FTSE retreats from eight-month highs, rates in focus

FTSE retreated from 8-month highs on Wednesday, with strong jobs data raising the spectre of interest rate hikes, and with analysts highlighting concerns about companies' weak earnings and high valuations.

Data showed the unemployment rate dropped to 7.1 percent in the three months to November, below even the most optimistic analyst forecast and just a decimal point above the threshold where the Bank of England has said it may think about raising interest rates.

Although the strength in job creation is good news for British business, the prospect of higher rates is not, as it will increase borrowing costs for companies and consumers alike and reduce the appeal of equity investments.

"We are in the phase of the economic cycle where you are recovering with spare capacity. But at some point you will run out of slack. We are approaching that period but we are not there yet," said Steven Bell, director of global macro at F&C Investments.

"It's still positive for equities but we are moving into the space where the biggest space is to be short bonds."

Bell's own positions include a modestly long one on global equities and a short one on British gilts, whose prices fell on Wednesday as the market moved to price in a hike sooner.

The FTSE share index, meanwhile, edged lower after the jobs data, to trade down 7.66 points, or 0.1 percent, on the day at 6,826.60 points by 1139 GMT.

The retreat came after the index, which is in overbought territory according to the 7-day relative strength indicator (RSI), hit an eight-month high of 6,867.42 points on Tuesday.

Analyst downgrades were behind most of the key single stock fallers, as they raised concerns about the weak start to the earnings season and the stretched valuations.

Royal Bank of Scotland fell 3.1 percent after UBS downgraded the stock to "sell" from "neutral", saying that the share price already reflects much of the progress that they think the group will make in the next 18 months.

While company specific, such concerns underscore a broader trend of stretched valuations, with analysts saying that company earnings now need to show strong growth to justify any further gains in share prices.

So far, though, the company updates are not really delivering. Brewing giant SABMiller fell for a second day as Tuesday's disappointing sales figures translated into price target downgrades from the likes of Credit Suisse, Exane BNP Paribas and Deutsche Bank.

Meanwhile shares in William Hill, which issued a trading update last week, suffered after HSBC cut its price target to 350 pence, which was below current levels.

"Valuation is not compelling given threats to earnings and we see little to attract the marginal buyer," it said in a note.

Overall, Thomson Reuters StarMine SmartEstimates predict that FTSE 100 companies will on average miss consensus 2013 earnings expectations by 0.8 percent, based on the up-to-date forecasts from the historically most accurate analysts.

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EasyJet's McCall doubles pay to £6.44m in 2013 after revenues surge

Earnings for budget airline boss among first to be published under new government clear language guidelines

The boss of EasyJet, Carolyn McCall, almost doubled her pay to £6.44m in 2013.

Her total remuneration was reported by the budget airline under new rules introduced by the business secretary in September that require publication of chief executive earnings in simple terms.

Around £4.2m of her overall pay was in shares that will vest in March 2014, under a long-term incentive plan. McCall, a former chief executive of the Guardian Media Group, also was paid a £1.15m bonus.

EasyJet's chief financial officer Chris Kennedy more than doubled his rewards to £3.74m, including £2.74m in long-term incentive payments.

Pilots in France recently called a one-day strike claiming that management was not sharing record profits with its employees.

A spokesman for EasyJet said McCall's rewards reflected a surging share price and performance over the last three years. He said average salary across the airline was £62,000 and that pay was designed with "a clear link between the value created for shareholders and the amount paid to EasyJet's directors."

"Shareholders have shared in this success through a 120% rise in the share price during the financial year. Dividends of £85m were paid during the year and EasyJet has recently recommended to shareholders the payment of dividends totalling £308m to be paid in March 2014.

"EasyJet's pay strategy is constantly reviewed to ensure it is in line with companies of similar size and turnover in the FTSE 100 and is based on investors' best practice guidance and reflects consultation with our major shareholders. EasyJet is committed to maintaining an open and transparent dialogue with shareholders."

Profits rose 51% to £478m over the 12 months to September 30, as revenues went up 10% to £4.3bn.

The pay at EasyJet is one of the first to be published under new accounting rules brought in by the business secretary, Vince Cable, requiring FTSE companies to include a single total pay figure for top executives, rather than obscuring rewards in incentive schemes.

A report earlier this month showed that while directors have curbed bonuses, rewards diverted into so-called long-term plans have rocketedand pushed top executive pay up by 14% in a year.

