December 11 2013

In the trading room today: Does the U.S. Budget Deal Mean Stronger USD? As the news of a U.S. budget agreement that would set government spending levels until 2015 removes some of the roadblocks to a reduction of the Fed’s monthly asset purchases, we ponder if the budget deal means a taper announcement and a stronger USD, we analyze the latest trend developments in the EUR/USD currency pair, we keep an eye on the GBP/USD pair, we note the loss of momentum of the USD vs JPY, we highlight the market’s reaction to the U.S. budget deal and the German CPI, we discuss new forecasts from UniCredit and Mizuho Bank, and prepare for the trading session ahead.


USA 

Breakthrough in Washington between Democrats and Republicans could end the damaging cycle of “crisis-driven decision making” and avoid another shutdown next year. How the deal was announced- full story and analysts’ reaction…

 


Powered by Guardian.co.ukThis article titled “US budget deal brings relief; Lloyds hit with record fine over bonuses – business live” was written by Graeme Wearden, for theguardian.com on Wednesday 11th December 2013 13.25 UTC

Simon Chouffot, spokesperson for the Robin Hood Tax campaign, says the record fine imposed on Lloyds over its staff bonus schemes shows that the government is still being too soft on banking greed:

“The people who run Britain’s banks seem to hold the public in total contempt – pressurising staff into ripping the rest of us off. Businesses are supposed to serve customers – but with banks, it’s the other way around.”

“Issuing fines after the latest scandal happens to be unearthed will not fundamentally change the relationship between banks and society. The Government must get a grip on the culture of greed in the sector and ensure it starts contributing positively to society.

Worth noting that Lloyds says it has now mended its ways.after continuing to use incentive schemes such as the ‘champagne bonus’ more than two years after the taxpayer bailed it out.

Market update

Back in the markets, and the big three European indices are all positive — as traders take some comfort from the détente between Democrats and Republicans over the US budget (see opening post onwards for details and reaction).

BAE Systems is the biggest riser on the FTSE 100, up 2.5%, with analysts predicting defence stocks will benefit from the increased US spending.

Liberum Capital analysts:

This is progress and will allow budget prioritisation.

Economists say the US economy will benefit too:

FTSE 100: up 25 points at 6551, +0.4%

German DAX: up 29 points at 9143, +0.3%

French CAC: up 33 points at 4124, + 0.8%

The boss of Tesco Bank also agrees that whopping bonuses for bank sales staff are counter-productive.

Updated

Our Money editor, Patrick Collinson, argues that Lloyds didn’t heed banking scandals of the past when it offered its staff hefty bonuses for selling products, and demotion if they failed.

Here’s a flavour:

The FCA uncovered incentives such as “champagne bonuses” and “grand in your hand” that owe more to the culture of Wall Street trading that a high street bank giving advice on the hard-earned savings of the Mr and Mrs Migginses of Britain. If Lloyds staff failed to meet their targets, they could lose nearly half their salary. No wonder desperate employees ended up flogging policies to themselves and their family members to keep food on the table.

As usual, the directors of the bank will be contrite, will say that lessons have been learned, and that it’s different this time. But one important fact should always be remembered about Britain’s bankers. How many have been jailed since the start of the financial crisis? None. Until the penalties become personal, the likelihood of any lessons being learned will remain at zero.

More here: Lloyds has failed to learn the lessons of previous mis-selling fines

Updated

Back on Lloyds…….. and unions are saying that they warned against the kind of sales targets at the heart of today’s record fine (details from 9.21am)

Dominic Hook, Unite national officer, said:

Despite the countless reports and investigations into the conduct of the banks the industry clearly has not learned the lessons of the financial crisis nor heard the concerns of customers and staff in order to adequately change.

(reminder, our news story on the fine is here)

Nikos Magginas, economist at National Bank, agrees that there are some glimmers of hope amid the news that Greece’s unemployment rate has hit a new high of 27.4%.

Magginas said (via Reuters):

The decline in the number of those employed was the lowest since early 2010.

The data shows a stabilisation trend in the jobless rate and a slowdown in new job losses, helped by a strong performance in tourism.

