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Britain’s top companies lose £36bn in value as stock markets react to US warnings on QE and drop in Chinese manufacturing. Ben Bernanke, chairman of the Federal Reserve, hinted on Wednesday about a possible easing of its $85bn-a-month bond-buying programme, in a testimony to Congress…

 


Powered by Guardian.co.ukThis article titled “Stock markets lose nerve on fears of end to quantitative easing” was written by Nick Fletcher, for The Guardian on Thursday 23rd May 2013 18.13 UTC

A day after the FTSE 100 came within 90 points of its December 1999 all-time high, the index slumped 143 points yesterday to 6696, wiping £36bn off the value of Britain's top companies.

The 2.1% fall was the index's worst in one day since it lost just over 2.5% a year ago to the day, on fears that Greece could leave the eurozone. But after its recent strong surge this latest fall in the blue-chip index merely wipes out the gains made since last Friday.

Stock markets around the world tumbled from their recent highs as investors took fright at weak Chinese manufacturing data and signs that the US Federal Reserve might end its bond-buying programme sooner than expected.

Markets have been buoyed in recent months by the various measures taken by central banks to stimulate the global economy by flooding it with cash. Measures include printing money, buying up mortgage-backed bonds and keeping interest rates at historic lows. Much of the recent economic data indicated the policy was having the desired effect, while the long-running eurozone crisis seemed to have entered a period of relative calm.

But analysts have been warning that any signs the money taps were about to be turned off or that the global economy was not recovering as expected would be taken badly by the markets.

Thursday's rout began with comments late on Wednesday from the Federal Reserve suggesting that America could end its quantitative easing, or QE, programme in the near future, and accelerated after a Chinese survey showed factory activity had fallen for the first time in seven months in May. The Nikkei 225 dropped more than 7% overnight on Wednesday to 14,483, its biggest one-day fall for two years. However, analysts pointed out that the Japanese index had almost doubled in value since November, so was still well ahead for the year.

European stock markets fell, with Germany's Dax and France's Cac both closing around 2.1% lower, while Italy's FTSE MIB fell 3% and Spain's Ibex was down 1.4%.

On Wall Street the Dow Jones industrial average, which had reached an all-time high this week, fell sharply when trading opened on Thursdaybefore staging a recovery. By lunchtime the US index was down just 15 points following stronger than expected weekly jobless claims and home sales.

Rupert Osborne, futures dealer at City broker IG, said: "The stronger home sales and jobless claims … fit with the idea that the US economy is approaching a point where a reduction in stimulus is appropriate. This neatly illustrates the irony of the position; traders across the world are openly hoping for poor US data since this keeps the Fed involved."

Ben Bernanke, chairman of the Federal Reserve, had hinted on Wednesday about a possible easing of its bn-a-month bond-buying programme, in a testimony to Congress. These comments were later compounded by the minutes of the Fed's last policy-making meeting, which showed that some members thought such a move could come as soon as June, much earlier than any analysts had been expecting.

Michael Hewson, senior market analyst at financial spread-betting company CMC Markets UK, said: "There was an expectation after Bernanke's testimony on Capitol Hill that the latest Fed minutes wouldn't add too much to overall market expectations around the prospects for further easing against expectations of possible tapering.

"The release of the latest Fed minutes completely changed that dynamic with a single line, 'a number of participants express a willingness to reduce QE in June'.

"The disappointing Chinese manufacturing data gave markets the extra nudge over the edge that was needed and persuaded investors with money in the game to cash in."

In China the HSBC purchasing managers index fell to 49.6 points in May, from 50.4 the previous month. Any level below 50 produced by the survey of industry indicates a contracting sector. China is a major consumer of commodities, so the signs of a slowdown in the country put metal prices under pressure, with copper down more than 3%. Oil prices also slid lower, Brent crude falling nearly 1% to 2 a barrel.

But gold and silver edged higher as investors searched out safer assets amid the sell-off.

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USA 

Recession in the US might have been avoided, but stock market glee will fade and March could bring the start of $1.2tn cuts. Negotiations ahead will be complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing…



Powered by Guardian.co.ukThis article titled “Fiscal cliff still in view for Americans facing income and spending cuts” was written by Nils Pratley, for The Guardian on Wednesday 2nd January 2013 20.16 UTC

It’s a triumph! The fiscal cliff has been avoided, US politicians have discovered the spirit of compromise and stock markets are booming. Happy new year.

