Financial Market

News was released today that Pakistan has cleared the way with Iran on plans for a $7.5bn gas pipeline to India.

The proposed pipeline that will run 1,620 miles will be a lucrative investment for Pakistan as it charges transit fees on the gas India imports from its western partner.

The deal was struck on the first leg of the Iranian presidents South Asian tour which also saw Iran agree to supply Pakistan with 1100MW of electricity.

For India the pipeline is seen as crucial to supply their rapidly expanding energy needs, for which it predominantly relies on imports to support its fast growing economy.

It is also thought that the pipeline deal will help boost security between the three countries as they have more to benefit from mutual co-operation. Of the three partners India and Pakistan have fought three wars in the past half centaury

Along with its accusations of the nuclear ambitions Iran harbours, the US is against the pipeline deal as it believes it will weaken its efforts to isolate Iran. Another Eastern flowing energy pipeline is also not a positive sign for European governments.

Oil prices reached new highs in Tuesdays trading which saw them approach $120 a barrel for the first time.

US light, sweet crude eased to $118.11 in Asian trading, having risen as high as $119.90 due to concerns of global supply, brought on by growing violence in key oil producing nations.

London’s Brent crude peaked at $116.75 a barrel on fears of further attacks on pipelines in Nigeria, falling output in Mexico and the continued weak dollar. Together these factors have pushed oil prices up 24% this year alone.

To add to the woes the oil producing cartel OPEC has shown itself disinclined to raise quotas to curb rising prices.

“The bulls are certainly in control of the oil market right now,” said Victor Shum, from energy consultants Pervin & Gertz.

There is also the added worry of further price rises with figures due later today expected to show further declines in weekly US petrol refineries.

Recently increased disturbances in Nigeria have pushed oil prices steadily upwards. Shell has reported that continued attacks on its pipelines have lead to a fall in supply of 169,000 barrels a day.

The attacks that are being made by anti-government rebels on the regions oil infrastructures have gradually been escalating and threatening any future investment in the oil rich area of the country.

Mexico is also reporting a drop in oil exports down 8% this year. As opposed to political unrest, these shortages are being brought on by gas fields being exhausted.

The exhaustion of natural resources is a growing problem that itself is pushing oil exploration and investment into ever more hostile environments that then become susceptible to problems similar to those being seen in Nigeria.

News broke today that the Britain’s biggest bank are preparing themselves for a high court defeat in the test case over overdraft charges.

On Thursday a judgement is expected which will determine whether or not the Office of Fare Trading can rule excessive banks charges as unfair.

If the OFT wins then it is expected to decide that charges imposed by banks on overdrafts are in fact too high and therefore unlawful.

Since the issue came to light in 2006, hundreds of thousands of bank customers have attempted to reclaim banks charges on the ground they were too high and unfair.

Due to the amount of cases that were taken to court both the OFT and the banks agreed to stage a test case that has meant putting on hold tens of thousands of claims.

“A decision in favour of customers would be massively significant. Public confidence in the banking system is at an all-time low,” said Marc Gander of the Consumer Action Group.

An estimate on the BBC website stated that in 2007 around £748m was refunded to nearly 378,000 customers throughout the UK.

It was in July last year that it was agreed that the test case would go ahead after the OFT agreed a deal with Seven banks and the Nationwide building society. Consumer group Which? Has outlined the three possible outcomes of the case.

An outright win for the OFT. The court could rule that all terms and conditions for all the test case banks over the last 6 years can be assessed for fairness.

An outright win for the banks. The court could rule that none of the terms and conditions used by any of the test case banks over the last 6 years can be assessed for fairness.

Something in between. The court might decide that some terms and conditions are subject to fairness assessment, while others are not.

Whatever the outcome Which? Admitted that this case will not decide whether charges for overdrafts are in fact fair or not.

The United Nations yesterday warned that the political unrest across the globe that is being spurned on by rising global food prices, could undo the progress that has been made in developing countries.

In the Port-au-Prince province of Haiti rioters took to the streets for the second day after UN peacekeepers had fired tear gas and rubber bullets at protesters to stop them storming the presidential palace.

Protester set tyres alight and looted stores as hungry demonstrators rioted amid price hikes in staple foods such as rice and beans, as well as hikes in fuel costs. Five people were killed in the riots as protesters dubbed their hunger “grangou klowox” or eating bleach, a phrase being used to describe the burning in their stomachs.

A net importer of rice and one of the poorest countries in the world, Haiti is being hit hard by the rise in global food prices where people have no more than £1 a day to live on. Rioters have been demanding that the government should scrap all taxes on staples, and have called for the resignation of the president.

Haiti’s president Mr Preval has spoke of the possibility of increased government subsidies on the production of staple foods, but whether this will placate rioters is unknown.

The president did make a public address stating “To those who are stirring up violence, I order you to stop because it is not going to solve the problem”. He has also ordered Halti police and the 9,000 peacekeepers in the country to halt all looting in the country.

The unrest seen in Haiti provides evidence of the destabilising effect that accelerated food inflation could have around the world. Global food prices have surged of late, brought on by increasing demand in rapidly expanding countries such as China and India, drought in grain producing Australia and new competition for plant based bio-fuels.

Since 2002 the UN estimates that global food prices are up 65%, with grain up 42% and dairy up 80% in 2007 alone.

