King puts the boot into the City

Another week begins, and the spotlight passes from one central bank head to another – Sir Mervyn King of the Bank of England. King puts the boot into the CityIn the past two weeks the markets have watched Fed Chairman Bernanke speak about interest rates and possible further quantitative easing.

Last week ECB President Trichet used language that indicated rate rises are just around the corner (sending the Euro markedly higher against the Pound and Dollar) and this week it is the turn of Bank of England and Mervyn King with the monthly MPC meeting scheduled this week.

After last month minutes showing three members voting for a rate rise, Sterling has enjoyed a bounce against the Dollar – if not the Euro – and if the Bank does decide to raise rates we can expect further gains.

However, King seemed to rule out any symbolic rate rises in the inflation report last month and given the current spike in crude oil stemming from unrest in the Middle-East, the doves on the MPC will be stressing that the UK economic recovery cannot be put in jeopardy by raising rates.

King has also drawn criticism from the city with comments over the weekend that city institutions are too short-term orientated.

Given that Mr King once said he thought central banking should be a dull subject, the thinking may be that he seems to be overplaying his hand and that could hurt the credibility of the bank if he is seen to be overly political.

The ECB meeting has been the catalyst for the recent Euro strength, but any rate rise in the Eurozone would probably only be beneficial for the Germans.

The struggling periphery PIGS nations will certainly not welcome any move – especially the Spanish whose mortgages are prices from one year Euribor – which jumped 14 basis points immediately after Mr Trichets announcement.

In the face of rises oil prices, which acts as a global tax, raising rates at the behest of the Germans risks derailing any sustainable recovery in nations trying extremely hard to get their public (and private) finance back in order.

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.

Fear factor returns

Despite good economic data yesterday from the US in the form of US pending home sales and Manufacturing ISM the market flipped into negative mode.

There is no one reason for this shift but a culmination of reasons and this led to equities tumbling and Oil and commodities falling; the main losers were the banks as fears rose on renewed balance sheet concerns. 

September was previously touted as the month for stocks to fall and the first day of the month definitely backed up this prediction. Concerns over the sustainability of China’s growth were a big factor and also discouraging data from automakers. 
In the markets we witnessed further strength in the USD and the JPY as the risk aversion trend came into play. GBP/USD moved from a morning high of 1.6350 to a low of 1.6111 and EUR/USD retreated from 1.43 to 1.42; GBP/JPY fell back under the 150 level as the positive YEN feel on the new leadership continued coupled with strength on the back of risk aversion. 
USD/JPY moved into 92.00 levels and this brings the 90.00 level into focus again.

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Cautious traders sell the FTSE’s summer rally

FTSE 100 property stocks came tumbling down after JP Morgan put out a damning note, saying the real estate rally was unsustainable.

UK based property stocks have risen 98pc since March, their strongest rally in 34 years. The analysts said the overall sector was 14pc too expensive, with the UK looking particularly vulnerable.

“We call for caution and recommend focusing on fundamental value because we believe the current rally is likely to end rather unhappily,” they said, forecasting a possible 41pc correction in prices.

“The market remains distressed, in our view, and has not degeared enough, triggering the risk of future equity raisings or an acceleration in forced sales.”

Liberty International dropped 19½ to 504½p. Hammerson was off 15 at 390p. Mid-cap Taylor Wimpey toppled 4¼ to 48p, Redrow was 14¼ lower at 233p, while Barratt Developments slid 16½ to 229½p.

Pub companies with their large property portfolios also took a pasting. Enterprise Inns sunk 8¼ to 158p, while Punch Taverns was 5½ lower at 125¾p.

Traders returning from their holidays were cautious after the furious bull run of the summer months, ploughing into pharma and tobacco stocks and selling risky banks.

The FTSE 100 struggled for direction in early trade, only to start heading south after the publication of PMI data, which showed a surprise drop in British manufacturing last month.

After a near 20pc rise since early July, the FTSE 100 fell 89.2 points to 4908.9. The mid-cap index shed 197.83 points to 8817.51.

Sentiment was further shaken after Paul Tudor Jones, the billionaire US hedge fund manager, said he did not believe that an economic recovery was under way.

Brent crude was down by almost $1 to under $69 a barrel in late trading on Tuesday. Oil major BP followed suit, losing 12½ to 519½p. Shell was 19p lower at £16.55, and Tullow Oil slipped 33p to £10.44. 

