Financial Market

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.

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%.

UK house price inflation has fallen to its lowest rate for twelve years, with consumer confidence at its lowest since 1993. Subsequently the UK housing market could see its first declines since then as a result.

One of Britain’s largest lenders reported that prices in March fell 0.6% on February, bringing annual growth predictions down to just 1.1%.This forecast also marked the lowest annual growth prediction since March 1996.

Predictions are that UK house prices will now continue to fall further, and that the marked has see a stark shift since summer of 2007.

“Expectations of higher house prices will have undoubtedly encouraged some speculative demand in the housing market over the years, but with lower house price growth expected now and in the future, the effect will work the other way, causing at least some of this demand to fall away,” - Fionnuala Earley, Nationwide’s chief economist

The average UK house price was now £179,110 up only £2,2027 on the same figure last year. Over the last two years however these prices remain up 11% and up 47% in the last five years.

However price are generally predicted to see a further fall throughout the course of 2008.

“A moderate fall in prices at this stage should not be unwelcome and should help to ensure greater stability in the market going forward.” - Fionnuala Earley, Nationwide’s chief economist

Yesterday Nationwide put up the price of its fixed rate and tracker mortgages which account for 90% of new home buyer mortgage deals, amid increased inter bank, or Libor, lending costs.

A continued dampening in the housing market could also set the stage for a rate cut from the Bank of England as early as next month.

“We think these latest developments, along with the continued weakening in the housing market, will mean that the MPC will bring forward its rate cut to April.”

Oil jumped above $107 a barrel today after the continued conflict in Iraq led to saboteurs blowing up one of the countries two major export pipelines. The attack came amid the third day of Iraqi military operations, targeted towards loyal fighters of the Shi’ite cleric Moqtada al-Sadr in the town of Basra in the southern Iraq.

The explosion marked the first time since 2004 that the southern Iraqi supply route has been disrupted.

“Crude exports will be greatly affected because this is one of two main pipelines transporting crude to the southern terminals, we will lose about a third of crude exported through Basra,” - Oil Company official

In last Friday’s trading a commodities sell off saw oil take a sharp fall to below $100 a barrel, after record highs of $111.80 seen last earlier in the week, but todays rise is a further extension on the $4 gains made yesterday after a report showed lower than expected petrol stocks in the US.

US crude was up 43 cents to $106.33 this afternoon, after peaking at $107.70 earlier in the day. Any gains that were to come on the back of increasing conflict in Iraq were limited by a strengthening dollar which also showed gains after the FED eased recession worries.

The dollar gains were also backed by figures released which showed US jobless benefit claims fell by 9,000, with the greenback managing to regain some lost ground. In early trading it saw a rise of 0.6% to %1.5757 against the euro and a rise of 0.9% against the Yen.

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.