Financial Market

The newly nationalised Northern Rock bank today announced that the £24 billion state loan that it was granted in 2007 will be repaid in full by 2010. This comes despite the fact that the bank has warned that it may not break even for three years.

The bank also warned today that it will be primarily loss making in 2008 after a pre-tax loss of £167.6m, and this news came after stating the bank would pay former chief executive Adam Applegarth £785,000 as part of a severance package.

The payout will be split between a £760,000 payment and £25,000 in non-cash benefits which will be paid monthly.

“A lot of shareholders will be very unhappy with the size of Mr Applegarth’s payoff but it looks like legally, the company could not have avoided paying that amount,” - Roger Lawson of the Northern Rock Shareholders Association Group.

Northern Rock fell into trouble in September 2007 with the Bank of England stepping in to prevent the bank from filing for insolvency. As a result the bank lost 65.5 pence a share, around £243.5 million in overall value, compared to an increase of 394.5 pence a share the year before.

Northern Rock had £471.9 in bad loans compared to 81.2 million the previous year, and customer deposits were also down to £11.6 billion on the 31 December 2007 from £30.1 billion on June 30th the same year.

There are plans to sell off over half of the Banks assets and cut a third of the workforce to repay the loan that was issued by the government and return to public ownership. In an effort to accelerate its own mortgage redemptions the bank has ended much of its lending, including personal and commercial loans. It also intends to reduce its mortgage lending to 2.5% of the UK market down from 9.7%.

These measures, coupled with the trimming of staff numbers by about 2,000, roughly a third of the total number, over the next three years, should help the bank to cut costs by 20%.

UK house price inflation has fallen to its lowest rate for twelve years, with consumer confidence at its lowest since 1993. Subsequently the UK housing market could see its first declines since then as a result.

One of Britain’s largest lenders reported that prices in March fell 0.6% on February, bringing annual growth predictions down to just 1.1%.This forecast also marked the lowest annual growth prediction since March 1996.

Predictions are that UK house prices will now continue to fall further, and that the marked has see a stark shift since summer of 2007.

“Expectations of higher house prices will have undoubtedly encouraged some speculative demand in the housing market over the years, but with lower house price growth expected now and in the future, the effect will work the other way, causing at least some of this demand to fall away,” - Fionnuala Earley, Nationwide’s chief economist

The average UK house price was now £179,110 up only £2,2027 on the same figure last year. Over the last two years however these prices remain up 11% and up 47% in the last five years.

However price are generally predicted to see a further fall throughout the course of 2008.

“A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward.” - Fionnuala Earley, Nationwide’s chief economist

Yesterday Nationwide put up the price of its fixed rate and tracker mortgages which account for 90% of new home buyer mortgage deals, amid increased inter bank, or Libor, lending costs.

A continued dampening in the housing market could also set the stage for a rate cut from the Bank of England as early as next month.

“We think these latest developments, along with the continued weakening in the housing market, will mean that the MPC will bring forward its rate cut to April.”

Oil jumped above $107 a barrel today after the continued conflict in Iraq led to saboteurs blowing up one of the countries two major export pipelines. The attack came amid the third day of Iraqi military operations, targeted towards loyal fighters of the Shi’ite cleric Moqtada al-Sadr in the town of Basra in the southern Iraq.

The explosion marked the first time since 2004 that the southern Iraqi supply route has been disrupted.

“Crude exports will be greatly affected because this is one of two main pipelines transporting crude to the southern terminals, we will lose about a third of crude exported through Basra,” - Oil Company official

In last Friday’s trading a commodities sell off saw oil take a sharp fall to below $100 a barrel, after record highs of $111.80 seen last earlier in the week, but todays rise is a further extension on the $4 gains made yesterday after a report showed lower than expected petrol stocks in the US.

US crude was up 43 cents to $106.33 this afternoon, after peaking at $107.70 earlier in the day. Any gains that were to come on the back of increasing conflict in Iraq were limited by a strengthening dollar which also showed gains after the FED eased recession worries.

The dollar gains were also backed by figures released which showed US jobless benefit claims fell by 9,000, with the greenback managing to regain some lost ground. In early trading it saw a rise of 0.6% to %1.5757 against the euro and a rise of 0.9% against the Yen.

Monday saw heavy losses to European stocks triggered by continued global gloom, but in early trading today showed signs of recovery after a positive session for Asian stocks. The FTSE 100 index was up 2%, the Dax up 1.8%, and the Cac 40 in Paris up 1.9% in early trading this Tuesday morning.

Asian markets also closed predominantly higher with the Nikkei closing 1.5% up, the Hang Seng up 1.4% and the Sensex in Mumbai up 2.0%. Shanghai’s main index did however fall 4% amid fears that Beijing will take action to slow her economy.

Mondays trading marked a wild session which many believe is a culmination of the several events that have rocked investor’s confidence in the past week. The collapse of respected US investment firm Bear Stearns, with its subsequent sale to another Wall Street player JPMorgan Chase at the rock bottom price of $2 a share, followed by emergency liquidity actions undertaken by the Federal Reserve on a Sunday night, and a continued confidence crisis in worldwide credit markets, together led to major European markets recording huge losses in Mondays trading.