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Tesco's grim trading update will prompt questions about chief's strategy

Tesco is expected to unveil another grim trading update next week which is likely to prompt new questions about whether the turnaround strategy of chief executive Phil Clarke is working.

A flurry of City analyst research notes out yesterday predicted disappointing sales data when the UK's biggest grocer reveals its third quarter sales update. Barclays, Shore Capital and Deutsche Bank all expect no progress in the grocer's crucial UK market - which still accounts for 70% of group profits - after flat sales at the time of the last update.

Retail analyst James Collins at Deutsche Bank, Tesco's joint house broker, is forecasting a 1.5% decline in the most recent like-for-like UK sales.

He said: "We expect third-quarter like-for-like trends to have deteriorated in most markets versus the second quarter, most notably in the UK, Thailand, Ireland and Korea."

Barclays' James Anstead is predicting a 1.8% drop. He said: "It seems unlikely that Tesco's third quarter trading statement will be the turning point that the market is looking for."

Shore Capital's Clive Black is expecting a sales decline of 1-2%.

Tesco was one of the biggest FTSE-100 fallers. The shares lost more than 2.5% to close at 345p. Two years ago they were changing hands at 405p. JP Morgan yesterday cut its price target from 335p to 315p, Deutsche Bank reduced its target from 405p to 386p.

Tesco's main problems are in the UK, where it is losing business to upmarket rivals like Waitrose and the hard discounters, especially Aldi and Lidl. It is also struggling to catch up with a move away from big weekly shopping trips to out-of-town hypermarkets and a shift to online shopping.

Last week research group Kantar reported that all four of the big UKsupermarkets were losing market share, for the first time in more than a decade.

Clarke is 18 months into a £1bn transformation plan for Tesco's UK stores, which ranges from employing more store staff to revamping tired hypermarkets, improving the food on the shelves and trying to make faster headway in online shopping.

In an interview with the Sunday Times last weekend, Tesco's chairman Sir Richard Broadbent admitted the grocer had become too inward-looking over recent years and "had lost touch with the outside world". He said that a turnaround would not be rapid and that innovation - such as Tesco's new Hudl tablet computer - was key to the retailer's revival.

But at Tesco's last financial results it became clear that the grocer also has substantial problems overseas. Clarke, who led the international business before he took over the top job, reported declining like-for-like sales in every one of its international markets, which spread from Turkey to Thailand. Profits in Europe were down more than 70%.

Article Source : http://www.guardian.co.uk
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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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Stock markets soar on positive world manufacturing surveys

UK order books and output grew at fastest pace in 20 years while China's year-long contraction ended

Stock markets soared on Monday as surveys of manufacturing output around the world gave the strongest indication yet that the richest countries are finally shaking off the after-effects of the financial crisis.

British manufacturing order books and output grew at their fastest in almost two decades while China, which has suffered a year-long contraction in manufacturing output, saw activity expand in August. Factory sectors in Spain and Italy returned to growth for the first time since 2011. Only France and India among the world's biggest economies experienced falls in production and Paris will be comforted by indications that some areas of manufacturing stabilised during the summer.

India, though, appeared to be heading into deeper trouble after a fall in the rupee failed to arrest the country's first contraction in manufacturing for more than four years.

The FTSE 100 jumped almost 100 points to 6507 with mining groups leading the charge. Rio Tinto and Anglo American saw a sharp rise in their values as investors bet on a more widespread use of iron, coal and nickel. The French Cac and German Dax also rose strongly.

George Osborne has taken comfort in recent months that the UK's long-awaited recovery in manufacturing is under way. The services sector has expanded for more than a year, but the economy was unable to push ahead while construction and manufacturing contracted. Since the beginning of the year those sectors have stopped being a drag on growth and in recent months have added momentum to the growth figures.

The monthly snapshot from the Chartered Institute of Purchasing and Supply/Markit said the return of confidence, a rosier outlook for exporters and demand for new products had all helped UK factories in August.

The purchasing managers index (PMI) rose from 54.8 in July to 57.2 last month – its highest level in two and a half years.

The PMI is made up of various measures of industrial activity including orders, output, employment, stock levels and inflationary pressure.

Rob Dobson, senior economist at survey compilers Markit, said orders and output were growing at their fastest since the summer of 1994, a period when the UK was recovering from recession.

