Financial Market

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.

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.

On the back of the Commodities outlook for 2008 article at the end of January Financial Market predicted “mergers in (base metal) industry related firms could be the trend of 2008 with rising costs, labour shortages and generation of cashflow fostering the perfect conditions for mergers.”

It seems this has been demonstrated two weeks into February with mining firm Rio Tinto being unveiled as a potential hostile takeover target for rival BHP Billiton.

With £3.8billion profit for 2007, a 1% growth on 2006 profits, Rio Tinto has certainly benefited from surging commodity prices, leaving it in a good potion to fend off the hostile bid.

With demand for raw metals such as copper and coal from nations such as China driving consolidation in the sector, Anglio-Australian giant Rio Tinto rejected a £78.8billion takeover offer from its rival.

With commodity prices remaining high and production reaching record levels Rio’s chairman Paul Skinner said BHP Billiton needed to raise its offer “considerably” before the firm would enter talks.

“For us to become persuaded by the arguments for the combination we would need to see an offer for our shareholders that offers higher value than we could achieve ourselves” - Paul Skinner

BHP Billion’s bid offered 3.4 shares for each Rio Tinto share, already an increase from the unofficial 3 to 1 offer in December 2007, however BHP Billiton has warned it will not sweeten its offer.

On Friday news broke that Microsoft have tabled a bid to buy rival search company Yahoo for a figure of $44.6bn in cash and shares, 62% above Yahoo’s closing market share price on Thursday.

The offer was presented in a letter to the Yahoo board and came only days after revenue forecasts had been cut, and the company had subsequently committed $300m to try and revive the business in 2008.

The two competitors have found it increasingly difficult in the field of internet search and online advertising in recent years with the increasing dominance of third rival and market leader Google. Microsoft’s take over would merge the two rivals and create an entity that then could better compete with the market leader.

A statement from yahoo upon confirmation of the bid from Microsoft read that yahoo would evaluate the proposal “Carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.”

With the increasing belief by many that Microsoft’s existing business model becoming more unfeasible in the internet age, this offer indicates a radical shift in how Microsoft perceives the internet and its own future within it.
Over the last twelve months major search rival Google has began to offer free online software alternatives for much of Microsoft’s offerings, challenging the enterprise business model the software giant in built upon.

Currently Microsoft makes the majority of its money by selling license fees to its impressive software packages installed on PCs and servers. Google’s services available freely over the internet severely threaten this.

Coupled with the increasing threat to its core industry, the change in thinking demonstrated by Microsoft is undoubtedly due to the gems in Yahoo’s online advertising empire, a sector that Microsoft has thus far struggled to move into with any great success. Yahoo also offers a range of online applications that could bolster Microsoft’s existing Windows Live online services for both businesses and consumers.

There is the chance of a rival bid for Yahoo still being lodged, possibly from a media organisation, but there are few could offer a similar price to that of which Microsoft is offering. Rupert Murdoch’s News Corp. is one media conglomerate that could potentially do so, and a rival bid from Google is not off the table quite yet.

If Google do not launch a counter bid to Microsoft’s offer the search market leader will certainly delay proceedings by filing anti-competitive legal action against Microsoft in the hope of derailing any deal taking place, much in the same way Microsoft did to Google over DoubleClick last year.

It is already understood that Google executives have asked for a political strategy to challenge the acquisition of Yahoo which could threaten Google’s own dominance of online advertising. How far Google will go with any challenge is as yet unknown.

If the deal was to go through despite a challenge from Google, it would certainly consolidate the market and make two clear rivals, setting up a credible competitor to market leader Google. We would then be left with a true Microsoft versus Google scenario.

Wheat may not have the same prestige as gold, but over the past twelve months investors have found much to please the eye and pocket in fields of the crop.

Known as ‘softs’ agricultural goods are the latest product to join the commodity boom that has already pushed up prices in oil, copper and nickel due to the demand from emerging markets such as China and India. As mentioned previously on Financial Market gold has also benefited thanks to its perception as a safe haven from troubled economies.