The US stock market however didn’t record such losses thanks to bargain hunters taking advantage of the price tumbles, particularly in blue chip and technology sectors.

Shares in Bear Shares had fallen 84% on Monday to $4.31 whilst those of JPMorgan increased by 10% to $40.31.

“The Fed is treating Bear as if it were a large failed bank,” - S&P Economics.

As a result of the collapse many are predicted a prolonged global financial crisis, branching wider and deeper than previously predicted, marking a stark shift in opinion that could magnify any potential effects on world wide economies.

The action made by the FED on Sunday marked its first weekend move in nearly 30 years, making a quarter point cut and announcing it will lend to the twenty primary dealers that buy Treasury securities directly from it, a move not used since the Great Depression.

Largely responsible for the cut price sale of Bear Stearns, the FED will also finance the deal by providing up to $30 billion to JPMorgan.

Many are also awaiting further news today from the Fed, as they are widely expected to cut its benchmark interest rate by a full percentage point to 2.0% as it battles to restore confidence and boost the economy. With continued point cuts like this it could very much be the case that we will see the dollar as a free currency, the first currency to do so since the yen.

The price of Gold reached a new high in Thursdays trading hitting $1000 an ounce, fuelled by a weak US dollar and continuing fears about the US economy.

With economists concerned over a possible US recession investors are continuing to buy commodities as opposed to shares and the US dollar.

The rise in gold to a $1000 an ounce marks a 20% increase since the beginning of the year, on the back of an already impressive 32% rise in 2007. Following the high Gold did fall slightly closing at $993.80 an ounce, $13.30 above its starting price.

Every time data released reflects negatively on the US economy the value of gold continues to rise. The precious metal gets boosted in two different ways upon such news which has led to over a 50% rise in value in the past 15 months.

“First because it reinforces the return of its role as a safe-haven asset, and second because the dollar falls on expectations of further Federal Reserve rate cuts.”

In more good news for gold investors many analysts are now tipping the value of gold to rise even further now that the psychological $1000 barrier has been breached.

“Now that we have gotten above 1000, we are going to get a whole lot of momentum driven investors who are going to drive the price higher.” - JPMorgan Chase analyst John Bridges.

Traditionally gold has been denominated in US dollars, although the currency stopped being backed by gold in 1971. With the continuing weakness of the dollar against other leading world currencies, and notably the euro and the yen in recent days, investors are being driven evermore to the metal as a way of protecting themselves.

The current trend of gold is similar to that which was seen in 1979 when the metal hit $850 an ounce, as investors sought the metal amid fears of inflation.

There are however additional factors driving the current price of gold up which include slower production of gold mine, particularly in South Africa. Production of gold fields was cut in January for a three month period by 25% after severe blackouts caused mines to close. The mining firm responsible is Africa second largest, and accounted for 12% of global production in 2007.

It is also an increasing concern that global gold mines are aging leading to lower quality product and slow production.

“Mine supplies have been falling and central bankers have been less willing to sell gold from stock, and at the same time Asian demand for gold has been holding up,” added JPMorgan’s Bridges.

Today Chancellor of the Exchequer Alistair Darling signalled that Britain’s economic outlook relies on events in the financial markets as he unveiled a modest first Budget, which shored up borrowing and involved raising taxes on drinkers, motorists and business in order to help fill a hole in public spending.

Even with reduced growth forecasts, Darling left an air of optimism on the lasting effects of the credit crunch. The treasury did however stress that predicted growth could be effected if the crunch was to deepen further.

With the intention of not taking money out of the economy Darling focused on taxation to raise funds needed to pass government targets on public debt and make progress towards its goals on reducing child poverty.

He did however raise government borrowing forecast over the next four year by £20 billion which would put public sector debt at 39.8% of GDP in 2010. The treasury’s ceiling is 40%.

Without the proposed £2 billion tax increase Darling would have hit his debt limit.

Among the increases in tax in this budget, alcohol saw a 9% increase adding 4p to a pint of beer, 14p to a bottle of wine and 55p to a bottle of spirits.

Vehicle tax duty also saw a hefty shake up with the most polluting car due to pay £950 in 2010, whilst the most eco friendly cars would be free of any taxation. Bio fuels will also loose its 20p a litre subsidy.

A report from mortgage lender Halifax has released data the shows stamp duty for first time buyers has risen 82% over the last five years, in line with soaring house prices.

In 2007 the average bill was £1,751 compared with just £960 in 2002.More interestingly nearly all first time buyer in the South West, South East and East London were liable to pay stamp duty, while only 42% of first time buyers in Northern regions had to pay.

In London it is even worse news for first time buyer with the average stamp duty bill increasing by 364% over the last five years to £8,675.

The government has highlighted that as part of plans, half of all first time buyers will pay no stamp duty this year, and the lowest 1% tax band hits houses of value between £125,000 and £250, 000. Houses with a value between £250,000 and £500,000 will have a 3% charge, whilst properties above that bracket incur a 4% charge.

