Articles from February 2011

Warren Buffett billionaire investor still positive over US future

Warren Buffett, the billionaire investor, has urged Americans at his annual general meeting to ignore the “prophets of doom”, and to believe that the country’s “best days lie ahead”.
Warren Buffett billionaire investor still positive over US futureIn an upbeat annual letter to the shareholders of his investment firm, Mr Buffett said he was itching to make more large acquisitions.

The 26-page letter is seen as an authoritative guide to the state of the world’s biggest economy.

He is one of the world’s wealthiest and most influential investors. As such, his opinion is closely followed.

Despite the American economy struggling to emerge from the recession following the financial crisis, Mr Buffett believes the time is now right to make some major investments.

In his annual letter to his Berkshire Hathaway investors, he said his trigger finger was now itchy to invest in new projects, using some of the fund’s £23 billion dollars in cash reserves.

The news that Mr Buffett is seeking substantial new opportunities will be welcomed by many global investors.

Shares in the benchmark Dow Jones Index are roughly at the same levels as they were three years ago.

UK doing worse than expected as GDP figure revised down further

The UK economy shrank by more than previously thought during the last three months of 2010 revised official figures show.
UK doing worse than expected as GDP figure revised down furtherGross domestic product (GDP) slipped by 0.6% in the period, according to fresh data from the Office for National Statistics (ONS).

Its initial estimate had suggested the economy had contracted by 0.5% – with heavy snow blamed for the slump.

However the ONS said that the revision was not a dramatic one.

The ONS statement said that manufacturing appeared to have done quite well, but that the construction industry was weak. The services sector, which accounts for a large percentage of the economy, contracted.

GDP figures for a particular quarter are produced first as a so-called “flash” estimate, and are later revised at least twice as more detailed information is collated.

However Chief Secretary to the Treasury, Danny Alexander, said he expected the economy to recover.

“Of course, as we have said before these figures are disappointing. We have got to deal with the fact that we have inherited an enormous budget deficit – the previous government maxed out the nation’s credit card.

“But we have also got to do what we can to support the economic recovery. The early survey data suggests that the economy is able to bounce back and we are going to continue to do everything we can to support that.”

The Pound fell slightly after the figures to trade at $1.607, down 0.5 of a cent. Against the euro, the pound was unchanged at 1.17 euros.

Sterling weakens despite Bank of England’s interest rate vote

The future path for UK interest rates is still very unclear even with the benefit of the minutes from this month’s MPC meeting. Sterling weakens despite Bank of England's interest rate vote Despite the fact that members Sentance and Weale were joined by Spencer Dale in arguing for an immediate rise in interest rate, the majority of the committee remained unconvinced and in Posen’s case, still adamantly opposed to such a move.

This left the vote at 6-3 against an increase and despite renewed news warning about imminent and repeated rate rises, it is going to take a real change in sentiment from 2 of the 5 ‘steady as she goes’ voters to trigger a rise.

Wise Money finds it difficult to believe that this can occur until the committee has seen further evidence that the UK economic pick up has not been brought to a shuddering halt.

This feasibly, is unlikely to be the situation until towards the end of April when we and the MPC will get first sight of the preliminary 1st Qtr GDP data for 2011, a week prior to the May rate setting meeting which itself takes place a week prior to the release of the Bank of England’s May Quarterly Inflation Report.

It does look to me as though this meeting will be the first possible for a move in rates and the forex market seems to be of the same opinion with Sterling, having risen sharply yesterday morning, slipping against all the major currencies. Sterling is likely to remain vulnerable.

The crisis in Libya is still causing concern for commodities, equities and the world in general.

The little news that is emerging is very worrying with the escalating unrest disrupting oil supplies as civil war looms.

Oil prices have rocketed despite the fact that any shortfall in supply could be easily covered by Saudi Arabia.

The move looks more to do with fears that the problems will persist for some time yet and might spread further across the region.

Brent oil price rises to $111 a barrel

For a third straight day the price of crude oil has continued to climb on production fears at the twelfth largest OPEC producer. Brent oil price rises to $111 a barrelThe price of Brent crude oil has hit $111 a barrel, and US crude also rose in price, as worries persist about the unrest in Libya.

Markets are concerned the trouble could worsen in key oil producing countries, affecting supplies and hitting growth.

The price of Brent rose more than $5 a barrel, to $111.25 as US light sweet crude oil prices hit $100 a barrel for the first time since October 2008, before settling up 2.8% at $98.10 a barrel.