He said: "The UK's factories are booming again. Orders and output are growing at the fastest rates for almost 20 years, as rising demand from domestic customers is being accompanied by a return to growth of our largest trading partner, the eurozone."

Meanwhile, Britain's high streets have performed well this year and the British Retail Consortium said the trend continued into August. Sales rose 3.6% on a year ago as shops expanded to cope with rising demand. The BRC said the figures augured well for the autumn because they were strong enough to show an improvement on last August, when the Olympics was at its height.

Strong manufacturing growth has been accompanied by an increase in price pressures, the Markit report said. Companies reported rising costs for fuel and raw materials, with its input prices index up by 10.4 points on the month – the second highest rise in the survey's history.

The potential for a rise in inflation, coupled with analysis showing that much of the boost to the economy has been based on consumer spending while investment remained on hold, has persuaded some analysts to conclude that the quickening recovery is unsustainable.

Trevor Greetham, a director at Fidelity Worldwide Investment, accused the government of "unleashing the beast" of cheap mortgages to foster a dash for growth before the 2015 election.

He said a large part of the current recovery could be traced back to the government's Funding for Lending Scheme, which offers cheap money to banks, and the housing market scheme Help to Buy, which have channelled money into mortgages at the expense of business lending.

The TUC said the benefits of the recovery were being swallowed up by business managers and shareholders, leaving workers worse off.

Speaking before the TUC's annual conference next week, general secretary Frances O'Grady pointed out that UK workers have suffered a huge squeeze on their incomes over the last five years, with average pay falling by 6.3% in real terms.

She said many have remained on frozen or low pay while inflation has jumped, leaving someone earning £26,000 a year more than £30 a week worse off in real terms.

The study, part of the TUC's Britain Needs a Pay Rise campaign, compared hourly pay rates in 2007 (at 2012 prices) with those in 2012, and "shows the extent of the pay squeeze being felt by families across the UK as incomes fail to keep pace with rising prices".

O'Grady said the north-west was the hardest hit region in the UK following a fall in average hourly pay from £11.43 in 2007 to £10.52 in 2012 – an 8% drop in real terms.

France, India and Russia struggle

France's manufacturing sector is struggling to recover after a difficult year of redundancies at the state-backed car makers Renault and Peugeot Citroën and high-profile steel works closures.

While eurozone manufacturing activity expanded for a second successive month in August, in France the purchasing managers index was confirmed at 49.7, where a figure below 50 shows activity contracted. It was the only eurozone country where the measure of activity failed to improve.

However, output has fallen in France over the last four years far less than some other eurozone countries, and the slow rate of contraction was read by many analysts as a sign that the recession is bottoming out.

India also suffered a slowdown in manufacturing output in August, though much of the blame was heaped on the administration of prime minister Manmohan Singh, a former economics professor, who has run the country since 2004 and was re-elected in May.

The HSBC manufacturing purchasing managers' index fell to 48.5 after a drop in domestic and export orders. In the last two years GDP growth has more than halved to 4.4% and investment funds have flowed out of the country. The central bank has hiked interest rates, making it tougher for businesses and consumers to borrow.

India was not alone among the "Bric" countries to suffer a contraction in manufacturing. Russia's output also fell, largely because of government neglect and a high rouble. A drop in oil revenues exposed the weakness in manufacturing weakness, leading Vladimir Putin to suggest he may free several jailed business leaders to boost output and growth.

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

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Markets hit by fears that Syria attack could raise fuel prices

FTSE down but Shell and BP shares boosted while petrol retailers warn of grim outlook for consumer

Mounting prospects of a US-led military strike on Syria sent shock waves through the energy and financial markets on Wednesday with oil hitting its highest level for six months and drawing predictions that it could reach $150 (£97) a barrel.

The move in the value of crude, reflecting fears that wider Middle East output could be disrupted, gave a major boost to the share price of Shell, BP and other oil companies but sent the stock of heavy fuel-users such as easyJet and International Airlines Group, the parent of British Airways, into a nosedive.

The Petrol Retailers Association also warned motorists that it was only a matter of time before the price of petrol at the pump would have to rise and the outlook was "grim".

Motorists are warned petrol prices will rise as oil hits its highest level for six months, with investors worried the Syrian conflict could affect neighbouring countries. 

The FTSE 100 index fell further in London as investors worried about the potential for a wider conflict involving Iran and even Russia wading in on the side of the embattled government of Assad.

