Azure Global : 10/11/13

Friday 11 October 2013

IMF piles pressure on US to reconcile differences and prevent debt default

Shares and oil prices rise in hope of six-week extension as OECD warns US deadlock threatens world economy

Shares and oil prices rose strongly on Thursday amid hopes that policymakers in Washington were buckling under the global pressure for them to settle their differences and prevent a US debt default.

The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) both issued sharply worded warnings to Republicans and Democrats amid signs that America's Asian creditors were becoming alarmed at the potential consequences of the impasse.

Reports in Washington that the Republicans would agree to a six-week extension of the debt ceiling from next week's 17 October deadline led to a 323-point rise in the Dow Jones average. Brent crude was up by $2 a barrel and the FTSE rose by 92 points as the Republican leader in the House of Representatives John Boehner said it was time for meaningful talks with President Barack Obama.

After discussions with Republican leaders on Thursday night, the White House said Obama had held a "good meeting" but that they failed to reach an agreement to end the budget crisis despite earlier hopes that a deal may be in sight. Ninety-minute discussions between Obama and Boehner broke up with little apparent progress or press announcement, although there was a marked change in tone on both sides that suggested a deal may still be close.

Speculation about a deal had emerged after Jack Lew, the US Treasury secretary, said there would be chaos if the US defaulted – a message rammed home by IMF managing director Christine Lagarde and the OECD's secretary general Ángel Gurría.

Lagarde said there would be very dangerous consequences for the US economy and elsewhere if the default was not prevented.

She distanced herself from the infighting in Washington, noting: "The IMF does not make recommendations about how, politically, this can be resolved. We don't take a political view. We just look at the economic consequences.

"When it affects the largest economy in the world, we are bound not only to look at the immediate domestic consequences but at what happens elsewhere, so that we can have a dialogue with our members to help them prepare.

"I hope we will be able to look back in a few weeks and say what a waste of time that was. But we have to look at the risks no matter how unlikely they are to materialise."

Lagarde said there were two channels through which a debt default in the US would spread to the rest of the world. "One would be the trade channel, caused by a reduction in economic activity in the US from the third quarter onwards.

"The second would be the financial channel – the result of uncertainty and material issues. We are likely to see volatility, uncertainty and consequences for the rest of the world."

Lagarde said some of the warning signs of stress in financial markets – such as the VIX index of volatility and the price of insuring financial instruments – were flashing. "It's not helping the US to have this uncertainty and protracted way of dealing with fiscal and debt issues."

Gurría said: "The current political deadlock in the US is needlessly putting at risk the stability and growth not only of the US but also the world economy."

He added there was a risk that the west could be plunged back into recession by a default. "If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown. The magnitude of further possible negative feedback effects can only be guessed at."

The ongoing political impasse in Washington has sparked fears the US could default on repayments of its bonds, prompting banks and clearing houses to take preventative measures against such an unprecedented event.

In Hong Kong, the body which stands behind trades on the Hong Kong futures and options exchanges has concluded that some US Treasury bonds posted as collateral are more risky than in the past.

The US government needs to be able raise the nation's $16.7tn (£10.5tn) debt ceiling on 17 October otherwise it might not be able to make payments on bonds it has issued in the past, unleashing turmoil in the financial markets. About $120bn of debt needs to be repaid that day with another $200bn before the end of the month.

"Participants should make necessary funding arrangements to cover any shortfall to their margin requirements resulting from the increase in the US Treasuries haircut [discount]," the clearing house, Hong Kong Exchanges & Clearing, said.Neil Shearing, chief emerging markets economist, at Capital Economics said: "This is uncharted territory. Depending on the scale of default and the response of policymakers, regulators and the ratings agencies, substantial financial market dislocation could follow."

Article Source : http://www.guardian.co.uk

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WH Smith to open 16 more post offices in its stores

CWU fears for job losses after hundreds of staff were made redundant when WH Smith took on initial batch of post offices in 2006

WH Smith has walked into a row with post office workers after signing a deal to operate more outlets in its stores.

The retailer expects to open 16 more post offices in its branches, subject to six-week public consultations, under an agreement revealed alongside its annual results yesterday. WH Smith said it has also renewed a contract to operate 82 post offices in its stores for a further five years.