Updated

Looking for more details of how Lloyds staff were lured into mis-selling products by a flawed bonus structure, leading to today’s record fine of £28m? Look no further….

Lloyds mis-selling scandal: Q&A

It includes what to do if you think you were caught up in the scandal.

Italian PM promises reforms

In Italy, prime minister Enrico Letta has warned MPs that the country will slide into chaos unless they back him in a confidence vote due later today.

Letta urged politicians to throw their weight behind his reform programme, ahead of the first test of his parliamentary muscle since Silvio Berlusconi quit his coalition — trimming Letta’s majority.

Letta was also scathing over Italy’s failure to reform, saying MPs had avoided meaningful changes for 20 years.

Reuters has the details:

“I’m determined to work with everything I have to prevent the country falling back into chaos,” he said, pledging to throw his weight behind efforts to fight a growing tide of political disillusion and hostility to the European Union.

He said the next 18 months would be devoted to a broad package of institutional reforms aimed at creating a stable basis for economic growth, which he said should reach 1 percent in 2014 and 2 percent in 2015.

As well as a new electoral law and measures to untangle the conflicting web of powers between different levels of the administration, he promised to overhaul parliament to remove the Senate’s power to vote no confidence in the government.

He said the upper house would become a review chamber for legislation passed in the lower house, removing one of the key factors causing stalemate in the Italian political system.

On the economic front, he promised to rein in the deficit, cut Italy’s towering public debt, the second highest in the euro zone as a proportion of the overall economy, lower taxes on families and companies, reduce unemployment and boost public investment.

Privatisations would continue and the government would consider allowing employees to buy shares in the post office and other public companies, he said.

The lower house of parliament is expected to hold a confidence vote in the early afternoon, followed by the Senate tonight. Letta is expected to win both votes.

Updated

Greek unemployment rate rises

Greece’s unemployment rate has risen to a new record high, but there may still be some reasons for optimism.

ELSTAT, the country’s statistics body, reported that the number of people classed as unemployed rose by 14,023 between August and September. That pushed the jobless rate up to 27.4% in September, up 0.1 percentage point on August’s 27.3%.

The number of unemployed people rose by 14,023 persons in September to 1,376,463, a 1% increase during the month.

But the number of people in work also rose, by 5,397, to 3,639,429.

Those classed as inactive (not working or looking for work) dropped by 5,296 persons, which may suggest more people are now trying (and failing) to find a job.

Still, on an annual basis, the unemployment total is up by 5.9% and the employment total is down by 1.5%.

And the youth jobless rate remains a scar, at 51.9%.

The data is seasonally adjusted. ELSTAT’s believes there has been “a relative stability in the estimated seasonally adjusted unemployment rate” since the summer, but we’ll need to wait several more months until the picture becomes clear.

Here’s the official release.

And here’s some reaction:

Updated

Fog update: it’s not cleared yet:

Here’s our news story on the fine imposed on Lloyds for operating flawed bonus schemes for its staff:

Lloyds Banking Group fined record £28m in new mis-selling scandal

Updated

Now here’s an idea to keep Britain’s bank bosses in line:

The Independent’s Ben Chu points to the scale of the bonuses which Lloyds offered its staff to encourage them to sell products:

Back in Europe, the Finnish prime minister says he’s not given up hope of a proper deal on banking union before the end of the year (despite the limited progress made last night). That’s via his official spokesman.

Updated

Champagne bonus, anyone?

The FCA’s ruling against Lloyds includes detail of the bonus schemes that drove staff to sell inappropriate products to its customers:

· Variable base salaries

Advisers could be automatically promoted and get a pay increase or be automatically demoted and have a pay reduction depending on their sales performance. For a Lloyds TSB adviser on a mid-level salary, not hitting 90% of their target over a period of 9 months could see their base annual salary drop from £33,706 to £25,927; and if they were demoted by two levels their base pay would drop to £18,189 – almost a 50 per cent salary cut. In the worst example that the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted.