“Stamp duty has again become an issue for first-time buyers because the stamp duty thresholds have not kept pace with house price inflation.” – Martin Ellis Halifax chief economist

Mr Ellis went on to acknowledge that the government has raised the 1% threshold in recent years but said the government needed “to raise the stamp duty thresholds to compensate for house price inflation over the past decade”.

There is light at the end of the tunnel however for first time buyers, with the survey showing UK house prices did fall by 0.3% in February.

This week has not been particularly favourable to the dollar and today hit a new low against the euro amid fears continued fears for the US economy.

Uncertainty over the US economy has been further fuelled by poor job figures released in the US this week. In the report by the US labour department it was indicated that the US had seen an unexpected decline of 63,000 jobs in the month of February, the sharpest sign yet that the US is heading, or is in the midst of a recession.

At its lowest the euro was worth as much as $1.546 while the pound was worth $2.016 and the yen 102.91 to one greenback.

Both leading European currencies received the boost against the greenback after Frankfurt and the Bank of England decided to keep interest rates on hold on Thursday in order to curb inflation, which is currently at its highest rate in six years within the eurozone. Meanwhile the FED has been reduced its interest rates in order to tackle a cooling economy.

After the ECB’s comments on inflation it was made clear that the European central bank is more concerned about inflation in the eurozone than a potential fallout from the rising price of the euro, suggesting the benchmark interest rate will remain at 4% in the near future. This is in stark contrast to both the FED and Bank of England who are likely to cut interest rates.

Although this may be initiating a degree of profit taking there have been knock on effects to European based export companies who have seen their products become more expensive than their American counterparts.

The UK’s largest commercial broadcaster ITV Plc has announced today that annual profits for 2007 fell by 35% to £188million on the back of lower ad sales.

Net income for the broadcaster dropped to £137 pounds from £219 million the previous year. Overall sales at ITV fell 4.5% to £2.08 billion, however first quarter 2008 sales are predicted to rise 1.9% whilst revenue from the ad market will see an overall decline by 0.7%.

The broadcaster has also seen its shares face increasing pressure over the past twelve months, hitting record lows in January and February. It is thought that the ongoing argument that has left BSkyB’s 17.9% stake in the firm unresolved, has lead to advertisers becoming more cautious and as such having a direct impact on profits.

In December the competition commission recommended that BSkyB sell its stake in ITV which was later upheld in January, however BSKYB is due to challenge the Competition Commission’s decision to force the satellite broadcaster to sell down its stake.

On the back of the profit news ITV has stated that a recovery procedure is already in place and advertising revenues have stabilised.

The broadcaster who airs shows including Coronation Street and X Factor has also increased its combined shares of viewing audiences for the first time since the early 1990’s. Thanks to the addition of digital channels and investment in programming, ITV’s combined share increased to 23.3% from 23.1% in 2006.

`The viewers are finally coming back to ITV. The results and audience share gains counter the `myth that ITV is a business managing decline.” ITV executive chairman Michael Grade

ITV have also made plans to expand web content offering in 2008, as well as cut costs by closing local news rooms and selling the company’s stakes in businesses that aren’t deemed strategic.

It was also announced last week that former head of BBC Peter Fincham was due to join ITV as Director of Television, after ITV executive chairman Michael Grade extended his contract with the company until 2010.

Oil prices toady reached new record highs as the US unveiled an unexpected drop in oil reserves. The US energy department reported that US stocks of oil had fallen by 3.1million barrels in the previous week to 305.4million barrels, defying the prediction of many analysts expecting an eight straight rise in reserve levels.

The oil cartel OPEC has been meeting in Vienna this week and has been urged to boost production to reduce the record highs being seen and subsequent pressure being placed on world economies.

After OPEC members expectantly voted on Wednesday to maintain production at current levels the price of light, sweet crude for April delivery touched 104.8 dollars in Asian trading. This topped last Wednesdays previous high which was just short of the $104 mark.

George Bush has openly criticised the cartel for damaging the US economy and “making it harder here in America for working families to save and for farmers to be prosperous and for small businesses to grow”.

OPEC had later responded stating the market was “well-supplied, with current commercial oil stocks standing above their five-year average, and that the current price environment does not reflect market fundamentals”.

In the stock market investors are increasingly pouring money into commodities and in particular oil to hedge against the fall of the dollar. This fall of which is being spurred on by cuts in US interest rates made in order to stave off recession, whilst inflation levels remain at dangerously high levels putting off investors.

OPEC’s president therefore blamed the rise in oil prices on the weakened dollar and Americas mismanaged economy.

“What is happening in the oil market is due to the mismanagement of the US economy,” - Chakib Khelil, OPEC’s president

In relation to the new highs being seen the AA has also released figures which demonstrate how these prices are being passed onto the end user. British motorists are now seeing average petrol prices across the UK of 105.7p, with diesel at 111.6p, an increase of 2.5p since the beginning of the year.

The Chancellor Alistair Darling has an additional 2p fuel duty rise planned in the budget due to be released next week.