Sadly, none of the above is accurate. First, the largest part of the cliff remains, since $1.2tn of spending cuts over a decade will start to be implemented from March if no further deal can be done. Second, it’s stretching credibility to conclude the bipartisan mood in Washington is softening; the compromise that will see income taxes rise slightly for the richest Americans is so modest that it could have been struck weeks ago without brinkmanship.

Third, the stock market glee requires context. A one-day rise of 2% or so in share prices is not be sniffed at but we’ve seen larger rallies greet overhyped “fixes” for the eurozone crisis.

These usually fade once investors reflect that the avoidance of an immediate calamity is not the same thing as a determined attempt by politicians to address an underlying debt problem. Reaction to the US fiscal fudge could follow the same script: near certain recession has been avoided, but that’s not much to shout about.

So fans of clifftop dramas should settle back and prepare for another episode as the March deadline approaches. Indeed, Barack Obama barely paused before warning Republicans that they’ve “got another thing coming” if they believe spending cuts alone will be the focus of the next round of talks.

In other words, even the tax element of the tax-and-spending debate has not been settled definitively.

What’s more, negotiations ahead will be further complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing.

The new year deal did not contain a provision for an increase – the clearest illustration of how compromise was achieved only by ignoring the tougher issues.

It’s a case of out of the frying pan and into the fire, concluded John Ashworth, senior economist at the thinktank Capital Economics. “Given the cantankerous nature of the negotiations over the past 10 days, it is now very possible that we will see another standoff over those spending cuts and the debt ceiling that leads to a shutdown of the federal government by late February or early March,” he predicts.

That worry, it hardly needs saying, is unlikely to prompt cash-rich US companies to decide that this is the moment to increase investment and hire more workers.

Consumers will also be nervous; many now face immediate cuts in their disposable incomes because the less-heralded element of the deal was the agreement not to extend the temporary reduction in payroll taxes, the equivalent of UK national insurance contributions. For those earning $50,000 a year, it means a $1,000 cut in income.

Surely, it might be said, the political stakes are now so high and the confidence of US consumers so fragile, that a so-called “grand bargain” on tax and spending can be thrashed out at the second attempt. Don’t bet on it.

The missing ingredient in this drama is alarm in financial markets. The US can still borrow for 10 years at less than 2% (partly because the US Federal Reserve is buying US debt and other assets at a rate of $85bn a month), the dollar is relatively stable and the US economy is still growing.

As Richard Lewis, at the fund manager Fidelity Worldwide, puts it: “We are unlikely to see much change in behaviour unless or until serious dollar weakness calls time on Washington shenanigans.”

If the muddle-through option is still on the table in March – and it probably will be – don’t be surprised if the politicians again grab it.

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U.K. manufacturing is down, construction is struggling, exporters are having a torrid time – and then there’s the eurozone recession. Here is a view of the current conditions in the U.K. manufacturing, housing, construction and banking sectors…



Powered by Guardian.co.ukThis article titled “UK economy: the problem sectors” was written by Phillip Inman, economics correspondent, for The Guardian on Friday 7th December 2012 20.32 UTC

Manufacturing

Industrial output is now at its lowest level since May 1992 and manufacturing is 20% down on its peak. Latest figures showed a month-on-month fall of 0.8%, far worse than economists had expected and the 16th consecutive month when manufacturing output was lower than the same month a year earlier.

The Office for National Statistics found most areas of manufacturing were on the slide, with chemical production and wood and paper manufacture leading the downturn.

A fall in the value of the pound and the opening up of new destinations for UK exports – such as Indonesia and Columbia – have failed to lift the sector, which is far more dependent on trade with the euro area than ministers would like. The British Chambers of Commerce said the sector remained well managed and prepared for an upswing, but needed more government help to boost exports to fast developing countries.

Construction

There may be plenty of cranes on the London skyline, but the construction sector outside the capital is dead. Commercial building, the lifeblood of most large firms, has failed to recover from the financial crisis. The hole in the heart of Bradford, where a Westfield shopping centre is already four years late, is an example of building projects that have remained strictly on the drawing board.