· Bonus thresholds

Both firms had in place thresholds that meant should a certain sales target be reached large bonuses could be earned. At Lloyds TSB this incentive was called the ‘champagne bonus’ and could see an adviser receiving 35% of their monthly salary as a bonus as soon as they reached their sales target.

Updated

Lloyds responds

And here’s the full statement from Lloyds:

Lloyds Banking Group accepts the findings of an FCA investigation into its historic systems and controls governing bancassurance legacy incentive schemes for branch advisers, and has agreed to pay a fine of £28m.

The Group launched its new strategy in 2011 to fully refocus the business on its customers. As part of that approach, the Group has been addressing historic issues and ensuring that customers get fair and appropriate outcomes.

As soon as these issues were identified in 2011, the Group acted immediately to make significant changes to ensure that all its schemes focused on doing the right things for customers and providing good service. The FCA has acknowledged that we have made substantial improvements to systems and controls governing incentives.

Lloyds Banking Group has co-operated fully throughout the enforcement investigation and has agreed with the FCA the next steps with regard to customers.

The Group has already commenced a review to address potential customer impacts that may have occurred as a result of these failings. We are already contacting customers, and will continue to contact potentially affected customers over the coming months. Customers do not need to take any action at this stage to be included in the review and they will be contacted in due course.

The Group recognises that its oversight of these particular schemes during the period in question was inadequate and apologises to its customers for the impact that they may have had. We are determined to ensure that any customer impacts are dealt with quickly and fully.

Lloyds has accepted the FCA findings, and says the record £28m fine won’t have a ‘material impact’ on the group.

11-Dec-2013 09:27 – LLOYDS BANKING GROUP SAYS ACCEPTS FINDINGS OF FCA INVESTIGATION INTO SALES PRACTICES 

11-Dec-2013 09:26 – LLOYDS BANKING GROUP SAYS COST OF FCA ENFORCEMENT AND REVIEW IS NOT EXPECTED TO HAVE MATERIAL IMPACT ON GROUP 

Updated

The FCA’s description of Lloyds’ sales practices is depressing, but it’s not a shock. Back in March, my colleague Hilary Osborne exposed how there was still a dangerous “‘sell, sell, sell” culture at the heart of Halifax, a key part of Lloyds Banking Group.

She wrote:

An employee of Britain’s biggest banking group has described a “disheartening and demotivating” sales culture that pressurises staff into selling financial products to customers in order to meet strict points-based daily targets.

The man, who did not wish to be named, but we will call David Elliott, works as a financial consultant for Halifax.

He says his job chiefly entails trying to sell insurance to customers. “I’ve been a counter clerk, banking adviser, financial adviser and now I’m a financial consultant – so I’ve been at every level there is in a retail bank. It gradually gets worse the higher you climb the ladder and now I’m at the highest seller point in banking and the pressure is abnormal,” he says.

More here: Exposed: bank’s high-pressure sales culture continues

Updated

FCA: Lloyds investigation does not make pleasant reading

Tracey McDermott, the FCA’s director of enforcement and financial crime, said that the watchdog’s investigation found serious problems at Lloyds:

The findings do not make pleasant reading. Financial incentive schemes are an important indicator of what management values and a key influence on the culture of the organisation, so they must be designed with the customer at the heart. The review of incentive schemes that we published last year makes it quite clear that this is something to which we expect all firms to adhere.

Customers have a right to expect better from our leading financial institutions and we expect firms to put customers first – but firms will never be able to do this if they incentivise their staff to do the opposite.

McDermott added that Lloyds TSB and Bank of Scotland have made “substantial changes” in recent months, reviewing its sales practices and paying compensation to those affected.

Record fine for Lloyds over mis-selling failings

Just in: the UK’s Financial Conduct Authority has hit Lloyds Banking Group with the biggest ever fine levied for retail banking misbehaviour in the UK, after using unacceptable sales targets to motivate its staff.

The FCA has penalised Lloyds £28m, after an investigation found widespread evidence that the bank ran flawed sales incentive schemes that encouraged staff to sell products to customers regardless of whether they were in their best interest.