With oil breaching $100 a barrel and gold recording record highs in early January, Financial Market takes a look at the outlook for commodities in 2008.

Oil:
Oil prices have soared in the last twelve months and as such consumers have seen increased prices at the pumps, and with geopolitical factors such as civil unrest continuing in Iraq and Nigeria, and political stand off with Iran, prices should remain around this figure for the near future.

A continuing weak dollar will also support oil prices as importers buy dollar dominated oil supplies.The reluctance of OPEC to increase output, and the weakness in non-OPEC supplies, coupled with increasing demand from energy hungry India and China will help sustain high oil prices and perhaps even push them up further. Either way 2008 looks set to be the seventh consecutive year of oil price rises.

Gold:
The impressive performance of gold over the last year as documented in the article ‘Gold breaks a 28 year high as investors look to dollar priced commodities’ has meant that investors now need look no further for a reason to invest in some gold jewellery.

Rising more than 30% in 2007, recording new price highs in the process, gold has benefited from increased demand off the back of the sub-prime market crisis. Investors have increasingly looked toward the yellow metal as a safe haven investment, and a continued weakened dollar and mounting inflation fears will continue to push demand in 2008.

Base Metals:
Base metals such as copper and tin have in essence been the building blocks of the economic growth, particularly in India and China. But for all the benefit gained from emerging economic powers base metals as a commodity also suffer in times of economic weakness and as a result copper, lead, nickel and zinc all fell in the last quarter of 2007.

That said tight supply, particularly in copper, coupled with strong demand outside of the US should mean that base metals have a firm standing in the long term. That said if the American economic problems spread across global markets this outlook could swiftly change.

Mergers in industry related firms could be the trend of 2008 with rising costs, labour shortages and generation of cashflow fostering the perfect conditions for mergers.

Agriculture:
Many market experts believe the rally in agricultural prices may be only the beginning, and if the trends of metals and energy were seen in agricultural fields then the price of soybeans could rise another 80%.

In real terms, agricultural prices are still very, very cheap,” said Deutsche Bank’s Mr Lewis.

In 2008 world wheat stocks are expected to hit a 30 year low, partly due to heavy droughts in Australia which halved the winter wheat crop by 12 million tonnes. With poor harvests such as this, low inventories and growing demand through bio fuels, soft commodities look set to be well supported in 2008.

Leaked minutes today confirmed that the Bank of England’s Monetary Policy Committee voted 8-1 in favour of keeping interest rates on hold in January, although the Bank of England is still widely tipped to make a quarter point cut to 5.25% next month.

The leaked minutes demonstrate the Banks reluctance to follow suit after the FED’s three quarter point cut on Tuesday, with increased concern about the risk of spiralling inflation in the UK.

A reluctance to follow suit not only being shown by the Bank of England, but by other European central banks as well. Suggestions that European central banks are also reluctant to slash interest rates in a similar style to the FED created knock on effects in Wednesdays trading which saw US and European stocks fall further.

The worry is that slower economic growth will hurt corporate earnings, and stocks fell accordingly across all sectors. With Central Banks ruling out immediate rate cuts to boost economies, it means that slowed economic growth could be the trend for early 2008 as the US and UK fight to stave off recession.

“The uncertainty about corporate earnings growth in 2008 has risen, and not only in the financial sector.” said Matthias Schellenberg, managing director at ING Investment Management.

The Federal reserve today cut interest rates by three quarters of a point to take interest rates to 3.5%, 90 minutes before US trading opened. The dramatic cut was drastic action taken by the FED in order to stop markets falling after Europe and Asia recorded record losses on Monday, when US markets were closed.

The cut failed to work however with US markets recording sharp falls when Wall Street opened for Tuesday trading. Throughout the course of Tuesday trading other markets had closed even further down on yesterday, indicating the US would too open down. The FTSE 100 briefly rallied upon news of the FEDs actions after falling 3% early on, only to fall back again later on.

The actions of the FED are a clear indication of its concern, and weren’t meant to meet until next week, making this cut something of a panic move.