There was a slight rally in prices as David Cameron indicated he would first seek some kind of United Nations approval for an attack on Syria but not before shares in Dubai – the most important financial market in the Middle East – had slumped 7% and the index in Kuwait had fallen by 6%.

Michael Wittner, head of global oil research at French bank Société Générale, said the North Sea crude oil benchmark, Brent Blend, could rise from Wednesday morning's six-month high of $117 a barrel to as much as $150 if the war spread from Syria to key important oil producers such as Iraq. The US crude price, for West Texas intermediate oil, hit a two-year high, rising above $112 for the first time since May 2011.

"We believe that in the coming days Brent could gain another $5-$10, surging to $120-$125, either in anticipation of the attack or in reaction to the headlines that an attack had started," Wittner said in an investment note to clients.

"If the regional spillover results in a significant supply disruption in Iraq or elsewhere, Brent could spike briefly to $150," he added.

Syria is not an important oil producer or transit country but the wider area including Saudi Arabia produces 35% of the world's supplies. If Iraq or Iran were affected by any fallout from a military strike on Syria, the global oil market would rely on extra output from Saudi Arabia, the only member of the Organisation of the Petroleum Exporting Countries with significant spare oil production capacity.

"The Saudis could handle most likely scenarios, but the markets will look at the shrinking spare capacity that remains after any disruption is made up, and that would be bullish [for higher oil prices]," said Wittner.

The oil price spike was a boost to Shell, whose share price rose almost 4% to £22.25, and BP, whose shares rose by more than 1% at 452p.

The wider FTSE 100 index of leading companies fell by nearly 0.5% early on , adding to an already 3% slump since the middle of the month on the back of fears about Syria, allied with concerns that the US would finally halt a long-running government economic stimulus package.

Stock markets in continental Europe were also down, as was the Nikkei index in Japan, which fell by more than 2% to 13,264 points, with companies such as Toyota and Sony down up to 3%. The Dubai Financial Market index closed at 2,549.61 points, with Emaar Properties leading the rout. Shares in the developer that built Dubai's Burj Khalifa, the largest freestanding structure in the world, fell almost 8.5%.

Most mining companies based in London, such as Glencore Xstrata, were hit by the political uncertainty, but the price of gold – seen as a haven – continued to rise as did the US currency. The dollar strengthened 0.5% against the Japanese yen and 0.3% versus the euro.

Ishaq Siddiqi, London-based market strategist at ETX Capital, explained the dangers to the wider economy of higher crude values on the back of foreign aircraft strikes on Syria. "Once filtered through to the real global economy, the increase in oil prices will put a halt to the pace of economic momentum we are currently experiencing in major parts of the world.

"It's plausible that Brent oil prices could be over $120 a barrel in the coming days and, if oil prices spike even higher, it wouldn't be out of the question for the US Federal Reserve to hold off on tapering stimulus measures this year."

Threats of a $150 oil price take the markets back to July 2008 when Brent briefly traded at US$147.50, the highest intraday price on record. This was the height of the economic boom, which was followed by the autumn collapse of Lehman Brothers and then a full-scale banking crisis.

Crude then crashed to $40 but has largely been priced at over $100 since the middle of 2010, despite a relatively slow recovery in the world economy. Prices have been pushed upwards due to a mixture of stronger demand and supply problems. Oil supply from Opec producer Libya has already been reduced to a trickle after an armed group shut down a pipeline linking its largest western oilfields to the ports.

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

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Unilever sales miss forecasts as emerging markets growth slows

Anglo-Dutch maker of Marmite, Ben & Jerry's, Hellman's and Persil shows little sign of recovery in North America or Europe

Consumer goods giant Unilever has warned that growth in emerging markets was slowing, while there was "little sign" of recovery in North America or Europe.

The Anglo-Dutch firm reported underlying sales growth of 5% in the second quarter on Thursday, just below market expectations.

The maker of Marmite and Persil said growth in emerging markets in the quarter was 10.3%, compared with 10.4% in the previous quarter, while developed markets fell by 1.3%.

"Growth is slowing in emerging markets, as macro-economic headwinds influence consumer behaviour," the company said.

"Within this overall trend we see a mixed picture across the major countries reflecting different local circumstances. Developed markets remain sluggish with little sign of any recovery in North America or Europe."

Unilever makes products including Marmite, Cornetto, Pot Noodle, Flora, Vaseline and DomestosShares in Unilever fell 1.5% in early trading, losing 41p to £26.74.

