Greece had been agreed between its leaders and representatives from the European Union (EU) and the International Monetary Fund (IMF).
  • Oil prices rose slightly after positive data on the US economy raised hopes of stronger demand. ICE June Brent, the European benchmark, rose 19 cents on the week to $87.44 a barrel. Oil prices were also affected by concerns about supply from the Gulf of Mexico due to the oil spill.
  • Gold rose to its highest level this year ($1,181.05 a troy ounce) as investors fled to safety amid fears of eurozone contagion. It then finished the week at $1,167.

Mergers and Acquisitions

  • Hertz said it would buy Dollar Thrifty, a smaller rival in the car-hire business, for $1.2 billion. Hertz’s acquisition increases its global market share to 24%.
  • After months of seeking a buyer, Palm was finally bought by HP for $1.2 billion. Palm’s Pilot mobile device was a forerunner of today’s smart-phones, but demand has been weak for its newer models and Palm now has only 1.5% of the global smart-phone market.

Financial Institutions

  • Lloyd Blankfein and other executives of Goldman Sachs were questioned for 11 hours by a Senate subcommittee about the bank’s practices during the financial crisis. They defended their actions and insisted investors knew the level of risk they were taking when they traded in such instruments.
  • America’s Treasury announced the next step in its plan to sell its remaining stake in Citigroup. It will initially unload 1.5 billion shares of the 7.7 billion it still holds.
  • Lloyds Banking Group reported a pre-tax profit for Q1 2010. The bank lost £6.3bn in 2009 due to heavy loan write-offs in the wake of its takeover of HBOS, and is now 41 per cent owned by the U.K. taxpayer.
  • Deutsche Bank’s net income for the first quarter rose by half compared with a year earlier. Profit at Germany’s biggest bank was lifted by a strong performance in its investment-banking business. Deutsche made a pre-tax profit of €2.8bn (£2.43bn) over the first quarter, 55 per cent higher than in 2009. Of that, €2.7bn came from the corporate and investment bank, a record quarterly result boosted by strong performances in sales and trading.
  • Lazard posted a narrower quarterly loss and beat forecasts on an operating basis, helped by strong growth in advisory and asset management fees. The New York-based investment bank reported a net loss of $33.5m (£22m), or 38 cents per share, compared with a loss last year of $53.5m, or 77 cents per share.
  • Barclays failed to impress the market on Friday in spite of reporting a near 50 per cent rise in first-quarter profits, as growth stalled at its prestigious investment banking arm. The shares fell more than 5 per cent as investors took fright at a 26 per cent drop in underlying income at BarCap, the division headed by the bank’s American president, Bob Diamond.

    The reaction came as more than 6 per cent of Barclays’ investors voted against a pay scheme that could see Mr Diamond awarded more than £6m by 2012 if certain performance targets are met.
  • Spanish bank, Santander, which is the biggest in the eurozone, increased its share of the lending and savings markets in the U.K., after rebranding the Abbey and Bradford & Bingley businesses under its own name. U.K. profit rose 15 per cent in sterling terms to £426m in the quarter. The bank is attempting to buy a network of more than 300 retail branches from Royal Bank of Scotland.
  • Nomura Holdings posted a fourth straight quarterly profit, but Japan’s top broker failed to match the big trading gains posted by its global peers. Nomura posted a quarterly net profit of 18.4bn yen (£129m), compared with a 215.8bn yen loss a year earlier. The Tokyo-based broker has been expanding after buying the operations of failed US investment bank Lehman Brothers in those regions.
  • Close Brothers Group Plc, a British investment bank founded in 1878, lost a court challenge over a 4 million-pound ($6.2 million) market-abuse fine levied by the U.K.’s Financial Services Authority. Close Brothers’ Winterflood Securities unit and two of its brokers were fined because they didn’t spot “warning signs” of a 2004 share-ramping scheme.

Credit

  • The markets reacted to the continued uncertainty in the eurozone by raising interest rates on loans to Greece and Portugal and increasing spreads on CDSs to insure against their default. The eurozone leaders initially refused to bring in the IMF, to avoid admitting that they needed outside help: now Germany is trying to avoid committing to help Greece as it is domestically so unpopular. However, the longer the delay, the greater the risk of contagion for the rest of the zone.
  • The big question now is whether Greece can deliver the massive fiscal tightening that the IMF and the EU is demanding without the country – already rocked by strikes, protests and riots – becoming ungovernable. Athens will be required to cut its deficit by 10 percentage points of gross domestic product in three years. Its programme includes:
    • 2-3 percentage points rise in value added tax
    • Public sector pay freeze; recruitment frozen
    • Average retirement age raised to 67 from the current 53
    • Sale of state corporations, sale and lease of state-owned land and properties
    • 13th & 14th monthly salary abolished for public sector workers

    The Bank for International Settlements (BIS) estimates that European banks have ca. $189bn of exposure to Greece, with French banks accounting for $75bn of that. But if contagion takes hold, The BIS figures show that European banks also have claims of $240bn on Portugal, and $851bn on Spain.

  • Spain announced an increase in its unemployment rate to 20%, with 4.5m people now unemployed there. In Germany the unemployment rate fell to 7.8%, the lowest since December 2008.

Other

  • Expo 2010 opens to the public on 1 May 2010 in Shanghai. The cost is estimated at $55bn (£36bn, €42bn) – more than twice what Beijing spent on the Olympics. China appears to want to show the world how well it has emerged from the recent economic crisis.
  • The US administration designated the BP oil spill in the Gulf of Mexico an event “of national significance” as rescue workers struggled to stop the oil from washing ashore on the Louisiana coast. This will provide money and resources to fight the slick caused by last week’s explosion on the Deepwater Horizon rig. The US Coast Guard said that 5,000 barrels of oil per day could be leaking into the ocean from the site. BP’s shares fell 7 per cent as investors assessed the potential financial impact. The environmental impact could be catastrophic, as experts think it may take months to cap the leak.
  • BAA, (majority owned by Ferrovial of Spain) the owner of Heathrow and Stansted airports, will ask for state aid to compensate for the £28m cost incurred following the Icelandic ash cloud that shut British airspace for six days.
/by