Financial Market

In the first business post written for Financial Market, we highlight the recommendation made today by the United Kingdoms Competition Commission ordering British Sky Broadcasting to sell a significant proportion of it shares in competitor ITV PLC. Under the recommendations BSkyB must reduce its share stake from the 17.9% it currently owns to below 7.5%.

The recommendation by the Competition Commission will now go to the Secretary of State for Business, Enterprise and Regulatory Reform who has until the 29th of January to reach a conclusion.

As well as the share reduction the Competition Commission also pushed for pledges that BSkyB would not push for a seat on ITV’s board, but didn’t go as far to recommend that BSkyB sell its entire stake in its competitor.

As ITV’s single biggest stakeholder, claims have been made that by having such a large stake in the company it restricts competition and isn’t in the public interest. It was thought that BSkyB could also influence ITV strategy after it acquired the £940 million stake in November last year, and was seen as an attempt to thwart a potential take over by NTL. NTL latter pulled out of takeover talks and BSkyB’s moves were heavily criticised by rivals BBC and Channel 4.

BSkyB had suggested it transfer its voting rights into a trust but the Competition Commission deemed this would be too difficult to enforce.

Analysts have said that although BSkyB will loose a significant sum if forced to sell of its shares, the company has still succeeded in preventing a takeover of the free to air broadcaster.

At current share prices the sell off could cost BSkyB around £200 million as the value of ITV’s shares have dropped since it bought its stake in the company. BSkyB paid a 17% premium when it first invested with what it called a ‘long term investment plan’, and shares at 0900 GMT were trading at 84 pence, far off the 135p a share it paid.

Graph showing ITV shares over the last 2 years -Source www.lse.co.ukBSkyB is itself owned 39% owned by a subsidiary of Rupert Murdoch’s News Corp.

After news last week about the FED plans to inject liquidity into financial markets through a series of below market rate inter-bank loans totalling $20 million dollars, the European Central Bank has taken further steps pumping a record 348.6 billion Euros ($502 billion) into financial markets.

The emergency move follows last weeks co-ordinated action, and resulted in short term markets rate reducing at the quickest rate for ten years on Tuesday 18th December. The amount invested by the ECB was twice the amount first indicated, and came as a result of 390 private sector banks in the eurozone requesting the emergency funds.

The funds were offered for two weeks to boost liquidity in financial markets at a rate of 4.21%, short of previous market rates and with the intention of easing tightened credit markets. The loosening of those markets will then relieve fears of a Christmas period meltdown, a time of year when banks in particular need more cash to balance increased retails spending.

The loans made available by the ECB are 25 times larger than those the Bank of England previously made available, through a series of three month credits at 5.95% totalling £10 billion.

With the ECB making funds available to banks over a short term period, the aim is that these funds will be passed onto companies and individuals at cheaper rates. Indeed on news of the ECB’s actions the short term lending rate dropped, with the two week euro libor rate falling to 4.4%.

The fact that these short term cash funds were offered at 70 basis points less than the commercial cost of short term money sends out a clear message that things are so grim in the money markets that the ECB will do anything to unblock the system.

The offering of unlimited money at below market rates by the ECB through this immense cash injection is not a magic cure, but is more a step that will tide markets over the holiday period. It seems more an admission that central banks have failed to thaw freezing money markets of the last three months, and the problem still remains more about credit worries than market liquidity.

Toady on the 13th December 2007 a joint plan has welcomed by global financial markets that involves a $20 billion cash injection from a consortium of five world central banks to stave of the growing likelihood of US recession and ease the credit crunch in other financial markets.

The cash injection will be made available in the form of ten of billions of dollars of short terms loans to banks, aimed at lowering inter-bank lending rates. The program called a “term-auction facility” will be available alongside additional expanded lending facilities available from the Canadian and European Central Banks.

The move was welcomed by Banks who reacted negatively to what they called a timid quarter point cut on Tuesday 11th December. On news of the new lending schemes being released U.S. stocks began to show signs of recovery, after late drops on Tuesday following the cut by the FED.

“News that global central banks are pledging liquidity was a positive for the market early in the trading day, but, upon further reflection, some might be pondering if it’s really a solution, or further evidence of just how deeply embedded the problems in the financial system have become,” said Frederic Ruffy, analyst at Optionetics.

News of co-ordinated action with Europe’s top banks demonstrates that the FED is taking additional steps, after lowering the federal funds rate on Tuesday did not accomplish enough in terms of unclogging credit markets.

The main problem in credit markets has not been that rates were too high, but that financial institutions have been unwilling to lend after subprime mortgages and other securities had been badly mispriced. The added liquidity that the “term-auction facility” should provide should relieve some of that pressure on financial institutions.

Through this action the Fed is actively forcing liquidity into financial markets, rather than having banks demand it. This extra liquidity will be supplied at whatever price the market deems, rather than setting an interest rate first and letting the amount of the loans be determined by demand from banks.

As part of the plans there are also procedures in place to protect any bank accesses the funds, and so will remain anonymous. The aim here is avoiding any stigma a bank may receive regarding mis-managed liquidity property.

Earlier this month Iran’s President described the US Dollar as a ‘worthless piece of paper’ and at a time when speculative selling of the dollar reaching all time highs, Financial Market examine whether the days of the Dollar as a dominant international trading currency are numbered.