The FTSE 100 company's strongest growth came from its home care and personal care divisions, while refreshment was held back by "adverse weather" which hit ice cream sales. Its ice cream brands include Ben & Jerry's, Magnum, Wall's and Carte D'Or.

In its foods division, the good growth of Knorr and Hellmann's was offset by a decline in spreads.

Group turnover in the first half overall rose 0.4% to €25.5bn (£21.9bn), while pre-tax profit rose 14% to €3.6bn.

The chief executive, Paul Polman, said: "Our innovation pipeline is robust which will be vital as we navigate the slowdown in many parts of the world.

"The tougher economic environment and reinvigorated competition require us to set the bar higher on innovation and to increase investment behind our brands. At the same time we need to continue to take costs out of the system to help finance this investment."

The International Monetary Fund warned earlier this month that emerging markets are slowing down, as it cut its forecasts for global growth this year.

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

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Central bankers face fight to keep bond markets calm

Carney & Bernanke have to project gloom that satisfies markets without deterring businesses investing and consumers spending

For the next few weeks and months, Europe's central bankers will be arming themselves for yet another battle with the bond markets. After a brief period of calm following the Spanish debt crisis last year, interrupted only briefly by Cyprus flirting with bankruptcy, the bond markets are tense, poised for a seismic economic jolt.

The situation is complicated, undemocratic you might say, as the world's largest pension funds and sovereign wealth funds vie with each other to maximise their returns safe in the knowledge that only a few people at the heart of the financial system have a clue what they are doing.

One month they pile into sovereign bonds, the next they turn to stock markets. Driven by fear and greed, they swim the international money markets like sharks scenting a profitable kill.

Mark Carney, the Bank of England's new governor, was being sniffed by the markets for a sign of weakness or indecision within hours of his arrival last week.

Four days into his five-year tenure and he took the plunge into giving forward guidance to the markets. The guidance said: "There will be no shocks. We intend to maintain ultra low interest rates for some time", or words to that effect. Mario Draghi, his counterpart at the European Central Bank, took the same step just 90 minutes later, promising an "extended period" of record-low rates.

The problem faced by both men is that much of the bond markets is focused on the US where some major investors believe an end to ultra low rates is inevitable sooner rather than later.

Already, some of the biggest investment funds that populate the bond markets are wrestling with the prospect of the Federal Reserve not only pushing up interest rates within a couple of years, but also bringing its $1 trillion (£670bn) a year bond buying programme to a halt before next summer. After years of feeding on cheap dollars, the party might be over.

And if the US pulls back, there could be negative effects to inflation, commodity prices and the real economy.

The Fed's QE spree, which is set at $85bn a month, makes it one of the biggest bond buyers on the planet. Mostly, it buys US government bonds and in so doing effectively underwrites the Obama administration's growing debt pile.

Until a couple of months ago the only worry among bond investors was how the Fed's purchases pushed up the price of the remaining bonds left for sale. A higher demand for US Treasuries sent returns, known as the yield, spiralling down and encouraged many investors, often against their better judgment, to put their funds into US, UK and European stock markets.

Bank of England's news governor, Mark Carney, like his counterparts at the Federal Reserve and the European Central Bank, has a tough balancing act to master. The huge recovery in the FTSE 100 during the first half of this year can partly be attributed to a share-buying frenzy with money previously locked up in the bond market.

Such was the rise in the stock market that Fed boss Ben Bernanke has now hinted he might start to slow QE. Not switch it off, just slow the pace of growth.

Pimco, one of the biggest bond fund managers, promptly experienced a huge outflow. Its boss, Bill Gross, wrote last week, seemingly with his head in his hands, that panicky investors were blinded by the smoke from recent battles to the long term outcome of the war.

He pointed to the Fed's high tolerance of inflation. Just as the Bank of England has allowed inflation to yo-yo and peak at 5%, so the Fed is happy for its core inflation rate of around 1% to increase to beyond its 2% target, something Gross said would make inflation irrelevant as a guide to behaviour for many years. Then he talked about the likelihood of a dramatic fall in unemployment to the 6.5% level Bernanke has targeted. This target, he believes is also many years away.

"Fed [0.25% interest rate] will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth," he said.

Far from endorsing the Fed, he is even gloomier, saying that short bursts of goods news on the housing market or car buying belie the problems all western economies face of growing health and care costs, competition from Asia that drives down wages and a constant technological drive that is de-skilling important white-collar industries from architecture to the media.

