Financial Market

On the back of a bleak six months in the British economy at least one Company proved they although not recession proof, there are at the very least signs of improvement in the foreseeable future.

The search giant Google saw revenue rise and profits fall in the first quarter of last year in what is being seen as positive end of year financial results.

Net profit for Q4 was $382 million, a significant drop from $1.21 billion in Q4 2007. This 68% net profit fall was actually better than many analysts had predicted, and overall total revenue was up 18% to $5.7 billion.

“Google performed well in the fourth quarter, despite an increasingly difficult economic environment,” said Google boss Eric Schmidt.

“At least we have something to feel good about with this Google news in what has been shaping up to be a gloomy earnings period,” - Keith Wirtz at Fifth Third Asset Management.

In related news arch rival Microsoft posted lower profits on Thursday announcing 5k redundancies.

In the month of June UK inflation increased to an 11 year high of 3.8%, up from 3.3% in May, helped by increasing rising food and fuel costs.

The rise puts the countries inflation rate significantly higher than the governments 2% target and will certainly steer the Bank of England away from further rate cuts in the near future.

The UK’s central bank has said that inflation may increase above 4% in 2008, doubling the governments target, however as worries over the economies growth continue to grow the Bank of England is left with a tricky balancing acts.

The Bank of England can’t cut rates until it is convinced inflation is moving downwards,” said James Knightley, economist at ING.

Often used as a benchmark for pay negotiations, the RPI inflation measure rose from 4.3% in May to 4.6% in June.

Chancellor Alistair Downing has called for wage restraint in order to help rein in price growth.

“We saw what happened in the past when inflation got out of control and people found that every penny they got in a wage increase was swallowed up by food and fuel prices going up,” said Mr Darling.

He went on to say “Whether you are in the private sector, or public sector, whether you are sitting in the board room or working on the shop floor, we cannot allow inflationary wage increases because that would mean that everyone, especially people on lower incomes, would suffer,”

The biggest contributors to fuelling price inflation were the prices of non-alcoholic drinks and food, with prices increasing at a record pace of 9.5% in June from the same time last year. These figures were up 2.1% from May.

Increasing oil prices have also helped to drive up the cost of fuel with the average price of petrol increasing by 5.3 pence a litre.

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.

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.

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.

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”.