Chief executive Stephen Clarke, who took over from long-term WH Smith boss Kate Swann earlier this year, said the post offices were part of a plan to make the best use of store space and encourage more shoppers to visit.

However, a spokesperson for the Communication Workers Union (CWU) said: "We have grave concerns over WH Smith taking on a further 16 post offices."

Postal workers have been involved in a series of strikes since plans were revealed to franchise around 70 crown post offices, which are currently run by the government-owned service.

The CWU said the deal with WH Smith put the future of post offices at risk. It cited the case of a post office in Runcorn which has now moved to a Tesco store, while another in Grays, Essex, is being temporarily run from a council building.

The union is also concerned about job losses after hundreds of long-term staff were made redundant when WH Smith took on its initial batch of post offices in 2006. However, WH Smith said all staff would be transferred under rules which protect pay and conditions, and no redundancies were planned.

The row overshadowed another rise in profits, in line with expectations, at WH Smith despite falling sales. Pre-tax profits rose 6% to £108m as the company cut costs, improved efficiency and switched to selling more profitable items such as stationery, as sales fell 5% to £1.2bn. Underlying sales, which strip out the impact of new store openings and closures, slid at WH Smith's high street and travel stores, by 6% and 4% respectively, as sales of its core categories – stationery, books and newspapers/magazines – slipped back.

The company expects to open about 40 outlets a year in overseas airports, hospitals and railway stations. In the next half year it will open 20 outlets including its first stores in Russia and Qatar. The company now has 141 international outlets.

It is often criticised for shoddy looking stores in the UK with one Twitter account devoted to picturing its dirty carpets, but Clarke said WH Smith had spent £12m on improvements in the past year and more updates were in the pipeline.

Article Source : http://www.guardian.co.uk

Bank of England holds interest rates and quantitative easing

Governor Mark Carney believes much of the current 2.7% inflation rate can be blamed on one-off shocks

The Bank of England has rejected calls for a rise in interest rates despite a strong run of surveys showing the economy is recovering at its fastest pace since 2010.

In a widely expected decision, the central bank's interest rate setters kept the base rate at 0.5% and the level of its monetary stimulus to the economy, known as quantitative easing, at £375bn.

Some analysts have called for a rise in interest rates in response to the improving economic picture and a recent jump in housing market activity.

However, the bank's monetary policy committee has agreed to maintain its current policy stance until the unemployment rate falls to 7%. It expects to reach this milestone in 2016 after 750,000 jobs have been created.

Governor Mark Carney believes the economy remains weak and much of the current 2.7% inflation rate can be blamed on one-off shocks.

The bank is known to be extremely concerned at the level of business investment, which has continued to fall this year despite the pace of recovery picking up since the spring and many commentators describing it as a well-advanced and sustainable expansion of economic activity. Without a return to healthy rates of business investment, senior Bank staff fear the economy will be forced to rely on consumer spending to maintain growth.

Philip Shaw, UK economist at Investec, said the positive momentum of the economy made more QE unlikely.

"The key question surrounds the possible timing of the first interest rate hike. This is some way off and the likelihood is that the UK faces a long period of steady policy. Nonetheless markets and ourselves are sceptical that this move will occur as far in the future as the second half of 2016, as the Bank of England's guidance implies," he said, adding that the debt markets expect a rise in early 2015.

Peter Dixon, UK economist at Commerzbank, said: "As far as the immediate future is concerned, the BoE is expected to remain on the sidelines.

"Although the economy can be expected to lose momentum relative to recent trends, we look for a self-sustaining recovery with GDP growth in the region of 2% next year. This is not an environment in which additional policy activism is required, implying no more QE as well as no rate moves."

Howard Archer, chief UK economist at IHS Global Insight, said: "The already limited likelihood of any further QE appears to have waned further as the good news on the UK economy has been largely sustained – notwithstanding a few blips such as the surprise marked drop in industrial production in August. Meanwhile, any change in interest rates is clearly a long way off whether or not unemployment ends up falling more rapidly than the Bank of England currently expects."

Article Source : http://www.guardian.co.uk