The underlying factor is that the real economy has not changed much in the last week, and as such the FED would not have to act now to make a decision on interest rates. What has ushered this move is financial market developments that are threatening to impact the real economy.

In essence if financial markets panic about what is going on in the real economy it can affect the real economy, leading to a nightmare for economy policy makers, which is a feedback mechanism of the markets being spooked by the economy, feeding back into the economy, sending everything into a tail spin.

Therefore the rate cut by the FED is designed to prevent this tail spin, but at the same time destroys confidence.

For mechanical reasons rate cuts will make it easier to borrow money and buy shares, and therefore can be used to prop up stock markets, but when market is determined to fall it is difficult to stop it. This is a similar pattern to drastic rises what a quarter point rise tends not to have an effect on growth, another cut wont solve the current downturn, but this downward phase for many is seen as a correction of the upward phase seen over recent years.

It is hard to steer and control financial markets, and central banks will say it is there doctrine not to control stock markets but to stop the economy going into a spin and if that means further rate cuts then so be it.

The implications of the FEDs cut on the UK are expected to be minimal. The UK are based in sterling and the Bank of England shouldn’t feel any pressure by the Fed to cut UK interest rates accordingly. Central banks are however looking to perceive that they understand and are in control, which in turn does put some pressure on the Bank of England to act, making the expected cut next month even more of a certainty. A FED style out of hours meeting is unlikely though unless further chaos continues in the market.

In terms of the global volatility of markets witnessed over the past two days many do expect a bumpy year although not on the same levels, and as such many experts expect markets to settle down.

But it is important to understand that this market downturn is not like 9/11, this market downturn has an economic underpinning where world markets are trying to adapt their view of the American economy. World markets have been late in understanding the crisis facing the American economy and its decline over the past year. At the moment world markets are correcting itself in a sense, a process which can be messy. The Economy will settle down and markets will learn to live with where the economy will settle down, which in turn will bring an element of stability back.

Global stock markets have tumbled today; with European indexes recording some of the biggest loses in recent years, and worst early January trading since records began on the back of growing fears of recession hitting the US.

Indexes in Europe fell as much as 7% after huge a sell off in Asia leading to the biggest single days trading losses in recent years. The selling started in Sydney where stocks fell 3% recording their 11th straight decline, spurring the way for Asian markets to follow suit.

Hong Kong’s Hang Sang index recorded its biggest fall since 9/11 falling 5.5%, with losses of between 3% and 7% seen in India, China, Britain, France and Germany.

In afternoon trading, the Dow Jones Euro Stoxx 50 was down 5.7 percent. The CAC 40 index in Paris was down 5 percent, having fallen more than 7 percent at one point. The Dax 30 in Frankfurt was down 6.25 percent, and the FTSE 100 in London was down 3.7 percent.

US markets are shut today due to public holiday, but more losses are expected tomorrow after an announcement by President Bush on a $145 billion stimulus package to encourage more consumer spending failed to lift markets on Friday.

Many are of the opinion that the stimulus package plan announced by President Bush may not be enough to prevent a recession, and investors will find it hard to argue that recession will not affect world markets after today’s trading.

“Investors in Asia have been in a state of denial about the possibility of a recession in the United States. But now there’s no debate about it.” - Adrian Mowat, chief strategist for JPMorgan in Asia

And there may be even more losses in Asia still to come, particularly as banks report the fallout from their investments in the United States mortgage market.

The price of Gold today reached a new all time high when it was traded at $914 an ounce, up on the $866 high mentioned on Financial Market on the 3rd January.

With continued safe haven buying as investors seek a protection from looming recession in the US Gold has continued to set all time trading highs.

A continued weak Dollar has continued to boost the metal as foreign currency investors look to take advantage of their strong position in world trading. This time however it was other precious metals that were also recording all time trading highs for themselves, with Platinum also trading at $1,587 an ounce, and silver hitting a 27 year high of $16.58.

Precious metals are surging after the collapse of high risk sub-prime home loans market spurred a global credit crunch. Now investors are looking for investments with a perceived lower risk.