Civil engineering has suffered from a lack of infrastructure improvements after a near-£30bn cut in public investment spending. The CBI has urged the government to use the downturn to upgrade the road and rail network. The Treasury encouraging upgrades to the broadband network has failed to counteract falls in investment elsewhere.

Banking

The Bank of England has become increasingly frustrated at the unwillingness of banks to increase their lending to businesses and households. In the summer it set up an £80bn Funding for Lending scheme that allows banks to offer cheaper loans to customers. Banks have reported using the money to lower mortgage rates, but anecdotal evidence suggest older, more creditworthy customers have gained while first-time buyers remain on the sidelines. More importantly, many economists argue the loans on offer are small in comparison to the size of the problem.

The UK’s major banks remain in a dire financial situation and need to build up their capital reserves to protect themselves against another financial crash. The central bank governor, Sir Mervyn King, insisted earlier this month that UK banks were well-capitalised but said it would be “sensible” to improve their resilience further. He warned “an erosion of confidence” was damaging economic activity, creating “a spiral characteristic of a systemic crisis”.

Trade

British exporters are having a torrid time battling the headwinds of the slowing Chinese economy, the eurozone crisis and uncertainty in the US over the fiscal cliff (the tax rises and spending cuts timed for January which could halt US economic progress in its tracks).

According to the latest figures from the ONS, in the three months to October the country racked up its biggest trade deficit since records began. The trade gap widened to a record £28bn, from £25bn in the quarter ended July, the ONS said, as sales of goods into the rest of the European Union declined sharply.

George Osborne promised more help for exporters with loan and credit guarantees through the government’s UKTI export arm. But the sums remain small compared to the size of export orders and firms seem reluctant to take risks in the current economic environment.

Housing

Housebuilders have largely shed the debts acquired in the crash and become profitable again. But building remains at historic lows. The last time the UK built so few homes was in 1931.

MPs and business groups have called for a 1930s-style house building boom, but with no success so far. Ministers are planning to rip up planning rules to allow developers a clear route on greenfield sites, but even if this plan goes ahead, it will be some time before there are any spades in the ground.

Developers, which already have several years of plots on their books with planning permission, have refused to increase the number of new homes while customers are constrained by high mortgage borrowing costs. They blame the banks for withholding credit or charging too much for credit as the main reason for their inactivity.

Prices are slipping, putting another brake on investment in the sector. Halifax said prices are likely to stay flat next year after a 1.3% fall in 2012. Most families are unwilling to buy homes in a market where prices are falling, though buy-to-let investors have snapped up thousands of homes since the downturn, increasing the size of the rental market.

The eurozone

The machine at the heart of the eurozone is spluttering: the Bundesbank has sliced more than 1 percentage point off its forecast for economic expansion in Germany next year – highlighting severe aftereffects of the sovereign debt crisis.

The German central bank revealed the crushing blow to confidence and growth that has struck the euro area when it cut its projection for growth in 2013 from the 1.6% it had expected six months ago to a grim 0.4%. It also said the German economy, Europe’s largest, will grow only 0.7% this year, down from its previous forecast of 1%. The downgraded forecast shows Germany is no longer immune from the downturn in the rest of the currency bloc.

Separately, the German finance ministry said industrial output fell 2.6% in October, while manufacturing crashed by 2.4%, providing “further evidence that the economy’s backbone is quickly losing steam,” said the ING analyst Carsten Brzeski.

Without an expansive and confident Germany, it is almost certain the eurozone’s double-dip recession will continue into 2013, dragged down by severe contractions in the southern states.

There is also a feedback loop into UK trade should Germany suffer a prolonged fall in demand. Germany and the rest of the EU still comprise over 50% of UK exports, despite the government’s emphasis on redirecting trade elsewhere to rapidly developing economies in Asia, Africa and South America.

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Bank of England cut its growth projections for the UK economy and opened the door to more quantitative easing, Sir Mervyn King warns there is still some way to go before economy recovers as Bank predicts growth will flat-line this year…

 


Powered by Guardian.co.ukThis article titled “Bank of England cuts UK growth forecast” was written by Larry Elliott and Simon Goodley, for guardian.co.uk on Wednesday 8th August 2012 10.29 UTC

Sir Mervyn King, the Bank of England governor, hinted at further action to boost the ailing UK economy on Wednesday after Threadneedle Street slashed its 2012 growth forecast to zero and said inflation was back under control.

