FinancialExpat's Blog

China, the biggest contributor to world growth, has unveiled a USD 586 billion plan to stimulate its economy. China's cabinet pledged "fast and heavy-handed investment" in housing and infrastructure through 2010 and a "relatively loose" monetary policy. GDP growth in China fell below 10% in the third quarter, down from double digit growth in the first two quarters. The Chinese economy, which accounted for around 27% of global economic growth in 2007, is a key source of demand for raw materials and consumer goods. The strength of the economy is important for Asian and global markets alike so news the Chinese government is going to tackle growth is seen by market analysts as a welcome relief. China's extra spending may boost the nation's economic growth by 2 percentage points next year.

China's announcement saw the price of crude oil and copper rise more than 5%. Oil also gained after Saudi Aramco, the world's biggest state oil company, told South Korean and Japanese refiners it would reduce December supplies. Crude oil for December delivery rose to USD 64.30 a barrel on the New York Mercantile Exchange.

The yen declined for a second day against the euro on speculation that China's stimulation package will give investors more confidence to buy higher-yielding assets using money borrowed in Japan. The yen fell 1.7% to 127.10 per euro. Against the dollar, it declined to 99.14 from 98.24 at the end of last week. The euro rose to USD 1.2821 from USD 1.2718. The pound rose against the US dollar on speculation rising stocks are reviving risk appetite, boosting demand for sterling. The pound increased 0.5% to USD 1.5724 from USD 1.5643 at the end of last week.

Treasury two-year notes, the worst performing US government securities in the last year, may beat longer-term debt as the Federal Reserve cuts interest rates to stimulate the US economy. The difference between yields on two- and ten-year notes, known as the yield curve, may widen to a record 3 percentage points from 2.44 percentage points now, according to strategists at Morgan Stanley and Credit Suisse. Shorter term yields are falling on expectations the Fed will reduce its target for overnight loans between banks to mitigate the effects of recession. Ten-year yields are likely to rise as the government borrows to support the US financial system.

"A combination of weakening fundamentals, technical selling and sheer panic is producing stock prices that are at extreme odds with companies long-term prospects", according to fund manager Schroders. They added that the dividend yield on the UK market is now greater than that on government bonds - even excluding financials. "This has happened exceptionally infrequently over the last 80 years and, in each case, has provided a remarkable opportunity for investors to buy cheap stocks and generate strong long-term outperformance. The scale of recent stock-price falls now offers long-term investors the chance to buy shares at prices they could only have dreamed of previously."

Spotlight on Europe

The European Central Bank lowered its deposit rate last week to 2.75% from 3.25%. However, it may be forced to lower the rate further if banks continue to deposit huge amounts of cash overnight. Deposits have exceeded 200 billion euro (USD 255 billion) for 16 of the last 17 working days (as at Friday last week).

HSBC Holdings plc, Europe's biggest bank, said third quarter profit rose even as it set aside a more than estimated USD 4.3 billion to cover bad loans in the USA and forecast "further deterioration". Still, business in Asia is resilient and the bank won't cut the dividend or seek government help to raise capital, Chief Executive Officer Michael Geoghegan said today.

D Carnegie & Co, the 205 year old Swedish investment bank, has had its licence revoked by the country's regulator and will be put under supervision of the national debt office. The Stockholm-based bank may be able to regain its licence under the stewardship of the debt office, the regulator has said in a statement. They added that Carnegie took "exceptional risks" awarding loans.

Spain will guarantee bond sales by its banks for as long as five years under a 200 billion euro (USD 256 billion) program to encourage lending. Spain will back banks' new senior unsecured debt for as many as three years under normal circumstances and five years in exceptional cases. Prime minister Zapatero said in October that the plan was a "precautionary" measure to protect the country's banking industry.

Santander will raise 7.2 billion euro (USD 9.2 billion) selling new stock in a rights issue to boost capital, joining Barclays, Royal Bank of Scotland and Italy's biggest bank UniCredit in similar moves.

Posted by steve at 02:41 PM | Permalink

Emerging markets have seen record gains in the last week, as central banks in India, China and South Korea have taken measures to stem the damage to their financial systems. The MSCI Emerging Markets Index advanced 2.1% (Monday), adding to a record 20% rise last week. The International Monetary Fund almost doubled its limit on loans to developing nations last week and the US Federal Reserve provided USD 90 billion in currency swap agreements to Mexico, Brazil and South Korea. In addition, the South Korean government has just announced an economic stimulus package worth USD 11 billion aimed at public projects and tax cuts to encourage spending in an effort to avert a recession. It is keen to avoid a repeat of the 1997-98 Asian economic crisis and last week cut interest rates to 4.25% from 5%. Such measures, and the IMF's emergency loans to Hungary and Ukraine, with a possible loan to Pakistan to cover its balance of payments deficit for the next two years, have acted to restore a degree of investor confidence.