The UN Food and Agriculture Organisation (FAO) said in a recent report that Burkina Faso, Cameroon, Egypt, Indonesia, Ivory Coast, Mauritania, Mozambique and Senegal have all seen unrest in recent weeks linked to food and fuel prices.

The International Monetary Fund has been the latest organisation to forecast slower economic growth in the world economy over the next two years as a result of the global credit crunch.

In its forecast the IMF has suggested that the world economy would slow to 3.7% this year and 2009 which would mark a 1.25% drop in economic growth in 2007.

Predicting that the US will go into “mid recession” this year, the IMF has said that downturn in economic growth will be spurred on by the US, which will see growth in the UK slow to 1.6% in 2008/09.

The IMF also stated that the sharp decline in growth in the UK economy would come as a result of a weakening housing market, contraction of the financial sector and impact on UK exports that will come as a result of weaker growth in the US and Europe as well.

In the March budget Alistair Darling predicted UK growth figures of 2% in 2008 rising to 2.5% in 2009, optimistic forecasts that are clearly not shared by the IMF.

These figures have also been released with the warning that global downturn may be even more severe; with a 25% chance the global economy will see growth levels fall to below 3%, marking a global recession.

“The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression,” the report says.

The IMF has predicted that the countries that will be hardest in any global downturn will be those will excessive house price inflation, marking Spain , Ireland and the UK as the most venerable.

In the US house prices have fallen by around 10%, and the IMF predicts that in the UK house prices are currently over valued by as much as 20%. Further falls in the US are predicted for this year of between 14% and 20%.

Criticising past FED actions when US interest rates were kept at 1% for several years, the IMF said that in the future central banks need to take more account of rising house prices when setting interest rates, “leaning against the wind” to prevent house prices moving out of “normal valuation ranges”.

News today has stated that HSBC is offering two year extensions on fixed rate mortgages that were sold by competitors who are reducing the mortgage share holding or raising rates in the UK.

Starting on the 14th April for five week, the offer comes with applicable fees and also states that owners must have equity of 20% of the properties value.

A spokesman from HSBC explained that this unusual eagerness in current financial markets to buy up existing mortgages with rate deals is as a result of its far eastern businesses that are extremely liquid, as HSBC currently has a “surplus of funding”.

The proposed deal will be welcome news to people with mortgages coming off fixed rate deals in current financial markets.

It is estimated that 1.4 millions home loans are to reset this year and will force borrowers to shift to variable rates.

The bank also said that is will extend loans with fixed rates as low as 4.5 per cent.

HSBC also offers a range of current account options including the bank account and bank account plus.

To FED boss Ben Bernanke added to the concerns of already strained financial markets by warning that contraction of gross domestic product (GDP) in the first six months of 2006 is a distinct possibility.

Speaking to congress Bernake said “It now appears likely that real GDP will not grow much, if at all, over the first half of 2008 and could even contract slightly”

With two consecutive three month periods of negative growth generally accepted as the definition of recession the US could be heading towards that mark.

The announcement came as Mr Bernake begins two days of testimony to US congress, at which it is thought he will be questioned on the FED’s decision to rescue Wall Street investment bank Bear Sterns.

“We did what we did because we felt it was necessary to preserve the integrity and viability of the American financial system, which in turn is critical for the health of the economy,” Ben Bernake

Mr Bernake has also said that it will take up to two years to determine whether or not the economy technically hits recession status, based on an the judgement by the non-profit economic research institute, the National Bureau of Economic Research (NBER).

He went on to predict that after a tricky first half in 2008 the economy would see an upturn in the second half of the year, which will continue throughout 2009.

It is thought that the expected up turn will be helped by the cuts the FED has made in interest rates and the government’s $168bn (£85bn) stimulus package that involved tax rebates to individuals and tax breaks to businesses.

The FED has cut interest rate has by more than half since 2007 which now stands at 2.25%. The next review is due to start on April 29th.

Swiss financial giant USB has reported that its writedowns as a result of the sub-prime mortgage crisis have more than doubled to £18.5 billion, accounting for the biggest writedown by any bank since the global credit crunch hit.

Upon releasing the news the bank also said that current chairman Marcel Ospel would not seek re-appointment.

The writedowns include $19 billion worth of fresh assets which come on top of the $18.4 billion that was wrote off in 2007, as the value of its assets has plummeted.

The Swiss bank has also said it is seeking to raise £7.5 billion in capital which it will do by issuing new shares.

These new losses announced by the bank do however dwarf those declared by US banks Citigroup and Merrill Lynch which have declared write-offs of $21.1 billion and $22 billion respectively.

• UBS: $37.4bn
• Merrill Lynch: $22bn
• Citigroup: $21.1bn
• HSBC: $17.2bn
• Morgan Stanley: $9.4bn
• Deutsche Bank: $7.1bn
• Bank of America: $5.3bn
• Bear Stearns: $3.2bn
• JP Morgan Chase: $3.2bn
• BayernLB $3.2bn
• Barclays: $2.6bn
• IKB: $2.6bn
• Royal Bank of Scotland: $2.6bn
• Credit Suisse: $2bn

USB made the announcement as it said it expected to post a first quarter net loss of $12.1 billion.

Chairman Ospel said “I have always stated that I ultimately take responsibility for the bank’s situation” and went on to say “We have worked very hard and have been able to address the firm’s most pressing problems, thereby laying the foundation for the long-term success of the bank.”

Mr Ospel will be replaced as chairman by the current bank’s main legal adviser Peter Kurer.