King said there was no urgent need for fresh stimulus, but signalled more money creation through the Bank’s quantitative easing (QE) programme in response to an economic performance that has “continually disappointed expectations of a recovery”.

Against a backdrop of a worsening crisis in the eurozone and tighter lending conditions imposed by UK banks, the Bank’s quarterly inflation report cut its growth forecast for 2012 from the 1.25% pencilled in three months ago and believes the bounce-back in 2013 will be weaker than previously anticipated.

King said: “The overall outlook for growth is weaker than in May, reflecting downside news in the near term and, in the medium term the possibility that the weakness in output and productivity growth that we have seen since the financial crisis persists. GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.”

The governor said it would not be until 2014 that activity returned to its pre-recession peak in 2008 and used an Olympic analogy to underline that recovery would be long and hard.

“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing. Many of the conditions necessary for a recovery are in place, and the monetary policy committee [MPC] will continue to do all it can to bring about that recovery. As I have said many times, the recovery and rebalancing of our economy will be a long, slow process. It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead.”

King said it would take a “bit of time” to assess the impact of the Bank’s new funding for lending scheme (FLS), which came into force last week and is designed to encourage banks to lend more at lower interest rates. Last month Threadneedle Street announced a £50bn increase in its QE programme to £375bn by November, and the governor said further purchases of government gilts to create money was an option.

On the foreign exchanges, the pound rose slightly after King expressed strong reservations about cutting the bank rate from its historic low of 0.5%. The governor said there was a risk that such a move could prove counterproductive by making life more difficult for some banks and building societies.

Vicky Redwood, UK analyst at Capital Economics, said it would not take much to tip the nine-strong MPC towards further action. “We expect another £50bn [of QE] to be announced in November when the current purchases are completed.”

The governor strongly defended the Bank’s forecasting record against accusations that it had persistently been over-optimistic about the outlook for growth, pointing to a euro crisis that “goes on and on and on” as the reason for the latest downgrade as it pushes up costs for domestic borrowers.

King said tumbling inflation would eventually boost consumer spending by raising real incomes, while the FLS was “bigger and bolder than any initiative so far tried to get the banks lending again”.

Labour seized on the admission in the inflation report that banks might use the FLS to inflate their profits rather than lowering interest rates, and said it was time for a Plan B.

Rachel Reeves MP, Labour’s shadow chief secretary to the Treasury, said: “With growth forecasts slashed yet again, not just this year but in future years too, it is clear that we cannot go on with the same failing plan from this government. The chancellor’s policies aren’t only causing short-term pain, but long-term damage to our economy too. And despite the crisis in the eurozone, Britain is just one of two G20 countries in a double-dip recession.”

King said the Bank found it difficult to explain why the jobs market had been so resilient at a time when official figures have shown the economy deep in a double-dip recession. Threadneedle Street has lowered its longer-term growth projections for the economy in the belief that there has been permanent damage caused by the deepest and longest downturn since the second world war.

John Hawksworth, chief economist at PricewaterhouseCoopers, said: “It seems likely that we have entered a ‘new normal’ period where growth will be relatively subdued by historic standards for some years to come as the banking system remains impaired and global commodity prices remain relatively high and volatile.”

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Calls for ‘banking union’ to save euro after Paris and Brussels support Spain’s plea for EU rescue of its beleaguered banks



Powered by Guardian.co.ukThis article titled “Germany weighs up federal Europe plan to end debt crisis” was written by Ian Traynor in Brussels and Giles Tremlett in Madrid, for The Guardian on Monday 4th June 2012 21.09 UTC

Europe’s leaders appear to be edging towards an ambitious and controversial new blueprint for a federalised eurozone after Paris and Brussels threw their weight behind Spain’s pleas for an EU rescue of its beleaguered banks.

At the start of three weeks likely to be crucial to the survival of the euro, the new French government and the European commission voiced strong backing for a new eurozone “banking union” to save the single currency.

The plan could see vast national debt and banking liabilities pooled – and then backed by the financial strength of Germany – in return for eurozone governments surrendering sovereignty over their budgets and fiscal policies to a central eurozone authority.