The manufacturing sectors in the US and UK have seen continued weakness in October. The US Institute for Supply Management's factory Index dropped to 38.9 from 43.5 in September. In the UK the CIPD/Markit manufacturing index stood at 41.5 in October, slightly up on September but the sixth month in a row of contraction. A reading of 50 in each index is the dividing line between expansion and contraction.

The cost of borrowing has fallen following the moves by European policymakers to join their counterparts in Asia in reducing borrowing costs. LIBOR rates for 3 month loans in US dollars fell to 2.86% earlier this week, the lowest level since the failure of Lehman Brothers on 15 September. The European Central Bank and Bank of England are expected to cut interest base rates later this week. Australia's central bank has just cut its base rate 75 basis points to 5.25%.

The yen rose against the Australian dollar and British pound as falling interest rates make it less attractive to buy overseas assets using funds from Japan. A market expert commented, "The yen is being supported by the narrowing differential with other markets." The yen rose to 66.73 per Australian dollar, 156.22 against the pound but remained more stable against the euro and US dollar (125.14 against the euro and 98.94 against the US dollar).

Crude oil for December delivery stands at USD 63.03 on the New York Mercantile Exchange, suppressed by slowing demand in the USA, the world's largest consumer of oil. US oil consumption during October was 7.8% lower than the same month last year. This is reflected in the price for crude oil which is 33% down from this time last year.

The European Commission will on 12 November present a proposal to amend the Savings Tax Directive in order to close possible loopholes and to limit the administrative burden on paying agents. The Savings Tax Directive applies in 42 jurisdictions: 27 member states, 5 non-EU countries and 10 dependent and associated non-EU territories. The European Commission have now started discussions with selected Asian financial centres, namely, Hong Kong, Singapore and Macao. Negotiations will also start with Norway and possibly Bermuda and Iceland.

An embryonic commodity market has experienced growth of 5.4% through 2008 so far. It is carbon finance. Its primary purpose is to curb global warming by stimulating the trade of a new commodity known as a carbon-emissions reduction credit. When the EU began regulating greenhouse gas emissions in 2005, the credits became valuable. Instead of curbing their own emissions, companies were permitted to purchase credits. A coal-burning utility in Germany, for example, could buy credits to comply with the regulations if doing so was cheaper than switching from burning coal to natural gas. Experts suggest that carbon finance is "obviously an enormous market", but "It's a very, very risky market and one that few people understand well". On the other hand, if Europe, Japan and the US are serious about controlling emissions, and if China and India go along, the price of controlling emissions will rise, and carbon-credit indices could become attractive to investors. With little correlation to the equity markets, it could prove an interesting area for portfolio diversification.

The number of expatriate employees on international assignments has doubled over the last three years due to globalisation trends, according to international consultancy firm Mercer in their 2008/9 Benefits survey for Expatriates and Globally Mobile Employees. They have reported a 47% rise in traditional expatriates (employees on 1 to 5 year assignments) and a 38% increase in global nomads (employees who continuously move from country to country on global assignments). Mercers say that the growth has been driven by companies desire to be globally competitive. Nearly 70% of companies consider expat employee benefit provision a medium or high business priority. However, nearly a quarter of companies have no overall policy for providing expat benefits. The research also found that a third of companies offer international retirement plans, an increase from 23% in 2005. Nearly three-quarters of companies with an international plan restrict eligibility to certain expatriates who cannot be kept in the home or host plan.

In a new section for Across the Spectrum starting this week we look at a different world region each week in a little more detail. This week it is Latin America.

Banco Itau has agreed to acquire Uniao de Banco Brasileiros in a stock transaction, creating Brazil's largest bank and overtaking Banco do Brasil as Brazil's largest bank. The combination will create a bank with 575 billion reais (USD 261 billion) in assets. The transaction may signal further consolidation among Brazilian financial institutions. Brazil's central bank has injected more than 100m billion reais (USD 46 billion) in the banking system since 24 September to stimulate lending and prevent smaller institutions from failing.

The Unibanco deal acquisition may signal more consolidation ahead among Brazilian banks after local credit markets dried up. Sao Paulo based Nossa Caixa bank, is in talks to be acquired by Banco do Brasil.

