Financial Market

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.

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%.

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.

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.

Toady China has reported an ii year high inflation high increasing pressure on Beijing to increase interest rates.

After an unusually severe winter and freezing temperatures destroying crop yields, food prices have been pushed up 18.2% in January, leading to an overall inflation rise of 7.1%. The price of pork alone has risen 58.8% in the last twelve months.

Non-food inflation rose only slowly, hitting an annual rate of 1.5%, the figures showed.

In the last three weeks China has had one of the coldest winters on record, and coupled with expected price rises in the run up to the Lunar new year, inflation has risen to its highest level since September 1996, when it was at 7.4%.

The weather that has been experienced in China has also affected power supplies and transport networks.

“The CPI was mainly driven up by factors including the severe snow disaster that ravaged more than half of the country,” the official Xinhua news quoted Yao Jingyuan, the chief economist of the statistics bureau, as saying.

At the same time the country experiences record high inflation Beijing has also been taking steps to slow the growth of China economy which expanded at a 13 year high of 11.4% in January, also increasing prices.

Over the past thirteen months Beijing has raised interest rates six times and told reserve banks to put eleven times more money into reserves. Similar actions are also expected over the next year to control spiralling prices.

“This is not the peak. The peak will probably be in February because China suffered more in February from ice and snow storms,” Chen Xingdong, a senior economist at BNP Paribas in Beijing, said.

For communist China inflation is a particular concern, sparking fears of social unrest, and with the general consensus saying the worst is not over, Beijing is no doubt got radical plans up its sleeves.

Another key sign that the inflation problem is worsening was data released Monday showing China’s producer or wholesale prices were up 6.1% last month from a year earlier, the fastest increase in over three years.

“Energy costs, raw materials, mineral products are all shooting up. Labour costs are also increasing. These have to translate into inflation in one way or another,” said BNP Paribas’s Chen.

With costs of raw materials rising as well as food and energy prices, the countries vast export industries are also in danger of becoming more expensive to international markets. If this happens we could very well see China contributing more towards world inflation.

With the news this week that Virgin are the front runners in the bid to take over troubled bank Northern Rock, Financial Market looks at how the group will have to alter its tabled bid in order to cement any proposed deal.

The government has told the Virgin Group, spear headed by Richard Branson, that if it is to take over the Northern Rock the terms of its existing deal will have to be improved. The current terms are said to be more geared towards new investors than the long term standing of the mortgage specialist..

With the news that the Virgin consortiums terms are not to the liking of the government, the management-led bid to salvage the bank could still fall through. Nationalisation of the bank is still very much on the table without a better deal for taxpayers according to the treasury.

The government has stated that in return for its risk in helping the troubled bank out it wants increased exposure to any upside.

Northern Rock still owes the Bank of England £24 billion. If a successful take over offer is not made, an alternative course of action that has also been proposed involves the splitting of Northern Rocks debt into government guaranteed bonds and selling them off to investors.

Investors were further concerned when shares in Northern Rock fell as much as 8% upon news that the rescue packages tabled were not meeting government expectations, but this is a far cry from the disappointment of the zero return investors are expected to get should the bank be taken into public ownership.

Northern Rocks biggest single share holder SRM Global has also increased their stake in the company to 11.5%. As an opponent to the take over bid by Virgin, SRM would see Virgin take a majority shareholding in Northern Rock should the take over proposal be successful.

A sixteen year high, that’s the level of inflation the UK is currently experiencing for goods leaving UK factories according to January’s report released by the Office for National Statistics.

Annual output inflation reached 5.7% in January up from 5% in December, with the price of goods leaving factories up 1% and prices paid by factories for raw materials also continuing to rise, now up 18.7% over the past 12 months.

According to ONS data the surge recorded in January is due to the further increasing prices of crude oil which is up 70.3% on the year, and the spiralling costs of home grown food up 36% - a record high.

Core output inflation which strips out the effects of both rising fuel and food prices, has also risen faster than expected, up 0.8% this month and 3.2% on the year.

The report will certainly be of concern to the monetary policy committee at the Bank of England, and could prevent any further planned rate cuts being made in a bid to stave off UK recession.

“We had been expecting a further increase in output price inflation, but these figures are unequivocally awful,” said Philip Shaw, economist at Investec. “The scale of worsening of factory gate inflation highlights the MPC’s dilemma with monetary policy over the remainder of the year. It is having to grapple simultaneously with a slowing economy and a worsening inflation background.”

This news comes at a time when comparable housing market data also show continued slowdown throughout January, a sign that the once lucrative property market is beginning to loose momentum. House prices rose 9.1% in January down from 9.7% in December.

Amid growing recession concern the ONS also released figures showing Britain’s trade deficit gap in December was £7.574bn, higher than the predicted figure of £7.35bn.