Spain’s banking crisis, together with extreme volatility in Greece ahead of the rerun general election on 17 June and the French parliamentary poll on the same day, are compounding the febrile atmosphere and worrying the markets.

A “gang of four” – the European council president, the commission chief, the president of the European Central Bank and the head of the eurogroup of 17 finance ministers – has been charged with drafting the proposals for a deeper eurozone fiscal union, to be presented to an EU summit at the end of the month.

“You can’t demand eurobonds but not be prepared for the next step in European integration,” Germany’s chancellor, Angela Merkel, said at the weekend. “We won’t be able to create a successful currency like that and no one outside will lend us money any more.”

Pierre Moscovici, the new French finance minister, said eurozone bailout funds should be used to inject cash into collapsing banks. Such direct payments are impossible under existing rules. Moscovici added that France wants the summit to set up a eurozone banking union, which would take on responsibility for propping up failing banks and guarantee depositors’ savings across the 17 countries.

The commission and France are piling pressure on Germany to line up behind the proposal, which Merkel would need to take to her parliament for agreement. Renewed focus on Merkel came as she endured some of the strongest criticism yet seen during the 30-month crisis for the way she has handled the euro turbulence.

Joschka Fischer, the former German foreign minister, warned that his country was at risk of destroying itself and Europe for the third time in a century, and gave Merkel just a few months to change course and save the currency. In an article published on Monday, he wrote: “Germany destroyed itself – and the European order – twice in the 20th century. It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time.”

At a meeting in Berlin on Monday night, José Manuel Barroso, the European commission president, was expected to press Merkel on the issue of bank rescues, which has turned critical because of Spain’s banking emergency.

Spain’s prime minister, Mariano Rajoy, is reluctant to request a full-scale EU bailout because it would come with draconian and humiliating terms. He has the support of Olli Rehn, the European commissioner for monetary affairs. “It is important to consider this alternative of direct bank recapitalisation,” said Rehn, “to break the link between the sovereigns and the banks.”

Under existing rules for the bailout fund, money may go only to governments that can request a state rescue and then use the cash to shore up their distressed banks. The vast bulk of the Irish bailout has gone directly to the country’s ailing banks.

On his debut visit to Brussels, Moscovici called for a change in those rules: “We are in favour of this banking union,” he said. “It’s a fundamental issue for which proposals are on the table.”

Spain’s most senior banker, Emilio Botin, boss of Santander, called on Europe’s rescue funds to help out. He said four of Spain’s banks needed €40bn (£32bn) of new capital “and that will be enough”. Botin’s figures reportedly include €19bn that the Spanish government has already pledged to pump into stricken lender Bankia – cash that Spain does not have.

Botin’s assessment is at odds with banking analysts, who estimate that Spain’s banks need up to €100bn. Santander, which operates a ringfenced banking business in the UK, is not among those judged to need fresh capital. However, it is likely that if new direct bank support were approved for Spain, Ireland and Portugal might request similar treatment.

In a speech in Italy at the weekend, the financier George Soros warned that Merkel had no more than three months to fix the euro, but outlined the prospect of a grim new eurozone controlled by Berlin.

“The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany,” he said. “Germany is likely to do what is necessary to preserve the euro – but nothing more.

“That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments … it would be a German empire with the periphery as the hinterland.”

The proposals being drafted for the summit are certain to feature calls for a form of eurobond whereby Germany and other smaller creditor countries guarantee the debts of the struggling member states.

The blueprint, not yet finalised, has been played down by the European commission. “There is no masterplan,” said a spokeswoman, Pia Ahrenkilde-Hansen. The notion was also rubbished in Berlin on Monday – but not ruled out. “We are talking about several years and certainly not a solution that we are thinking about in the current problematic situation,” said Merkel’s spokesman.

In return for yielding to the pressure to pay to save the euro, Berlin will insist on major steps towards a eurozone federation or political union with budgetary, fiscal, and scrutiny powers vested in Brussels and in the European Court of Justice, meaning vast transfers of sovereignty from member states.

The Portuguese government said three of its leading banks would receive capital injections of €5.8bn, using funds provided under the country’s €78bn state bailout.

The banks included Portugal’s largest, Millennium, as well as BPI and state-owned Caixa Geral de Depositos. Only one of the country’s major banks, Banco Espirito Santo, is surviving without state funding.

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