Brazil has announced that it has removed its financial transaction tax (referred to as "IOF") in an attempt to improve the financial situation. The tax was levied at 1.5% on currency exchange for inflows of foreign capital, and at 0.38% for foreign currency loans.

Yesterday, Mexico's peso was the second biggest gainer among Latin American currencies after Chile's peso, and has risen 5% since touching a record low on 23 October. The peso traded at 12.78 per US dollar. A leading currency strategist in Mexico City commented that, "There is greater optimism that liquidity has made a comeback. This is making investors confidence flow back toward emerging markets."
The information set out herein has been obtained from various public sources and is published by way of information only. The Spectrum IFA Group can accept no liability of any sort in relation there to and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.
This information is only provided as a guide and, if you need assistance in this area you are strongly advised to seek the help of a specialist in this field as each individual case is different.

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Posted by steve at 02:53 PM | Permalink

US President George Bush has announced he will host an international summit in response to the current global financial difficulties sometime after the US presidential election in early November. The goal of the meeting is "to review progress being made to address the current crisis and to seek agreement on the principles of reform needed to avoid a repetition and assure global prosperity in the future." The meeting may prove to be the first in a series of meetings.

Sweden has become the latest European country to take action to stabilise its financial system with the creation of a USD 205 billion programme to boost liquidity in the system and take direct stakes in banks if needed. While its banks are stable and have experienced no liquidity or capital problems so far, they do control two thirds of lending in the Baltic states of Estonia, Latvia and Lithuania where economic concerns exist which could undermine Swedish banks.

The Dutch banking and insurance group ING has accepted a 10 billion euro capital injection from the Dutch government to boost its core capital. It is the first Dutch financial group to benefit from a 20 billion euro fund created a week ago by the Dutch government to recapitalise banks and insurers.

South Korea has joined countries in Europe, along with Hong Kong and Australia, in providing state backing to banks. The government will guarantee USD 100 billion in bank debts and supply lenders with USD 30 billion to stabilise its financial markets. South Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans. That's forced South Korea to rely on the wholesale market for about 44% of its funding, with international markets accounting for as much as 12%. The won has lost a third of its value this year, and dropped almost 10% last Thursday alone.

London interbank rates fell across the board with hopes rising among traders that measures by various national governments to guarantee loans and invest in banks are perhaps beginning to ease liquidity issues in money markets. Three-month Libor rates for dollar, euro and sterling on Friday fell to 4.41%, 5.02% and 6.16% respectively, all nearly half a percentage point down from a week ago.

State-backed rescue plans in the US, Europe and South Korea are encouraging purchases of higher yielding currencies funded in Japan, leading the yen to decline against other currencies. The yen declined to 137.93 per euro and 102.14 per dollar. Against the euro, the dollar weakened to USD1.3502 and the British pound rose to USD1.7470.

OPEC, the supplier of 40% of the world's crude oil, plans to cut output for the first time in two years at a meeting this Friday as the price of oil slides towards USD 50 a barrel. While OPEC may be able to prevent some of the price decline, analysts think it will be difficult for them to stem a price fall.

UK house prices posted the biggest annual decline in at least six years in October. The average asking price for a home fell 4.9% from a year earlier to 229,691 pounds (USD 398,000). In London prices dropped 2% from a year earlier. It is predicted by analysts that the UK economy will decrease 1% next year by analysts and they expect the Bank of England to lower the benchmark interest rate further in the coming months.

China's economic growth rate has fallen for the third quarter in succession at a rate of 9% in the three months to September, down from 10.1% over the previous quarter. A spokesman for the Chinese National Bureau of Statistics commented, "The growth rate of the world economy has slowed down noticeably. There are more uncertain and volatile factors in the international economic climate. All these factors have started to release their negative impact on China's economy."

India's central bank has unexpectedly lowered its key repurchase rate for the first time since 2004 from 9% to 8%. India's finance minister said, "I hope this reduction in interest rates will enthuse investors to continue to take forward their investment proposals." He further commented that the reduction "is consistent with our objective to moderate inflation as well as ensure satisfactory growth."

A survey by Nomura Asset Management UK has revealed that three quarters of northern European investors are planning to raise exposure to emerging markets equities over the next three years. Out of the 20 institutions surveyed, a quarter will raise their emerging market exposure between 4 & 10%, while the rest have more modest plans of increasing exposure by up to 4%. The survey also revealed that they are moving towards using more regional specialists rather than general emerging market fund managers in search of higher performance.

Posted by steve at 03:00 PM | Permalink