On the 11th of December the Pound rose against the Dollar for the forth consecutive day, creating speculation that the FED will cut interest rates subsequently reducing the attractiveness of Dollar assets further, in order to stave off a looming recession.

In additional news the FED has also announced a 0.25 point reduction marking the greatest easing of borrowing costs since the last recession in 2001.

It is not only against the pound that dollar is low, and across a range of world currencies the dollar has recently reached all time lows. This has gone as far as the currency losing a quarter of its value over the last five years against leading currencies. In one example at one point in 2002 the Euro was marked at 86 cents; today it buys $1.48.

The struggles of the Dollar have sent waves of scepticism throughout world markets, including several over hyped high profile cases when the Euro has been preferred to the Dollar. More realistically there are ongoing debates regarding Dollar dominated reserves being switched to alternate currencies in a similar trend to that of the Pound being replaced 50 years ago when Britain was the worlds greatest trading power.

Although currency values do ebb and flow there is an air of crisis with the current depreciation of the dollar due to the shear volume of reserves that are made up of a deprecating dollar assets. Foreign stockpiles have tripled since the beginning of decade holding $5.7 trillion Dollars and accounting for 65% of world wide stockpiles. The largest two single holders of dollar dominated assets are currently China and Japan holding 1.4 trillion and 1 trillion Dollars respectively.

The effects off holding Dollar dominated reserves over the past five years have meant huge financial loss to those countries, and countries are understandably itchy about how much more they can allow their reserve value to deprecate.

If speculation was true and foreign exchange reserves decide to dump the Dollar as a reserve currency cutting recent losses, it would result in a further slump of currency value. Therefore lure of selling first is also attractive to countries with large Dollar stockpiles as central banks are already overloaded with the currency, meaning those who abandon ship last may loose even more.

A falling Dollar is not a new scenario and America has staved off similar threats in the past, but with a slowing economy too, it makes the current situation even worse. The US housing downturn has had a negative effect on credit markets and the threat of a recession has led to two interest rate cuts, with more predicted. Slowed growth and falling interest rates make for a weakened currency in the Dollar, particularly when growth prospects elsewhere seeming more attractive.

To add to the Dollars woes there is also the threat of oil exporting countries ditching Dollars as the trading currency. This would have a severe impact on the Petro-Dollar cycle which has previously meaning oil trading states are obliged to buy Dollars in order to buy oil. Ditching the Dollar as the world’s oil trading currency would lessen its demand when confidence for the currency is already wavering.

Some experts have stated that here is in fact no reason why currency reserves should be dominated by a single currency. In essence reserves are a fall back, and are held to act as guarantor for a countries trading, reserves aren’t floated in global trading. As the main requirement is that the currency inspires confidence and is easily convertible, both the Euro and the Yuan are tipped to play a large part of financial reserves in the future.

More immediately the Euro Threatens the Dollar as it has additional present day advantages in terms of the reach of the currency and is share of world trade. The Euro only becomes more attractive as it stretches across so an increasing number of individual economies throughout Europe. Additionally the countries making up the euro are less dependent on oil imports than America is and sell more to oil exporters as well as to fast-growing economies such as China and Brazil.

In the short term the Euro looks an attractive substitute, and as huge Dollar dominated reserves are faced with fighting off the cost of US inflation it seems increasingly attractive. Sticking with the Dollar would mean importing the policies of America as she staves of a recession, but alternatively abandoning the Dollar completely would add to increasing pressure on the currency.

Whatever the future holds it is certain that Japan and China as the two largest holders of reserve Dollars will pave the way, and will be big players in avoiding a Dollar crash. As it stands Japan looks certain to stick with the Dollar. If China also retains it, recognising dumping the dollar would be self defeating as she owns such vast amounts of American assets, there may after all be some light at the end of the tunnel for America and the Dollar.

Upon news that the UK housing market will stagnate in the next twelve months and the prediction that house will not rise for the first time in ten years, it seems that the increasing pressure on first time buyers may be relieved, even if only temporarily.

In addition to this news Halifax last month released figures detailing falling house prices for the third consecutive month.

However first time buyers wont be as happy to know that house prices will fail to drop to the levels seen in the recession of the 1990’s due to ‘high employment levels and sound economic fundamentals’, and is widely predicted the volume of property transactions would carry the brunt of the slowdown, expected to fall by 15 percent.

Claims of a slowing economy were further backed up with a survey claiming high street sales are growing at their slowest rate for almost a year, and restaurants and pubs are suffering, as indebted consumers stop to think. As Britain now accounts for more than two-thirds of the EU’s entire credit card debt, spending trends are even more reliant on Bank of England changes.

In response to a slowing economy and subsequent cooling off in the housing market, the Bank of England recently cut interest rates to 5.5 percent.

With this cut in interest rates it seems consumers are more willing to spend in the high street, with this pattern trickling through to the housing sector in due course, reducing the expected impact on dropping buying levels.

But with this cut dubbed the first of a series of interest rate cuts a new threat emerges, and the battle for the monetary policy committee now is trading off the threat of inflation to the threat of a slowing economy.

It is true inflation is becoming an increased worry for many experts and with goods leaving factories reaching there highest prices in 16 years, last months output price annual inflation hit 4.5 percent, up from 3.8 percent in October.

A slowing economy eases inflation, and the five interest rate rises of 2007 were intended to curb it, but inflation is still up. In the event of more interest rate cuts we will only see a boost to consumer spending to sustain a slowing economy temporarily, resulting in even greater pressures on inflation.