In a damning indictment of how Lloyds ran its business, the FCA explained that staff at Lloyds TSB Bank and Bank of Scotland were put under undue pressure to hit sales targets or risk losing bonuses.

These bonuses could be almost half of an employee’s wage packet.

The products in question were mainly investment products (such as share ISAs) and protection products such as PPI.

At one stage, staff were offered “a grand in your hand” for hitting a particular target.

In one instance an adviser sold protection products to himself, his wife and a colleague to prevent himself from being demoted, the FCA said.

Lloyds’s fine was increased by 10% because regulators had warned that its incentive schemes were poorly managed, and because it was fined for the unsuitable sale of bonds in 2003 “caused in part by the general pressure to meet sales targets”.

The FCA also found that Lloyds staff received bonuses even if the bank knew they’d sold unsuitable products:

229 advisers at Lloyds TSB received a bonus even when all of their assessed sales were deemed unsuitable or potentially unsuitable; and 30 advisers received a bonus in the same circumstances on more the one occasion.

Updated

European finance ministers, incidentally, didn’t make as much progress as we’d hoped over banking reform last night. After a long, drawn-out meeting, ministers agreed some broad details, but couldn’t decide one key question — how to share the cost of dealing with a failed bank.

The FT’s Peter Spiegel and Alex Barker stayed up late for the action (or lack or) and reported:

A marathon negotiating session in Brussels produced a draft compromise, broadly based on Germany’s revised position, which sets out how eurozone countries cede power to a central bank resolution authority and establish a common funding network.

While the basic parameters are likely to survive in a final deal, several countries raised strong objections to Berlin-backed conditions that slowly phase in a single resolution fund – and gives big countries a greater say on when it can be used.

These voting arrangements and financing details – including the unaddressed issue of what happens should the bank resolution funds be exhausted – will be left to a final emergency meeting next Wednesday, on the eve a summit of EU leaders.

Here’s their full story: EU sets out framework for banking union

Updated

City traders also faced a challenge to find their offices in the fog gripping London today — as this lovely picture shows:

There’s a pretty muted reaction in the City, with the FTSE 100 up just 6 points.

It’s being dragged down a little by Royal Bank of Scotland – whose shares have fallen 1.6% as investors react to the news that finance director Nathan Bostock is resigning, apparently to join Santander.

Traders are also calculating that the outbreak of peace on Capitol Hill will encourage the Federal Reserve to begin slowing its stimulus programme, currently pumping $85bn into the system each month.

Budget deal: what the media say

The Financial Times reckons the deal is a decent start on the long road to dealing with America’s debts:

Due to its limited nature, the deal does not tackle broader fiscal problems affecting the US, such as the long-term cost of health and pension plans which could become more expensive as a consequence of the ageing population.

It also does not contain big changes to the tax code, which many on Capitol Hill want to see transformed.

“This bipartisan deal looks like a good step, but it doesn’t address the real drivers of our long-term debt,” said Michael Peterson, president of the Peter G Peterson Foundation, which advocates for a bigger deficit reduction deal. “We should all welcome our lawmakers coming together on a budget agreement that would end the recent cycle of governing by crisis. But make no mistake – we still have a lot more to do to put our nation on a sustainable fiscal path.

FT: US Congress strikes budget deal

Marketwatch points out that some in the Republican party could oppose it – -suggesting a battle to get it through the House of Representatives

House Speaker John Boehner praised the deal but didn’t address whether it can pass the House.

“While modest in scale, this agreement represents a positive step forward by replacing one-time spending cuts with permanent reforms to mandatory spending programs that will produce real, lasting savings,” he said in a statement.

Sen. Marco Rubio, a Florida Republican who may run for president, quickly came out against the deal, calling it “irresponsible” and charging that it doesn’t reduce the U.S. debt.

Marketwatch: Murray, Ryan reach two-year U.S. budget deal

Business Insider breaks down the numbers;

The legislation provides $63 billion in sequester relief over two years, which is split evenly between defense and non-defense programs. This is offset by targeted spending cuts and non-tax revenues that total $85 billion. Ryan and Murray said that the deal reduces the deficit between $20 and $23 billion.