It comes as the White House said it was watching oil prices.

“We are obviously monitoring this very carefully and we are concerned about it,” White House spokesman Jay Carney said.

The markets have been gripped by uncertainty this week as investors tried to work out the possible impact of the Libyan violence on oil supplies.

With foreign oil companies suspending production, experts pointed out that the state-owned National Oil Company has run Libya’s oil fields before and could do so again.

It did so in the 1980s when US oil firms left the country – but production would be hampered without the input of experienced of foreign oil companies- who are repatriating their staff to safety.

Oil prices continue to rise as Libya riots spread

Oil prices have continued to rise in the UK and US after ongoing riots in Libya and worries about the impact on the country’s crude exports.
Oil prices continue to rise as Libya riots spreadIn London Brent crude rose by more than $2 a barrel to $108.5, before falling back to $106.79 a barrel.

In New York, US light sweet crude oil rose by $5.60 to $91.80 a barrel.

US shares were also behind at midday. Asian stocks had closed down, and European shares also fell before recovering by mid-afternoon.

At noon in New York, the Nasdaq was behind by 1.65%, the Dow by 0.76%, and the S&P 500 by 1.11%.

At close France’s Cac 40 had fallen by 1.15%, Germany’s Dax by 0.05%, and the London FTSE by 0.30%.

Meanwhile, Spanish oil firm Repsol-YFP was joined by Italy’s Eni in closing down production in Libya.

On Tuesday, the Standard & Poor’s (S&P) credit rating agency downgraded Libya from A- to BBB+, and said it could lower the rating further.

Libya is the world’s 12th-largest exporter of oil, and there are concerns that growing tensions in the country could hit oil production.

Spillover into other big regional producers, such as Saudi Arabia and Kuwait, is another concern that is forcing up the price of oil.

Global oil companies have been pulling staff out of Libya as unrest continues to spread.

The rising price of oil, which could fuel further rises in already high inflation rates and hit corporate profits, affected stock markets in Asia and Europe.

Unrest in the region could spark a wider correction in stock markets, analysts said.

Oil price rises on Libya riots fear

The price of oil has risen on worries of the riots in Libya over the weekend.
Oil price rises on Libya riots fearBrent crude had jumped 2.6% by late afternoon to $105.2 a barrel, its highest level since before the 2008 financial crisis.

European energy companies are evacuating some staff from the country, which is a major oil and gas producer for the European market.

The European Union is preparing to evacuate its citizens from the country.

The UK Foreign Office has already advised that those without a pressing need to remain in the country, should leave by commercial means if it is safe to do so, as has the US.

Meanwhile Turkey has already begun flying its 3,000 or so citizens in the country home.

Commodities markets are worried about more than just Libya, with the threat of unrest escalating in Iran – the second biggest oil producer in the Organisation of Petroleum Exporting Countries (Opec).

There is nervousness that even Opec’s biggest producer, Saudi Arabia, may yet succumb to instability, although the autocratic regime there has yet to witness any protests.

Oil supplies in Libya and elsewhere have yet to be significantly disrupted by any of the events in the Middle East.

Opec is thought to have an additional 4.7 million barrels-per-day available, compared with Libya’s exports estimated at 1.5 million.

Libya is responsible for only 2% of all oil production worldwide, although its share of the European market is estimated at 10%.

Oil production is essential to the Libyan economy, with oil output accounting for 95% of export receipts and 25% of the country’s economic output.

China’s overheating economy stokes inflation worries

The Chinese economy is overheating leading the central bank to raise the reserve requirement for banks by 0.5% in its latest attempt to curb inflation.
China's overheating economy stokes inflation worriesBy demanding that the banks hold more cash, the central bank hopes to restrict lending, thereby reducing spending.

The bank has already raised capital requirements once this year, following a number of hikes last year, and has raised interest rates three times in the past four months.

Inflation in China, now officially the world’s second biggest economy, is growing at 4.9% a year.

High levels of lending helped China through the global downturn and contributed to the economy’s 10.3% growth last year.

However, concerns about the economy overheating and price rises is causing unrest, as they have done in the past, mean the government and central bank are now keen to clamp down on lending.

The measures taken so far have had little effect, with the rate of inflation rising in January and economic growth picking up in the final three months of last year.

Analysts, therefore, expect further measures in the coming months.

