Financial Market

Days after HSBC announced more writedowns as a result of the sub prime market, Barclays announced it has taken a further £1bn writedown on assets and confirmed that profits will be lower in the first quarter of 2008 than in the same period last year.

The announcement on profits was made after warnings that tough trading in its investment banking division Barclays Capital would cut group profits.

I reaction to similar news other banks including Royal Bank of Scotland, HBOS and Bradford and Bingley have asked shareholder to for extra cash in order to repaid the credit losses. Barclays on the other hand have not asked for any additional funds from shareholders.

“It [Barclays] maintains that it will continue to monitor all options and will clearly not be drawn on speculation as to what form this capital injection might take.” - Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers,

This week major global bank HSBC announced new write-down figures as a result of their exposure to the sub-prime market.

It was reported yesterday that Europe’s biggest bank announced that it had written off £1.6bn in debt provisions for losses against mortgages, credit cards and other loans to U.S. consumers.

The write offs were lower than those in the last quarter of 2007 and were in line with predictions, however many the lower write off could have been due to seasonal factors such as tax refunds being used to repay debt rather than any underlying improvement.

“I don’t see [US] real estate prices changing from where they are now until well into 2009… We don’t think it is a spring 2008 event; we think it is a 2009 event.” - Michael Geoghegan, HSBC’s chief executive

With these latest write offs HSBC took its amount of write downs to £7.5bn over the past year, standing forth in terms of the largest write down figures behind Citibank, UBS and Merrill Lynch.

At the same time it was announced that a further $2.6bn was being written off in the company’s banking arm.

It has long been the case throughout the sub-prime mortgage crash that a strong Asian arm has helped to counter the hit taken on US home loans, meaning resulting profits were still higher than this time last year.

“I am encouraged by the way we have increased pre-tax profits in every one of the major countries in which we operate in Asia-Pacific, the Middle East and Latin America,” - Michael Geoghegan, HSBC’s chief executive

The Bank of England held interest rates at 5% today amid increasing concern over inflation levels, despite the fact the UK economy continues to slow. The move fell in line with most analysts predictions, although a rate cut of 25 base points is now expected in June.

After a two day meeting the Monetary Policy Committee made its decision today which followed last months rate cut from 5.25%.

The continued rise in price of fuel and food has continued to push inflation above the BOE target, and this freeze in base rate demonstrates the increasing concerns of the UK central bank.

“The latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount,” - Ian McCafferty, chief economic adviser to the CBI business group.

This afternoon’s move is another step in the measured response that the BOE has shown since the credit crunch hit last year. Unlike the FED the BOE has steadily reduced rates remaining reluctant to make successive cuts. The FED on the other hand has continued to slash its base rate in response to the crisis.

More base rate cuts are however expected in order to prevent the UK economy from slipping into recession. The British Chambers of Commerce had said prior to the decision to hold rates that a cut would have underpinned confidence in both businesses and consumers, helping limit any potential damage the crunch would have on the economy.

“This decision was a mistake given the serious threats to economic growth,” - BCC adviser David Kern.

Roger Bootle, economic adviser to Deloitte second those thought saying that by holding interest rates the MPC risked “presiding over the deepest and longest economic downturn since the recession of the early 1990s”.

Figure released this week showed that:

• Manufacturing output fell by 0.5% in March, the sharpest rate of decline in six months.
• The UK services sector grew at its slowest rate in nearly five years in April.
• Consumer Prices Index inflation was 2.5% in March, above the target 2%.
• April food prices were up 4.7% compared with a year ago.

In similar fashion to what is expected of the Bank of England tomorrow, the European Central Bank is expected to hold interest rates at 4% showing a reluctance to cut rates amid high fuel and food prices pushed inflation to 3.6% in March.

Possible rate cuts later this year are possible as the Euro economy continues to slow.

The ECB has held interest rates at 4% since the credit crunch began, a move that contrasts with that of the FED who have slashed interest rates from 5.25% to 2% since summer 2007.

As a result of ECB moves the Euro is at a record high against the Greenback making Euro exports expensive.

As fears of inflation throughout the EuroZone are quelled the ECB is expected to cut interest rates, and as consumer confidence returns to US markets the Greenback is expected to start to peg back the Dollar.

Other metals continued to weaken today following the trading trends showed with Gold in yesterday’s trading after the dollar continued to strengthen.

Copper most notably fell in line with other commodities in early trading after interest in base metals continued to curb amid optimised that the worst of the credit crisis was over.

With the dollar’s resurgence making dollar price commodities are made more expensive to potential investors with other currencies therefore reducing there appeal.

‘Going forward it does look as though the course of the dollar is going to be all-important for most of the metals,’ - RBC Capital Markets analysts.

After the FED .25% rate cut temporarily halted the dollars resurgence, it returned in European trading after the market concluded that the US had in fact turned the corner on the credit crunch after higher than expected consumer spending data was released.

Although demand for metal commodities is falling with the resurgence of the greenback, copper prices are yet to see a dramatic slide after industrial action in Chile, the world’s largest producer, had dented supply.

At the same time LME-monitored copper stocks have declined 450 tonnes to 110,075 tonnes.

This week Gold slumped to a three month low to $850 an ounce after the US dollar continued to show further signs of recovery against the Euro after increasing optimism that the worst of the global credit crisis is over.

The yellow mental that has seen record highs in recent months has slumped by $25 since reaching $881.65 overnight. This overnight high was brought as a result of a temporary stalling of the dollars resurgence after the FED made a further interest rate cut.

Since the FEDs rate cut the US economy has been filled with an air of cautious optimism that the worst of the financial crisis has been weathered, helping push the dollar upwards. As a result the price of gold has seen a steady decline as its appeal to an alternative to the greenback has been diminished.

“The pace of decline, suggests gold will remain at risk to further corrections in the coming sessions, potentially testing below the psychological $850 an ounce mark before finding sufficient demand from bargain hunters and the physical sector.” - James Moore at TheBullionDesk.com

Although many had predicted a .25% rate cut by the FED to 2.0%, many were surprised by statements suggesting that further cuts could follow, weakening the dollar. US interest rates have now fallen from 5.25% since September 2007.

On Thursday however core inflation was higher than expected which many expect will halt any further rate cuts planned by the FED.

The resulting rise in confidence in US markets has seen an increase in the appetite for risk, which has further pressured gold, with investors redirecting money ploughed into commodities at the start of the year back into equities. A trend much expected with gold’s reputation as a safe store for wealth in times of economic uncertainty.