Murray said that the deal includes an additional $6 billion in revenue from additional federal worker pension contributions. Military employees take the same hit in the deal.

BI: BUDGET DEAL REACHED — Here’s What You Need To Know

And here’s the Guardian’s take:

Aspects of the deal may alarm both parties, particularly Democrats, who are being asked to accept additional spending cuts, no new taxes and increased pension contributions from public sector workers.

Nevertheless the prospect of ending years of political deadlock appeared to satisfy political leaders of both parties, whose expectations have been lowered by the recent government shutdown and a virtual standstill on a host of other issues.

US congressional leaders unveil two-year budget deal

The deal doesn’t address one problem, though — America’s debt ceiling. Congress still needs to agree to raise US borrowing limits in February 2014, or risk a default.

The thawing of relations between Republicans and Democrats on Capitol Hill may mean the debt ceiling is less of a poisoned pill?

Here’s Michael Hewson of CMC Markets’s take:

The new deal, if approved by Congress, which seems likely, would last until 2015, and ease the severity of some recent budget cuts, with slightly higher spending levels of $63bn.

This agreement, while a positive for markets, would then remove one potential land mine for markets ahead of February’s debt ceiling deadline, which still remains unresolved. It is likely that neither side will be pleased with the deal on the margins, but the hope is that enough Democrats and Republicans will be able to swallow it to be able to push it through Congress.

Updated

The agreement reached by Ryan and Murray comes to $85bn — made up of $63bn in cancelled sequestor cuts, and and around $22bn in deficit reduction.

Small beer, compared to America’s $17 trillion national debt — but enough to avert another shutdown in January.

Chris Weston of IG says it’s a cause to celebrate:

Finally US politics is starting to look like it can actually function without political partisanship or using the economy or markets as a bargaining tool like we’ve seen over the recent year.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, reckons the deal means investors should fret less about America’s fiscal problems in 2014.

He told CNBC the deal was good for stocks:

The short-term fiscal easing next year, the fact that Congress after years of dysfunctional behaviour has reached a compromise on their own without a crisis – all of those things are positive.

US budget deal could avert another crisis

Good morning, and welcome to our rolling coverage of the world economy, the financial market, the eurozone and the business world.

There’s a sense of relief in the financial world this morning after an unexpected burst of bipartisan co-operation in Washington.

Democrats and Republicans negotiators have agreed a deal to set spending levels until 2015 – averting the risk of a repeat of the government shutdown which gripped the markets in October.

In a welcome development, Senate Budget Committee chairman Senator Patty Murray, and her House counterpart Paul Ryan, stood shoulder-to-shoulder to announce the proposal, which could be voted through within days.

Ryan declared:

I think this agreement is a clear improvement on the status quo. It makes sure we don’t lurch from crisis to crisis.

The plan hammered out by Murray and Ryan is significant for two reasons — it eases some of the pain of looming spending cuts (the sequester), and it could end the damaging pattern of deadlock between the two parties.

President Obama hailed both sides for breaking “the cycle of short-sighted, crisis-driven decision-making to get this done.”

Under the agreement, federal spending would be fixed at around $1.012tn — a compromise between the two sides.

It means an extra $63bn in government spending over the next two years — which should please the International Monetary Fund, which feared the US was tightening fiscal policy too fast.

That’s got implications for the European economies too — the sequester threatened to knock the eurozone’s already weak recovery off course. 

As our Washington Bureau chief Dan Roberts explains, the deal is not without its critics:

Rather than raising new taxes to pay for the sequester relief – something Republicans were implacably opposed to – negotiators agreed to raise additional government revenue through fees, such as airport charges and by demanding that federal workers pay more toward their pensions.

Union umbrella group, the AFL-CIO, has already hit out at the proposal, arguing that federal workers were acting as a “punching bag” for Republicans.

The deal still needs to be voted through Congress. And it doesn’t fix America’s fiscal challenges – but it’s a start.

As Murray put it:

For years we have lurched from crisis to crisis. That uncertainty was devastating to our fragile economic recovery.

Reaction to follow, along with other details of the day ahead….

Updated

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