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.

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.

A report from mortgage lender Halifax has released data the shows stamp duty for first time buyers has risen 82% over the last five years, in line with soaring house prices.

In 2007 the average bill was £1,751 compared with just £960 in 2002.More interestingly nearly all first time buyer in the South West, South East and East London were liable to pay stamp duty, while only 42% of first time buyers in Northern regions had to pay.

In London it is even worse news for first time buyer with the average stamp duty bill increasing by 364% over the last five years to £8,675.

The government has highlighted that as part of plans, half of all first time buyers will pay no stamp duty this year, and the lowest 1% tax band hits houses of value between £125,000 and £250, 000. Houses with a value between £250,000 and £500,000 will have a 3% charge, whilst properties above that bracket incur a 4% charge.

“Stamp duty has again become an issue for first-time buyers because the stamp duty thresholds have not kept pace with house price inflation.” – Martin Ellis Halifax chief economist

Mr Ellis went on to acknowledge that the government has raised the 1% threshold in recent years but said the government needed “to raise the stamp duty thresholds to compensate for house price inflation over the past decade”.

There is light at the end of the tunnel however for first time buyers, with the survey showing UK house prices did fall by 0.3% in February.

This week has not been particularly favourable to the dollar and today hit a new low against the euro amid fears continued fears for the US economy.

Uncertainty over the US economy has been further fuelled by poor job figures released in the US this week. In the report by the US labour department it was indicated that the US had seen an unexpected decline of 63,000 jobs in the month of February, the sharpest sign yet that the US is heading, or is in the midst of a recession.

At its lowest the euro was worth as much as $1.546 while the pound was worth $2.016 and the yen 102.91 to one greenback.

Both leading European currencies received the boost against the greenback after Frankfurt and the Bank of England decided to keep interest rates on hold on Thursday in order to curb inflation, which is currently at its highest rate in six years within the eurozone. Meanwhile the FED has been reduced its interest rates in order to tackle a cooling economy.

After the ECB’s comments on inflation it was made clear that the European central bank is more concerned about inflation in the eurozone than a potential fallout from the rising price of the euro, suggesting the benchmark interest rate will remain at 4% in the near future. This is in stark contrast to both the FED and Bank of England who are likely to cut interest rates.

Although this may be initiating a degree of profit taking there have been knock on effects to European based export companies who have seen their products become more expensive than their American counterparts.

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.

In September 2007 Microsoft lost its appeal against a £343 million fine imposed by the European commission after a long running competition dispute. According to the European court Microsoft had abused it market position and froze out rivals in server software and products such as media player.

After the ruling Microsoft was ordered to ensure its products could operate with other computer systems by sharing information with rival software companies. It was also ordered to provide a version of its Windows operating system that would be available without Microsoft’s Media Player software.

In the latest development in the case the European Commission this week further fined the software giant for not adhering to the sanctions imposed by the original court ruling for its anti-competitive behaviour.

As part of the development Microsoft must now pay a record £680.9 million because of its failure to comply with the 2004 ruling. The fine for Microsoft comes on top the 2004 and 2006 fines of 280m and 497m euros that were issued respectively.

“Microsoft was the first company in 50 years of EU competition policy that the Commission has had to fine for failure to comply with an antitrust decision,” - Competition Commissioner Neelie Kroes

It was only last week that the Microsoft announced to open up some of its leading software, agreeing to publish several APIs for Vista and Office 2007 and provide free access to them, helping non-Microsoft developers interact with Microsoft products.

“Open access to this documentation will ensure that third-party developers can connect to Microsoft s high-volume products just as Microsoft s other products do” – Microsoft

In addition to this Microsoft will free up the protocols around its client and server software, amounting to 30,000 pages of documentation. With this announcement Microsoft has also pledged not to sue open-source non commercial versions of those protocols.

Microsoft isn’t however out of the woods just yet, and with two similar anti-trust cases recently launched against it regarding similar issues more fines could well be on there way.

The first of these cases examines whether Microsoft is abusing its dominance of the PC market to secure market share of the internet, the second will investigate Microsoft’s continued incompatibility with rival products.

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.

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.

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.