Bank of England’s Andrew Sentance warns colleagues on inflation risks

Bank of England monetary policy committee member Andrew Sentance has put further pressure on his colleagues with worries about high UK inflation.
Bank of England's Andrew Sentance warns colleagues on inflation risksHe questioned claims that unemployment and spare capacity in the UK economy would slow down price rises, which he instead blamed on strong global demand.

Mr Sentance has voted for an interest rate rise since June, and was joined by another committee member in January.

Bank governor Mervyn King has said that inflation will remain high this year.

Consumer prices inflation rose to 4% in January – twice the Bank’s official target – largely due to rising commodity prices and the VAT increase.

Mr King said this week that the Bank expected inflation to remain higher-than-expected due largely to sharp rises in food and fuel prices.

In his speech to the Institute of Economic Affairs, Mr Sentance said that the “output gap” – economist-speak for how much less the UK economy is producing than its potential – is not as great as in previous recessions.

It is seen as an indicator of how fast the economy can grow without pushing up prices.

He suggested that measures of unemployment, domestic demand and business expectations supported his claim.

Unemployment is currently below 8%, whereas in during the recessions in the 1980s and 1990s, the rate had risen to over 10%, he said.

With relatively fewer people competing for work, he suggested that wages may start to rise more quickly, perpetuating higher inflation.

He also warned that businesses may “come to expect higher inflation on an ongoing basis, and the higher rate of inflation becomes deeply ingrained”.

High inflation to a large extent reflected “global forces”, he said, in particular the strong recoveries in Asia and other emerging markets.

He added that the exchange rate may have overreacted to the recession, adding to inflationary pressures, and favoured a modest appreciation in sterling.

King warns interest rates will rise in May

UK interest rates will rise in May hints Bank of England Governor Mervyn King in inflation letter.King warns interest rates will rise in MayThe Bank of England Governor, Mervyn King, has signalled that interest rates may rise three times before the year is out, hitting 1.25pc by December.

Mr King came as “close as he can” to endorsing market expectations that the base rate, to which lenders’ own rates are tied, will start to climb from its record 0.5pc low in May, said economists.

They seized on a key passage in the Governor’s latest letter to the Chancellor explaining rising prices, after annual inflation hit 4pc in January, double the target and its highest level in over two years.

Mr King said the consumer prices index (CPI) measure would climb closer to 5pc in the next few months.

However, he said, the Bank’s Monetary Policy Committee (MPC) believed inflation will be around target, at 2pc in two or three years, “under the assumption that the bank rate increases in line with market expectations”.

Interest rate futures are pricing in a first 0.25 percentage point rise by May and another every three months for the next two years or so. That would signal a 0.75 percentage point increase by the end of 2011.

The Bank’s quarterly inflation report will update its forecasts for growth and prices to give more indications as to when the base rate will finally rise, after two years at 0.5pc.

The Pound yesterday hit a five and a half month high against a basket of currencies as investors bet that rates will rise sooner rather than later.

The uncertainty the Bank builds into its forecasts gives it room to alter its expected course. However, it is under pressure to raise rates given over-target inflation. Two MPC members were shown in the last set of minutes to have voted for a rate rise.

Inflation grows around the world

There was a raft of growing inflation reports from China, Japan, Australia and the UK.Inflation grows around the worldChinese inflation for January was reported as expected at 4.9% but given that the authorities had altered the make up of the ‘inflation basket’, de-emphasising the food component and adding weight to residential related spending, we will need a few months’ reports to establish a new trend.

The Bank of Japan left both their official rates and the size of their asset purchase programme unchanged (zero – 0.1% target and Yen 5 trillion respectively) but did issue a slightly more upbeat assessment of the domestic recovery – a change in dialogue from the previous month which allowed the Yen itself to initially firm, although the ground was then lost to a firmer Euro.

The Australian Central Bank’ minutes painted a very rosy picture of their own domestic economy going forward.

Despite the expected impact to GDP of the severe flooding, the RBA view is that the economy will claw back the loss during the 2nd quarter and that solid job growth, tighter labour market and the medium term inflation outlook will mean that the current slightly restrictive policy stance remains appropriate.

UK inflation came in at +0.1% m/m +4.0% y/y which was exactly in line with median forecasts the main driver being fuel, restaurant prices, furniture and alcohol.

This has pushed Sterling higher this morning and now sits GBPUSD1.6091 and GBPEUR1.1889.

However, the real importance in the figure will be seen tomorrow when the BoE’s governor, Mervyn King explains the current strategy following the publication of the Quarterly Inflation Report.

Sterling still underpinned on the higher rates, sooner rather than later scenario.