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The perils of bangers for cash- Chinese style

Say what you like about the Chinese, they certainly know how to do economic stimulus.

The 3.9 per rise in British private car sales in June announced this week was hailed as a great success. It was clear evidence that the labour Government’s “bangers for cash” car scrappage scheme and other efforts to revive the economy were starting to work.

Big deal. In China, June car sales were up whopping 48 per cent. Now that’s what I call a stimulus.

It just shows what you can do when you own the banks. Yes, I know we own our banks, too, but that’s different because labour are too incompetent- and broke to do anything that really works.

When China decided it needed a stimulus package, it chose to create one by ramping up government spending and opening the lending spigots.

Bank chiefs were told to flood the economy with credit and competed with each other to get the most money out the door. The result was a tidal wave of cash, with bank lending in June twice the level in May.

The authorities are now worried about inflation, a property bubble and future bad debts. But it has kept the economy growing at a decent lick despite the slump in exports. This is good news for many foreign companies, particularly carmakers. Jaguar Land Rover will this year sell many more than the 12,456 vehicles it shifted in China in 2008.

But China’s growth may actually be a net negative for Britain in the short term because of its impact on commodity prices. As Barclays Capital pointed out in a recent report, the effect of Chinese growth on the price of oil and metals seems disproportionate to its share of the world economy.

For the British economy, the near-doubling of the oil price in the past six months is a high price to pay for selling a few more Jags.

Although the oil price has fallen back by more than $10 a barrel in the past two weeks, economists warn that at above $60 it is one more reason to be nervous that flickers of life in the British economy could be snuffed out.

Recent signs have been discouraging, notably the 0.5 per cent fall in factory output in May published this week.

Against this background, yesterday’s decision by the Bank of England’s Monetary Policy Committee not to extend its quantitative easing programme was a surprise.

The purchases of bonds using newly created money have had limited impact so far.

The Chinese are clearly storing up serious potential problems in the future. But the British economy is still in such a fragile state that there remains more risk in doing too little than too much.

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Wall ST slides ahead of earnings season

US stocks fell to their lowest levels in two months on Tuesday as investors sold shares ahead of the start of the second quarter earnings season.

Confidence in the economic recovery was knocked by talk of a potential second government stimulus plan after Laura Tyson, an economic adviser to president Barack Obama, and House Democratic leader Steny Hoyer both suggested there could be merits to such a package.

Economic fears and a strong dollar took its toll on commodities, with the price of oil falling for a fifth consecutive session.

Energy producers followed, and Schlumberger dropped 4.4 per cent to $49.20 while Exxon Mobil lost 2.3 per cent to $66.56.

Industrial stocks also suffered, and General Electric gave up 4.1 per cent to $11.01.

The benchmark S&P; 500 closed down 2 per cent at 881.03, while the Dow Jones Industrial Average lost 1.9 per cent to 8,163.60 and the Nasdaq Composite gave up 2.3 per cent to 1,746.17.

That came after sharp selling in the afternoon as the S&P; fell below its 200-day moving average, which is seen as a key support level.

Analysts predicted that the market would remain subdued at least until Thursday, after Alcoa has reported its results.

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Hesitant start for Asian markets

Markets got off to a hesitant start Monday as investor doubts on the staying power of a global recovery kept Asian stocks soggy and currencies subdued ahead of a much expanded Group of Eight meeting this week.

Japan’s Nikkei slipped 1.58 per cent to 9,661.27, while the MSCI index of Asia ex-Japan eased 1.1 per cent to 319.61.

The air of caution kept the US dollar and bonds supported as safe-havens, while pressuring commodity prices. Crude oil futures were down at five-week lows of $65.00 a barrel.

Investors were still smarting from last week’s dismal US payrolls report which put a question mark over the recovery there, and thus across the globe.

Stock bulls had been hoping for something more ”V”-shaped and the disappointment was clear in Thursday’s 2.9 per cent drop in the S&P; 500. Having skipped a session on Friday for the Independence Day holiday, S&P; 500 stock futures were off 0.86 per cent in Asia at 885.90.

That implied the cash index was perilously close to breaking major chart support of a head and shoulders pattern.

Investors were also wary ahead of the Group of Eight summit in L’Aquila, Italy on July 8-10, which has been expanded to include China and a host of developing nations.

China last week floated the idea of discussing the US dollar’s place as the sole international reserve currency, causing a brief dip in the currency.

The G8 pushed back, however, with a source telling Reuters there was no appetite for such a momentous change.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.