"The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, 'Mr Chairman are you serious?'" Growth will be negatively influenced, Gross added.

Carney faces a similar problem to Bernanke. He needs to convince the bond markets that a decent run of car sales and a booming housing market in the south east of England does not make for a surging economy. And yet he won't want to sound so gloomy that he deters businesses from investing and consumers from spending.

There are many economists, mostly on the monetarist wing, who believe the underlying state of the economy is sound, and with the good times are so close we need to calm things down with higher rates.

So every time Carney sounds even modestly upbeat he will find himself stinging his audience with a bit of gloom.

Can he maintain this balancing act? As we have seen in the last few weeks, Bernanke only needed to allow the corners of his mouth to lift a little, to allow a slight smile, and the bond markets took flight.

The answer must be that central bankers can maintain their balance if they just keep recycling the same message every month for the next few years. Fund managers will, no doubt, read too much into one speech versus another and send demand rocketing, or the reverse, only for the status quo to reassert itself, which is great if you are a mortgage holder or have high debts. Low interest rates for longer is your saviour.

But the bond markets never lose. They will turn away and seek returns elsewhere, sniffing weakness in developing world countries or obscure stock markets. These investments could turn into nasty bubbles and crash, which means people – governments and small investors – getting hurt.

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

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Fed fears and China credit crunch concerns send jitters through markets

FTSE 100 falls to just above 6000 from all-time highs last month, while Dow Jones index opens 200 points down in New York

Fears that the Federal Reserve is preparing to remove its stimulus from the US economy coupled with anxiety that China is being gripped by its own credit crunch have sent jitters through global stock and bond markets.

The rout hit yields on UK government bonds which hit their highest level since October 2011 in what analysts said was one of the most rapid moves ever witnessed on the market. Yields, which move inversely to price, on 10-year gilts have now risen a full percentage point to edge towards 2.6% in just two months, a rapid pace of change in the potential cost of government borrowing that could in turn increase the price at which companies and households borrow.

The FTSE 100, which last month was testing all-time highs, lost another 70 points to sit just above 6000 – a key level it only moved through at the start of 2013 – while the Dow Jones Industrial Average in the US suffered a 200-point loss in the first half hour of trading. Commodity prices, such as copper, were also lower.

Yields on US government bonds, known as Treasuries, also hit two-year highs as investors digested recent remarks by the Fed chairman, Ben Bernanke, that he might begin to slow down the central bank's $85bn (£55.1bn) monthly purchases of bonds which are being used to simulate the economy.

Governments in the eurozone, particularly the fragile economies of Spain and Italy, also faced their highest borrowing costs since May as yields rose.

Chinese stock markets dropped more than 5%, the biggest fall in three years to reach their lowest close in more than four years, after the People's Bank of China (PBoC) – the central bank – appeared to suggest it would not step in to prevent a rise in the rates at which banks borrow from each other.

Analysts at Nomura said that "investors remain concerned over tight liquidity conditions in the banking system" in China after the PBoC said it would "contain financial risks with more solid actions" and "fine-tune policy when necessary".

The rates which banks borrow from each other in China have jumped to close to 10% and to as much as 25% for some banks – from just 3% a month ago – raising concerns about the impact of lending by non-banks in China, known as shadow banks.

Traders on the floor of the New York Stock Exchange

Michael Hewson, senior market analyst at CMC Markets, said: "Fears of a continued cash squeeze in the Chinese banking system has seen European markets continue their soft tone on fears that a dislocation in the banking system will cause further downward revisions in forward expectations for growth over the coming months".

Hewson noted that the warning at the weekend by the Bank for International Settlements, the international central bank organisation, that more stimulus could actually harm fragile economies had also ratted markets. Stephen Cecchetti, head of the BIS monetary and economic department, warned on Sunday: "Unfortunately, central banks cannot do more without compounding the risks they have already created. Monetary stimulus alone cannot put economies on a path to robust, self-sustaining growth, because the roots of the problem preventing such growth are not monetary."

But a senior US central banker attempted to fight back against the market reaction saying that the Fed could not be broken in its resolve in easing back from monetary stimulus in the way that the UK had been forced out of the exchange rate mechanism in 1992 by speculative attacks by George Soros. "But I do believe that big money does organise itself somewhat like feral hogs. If they detect a weakness or a bad scent, they'll go after it," Richard Fisher, president of the Dallas Fed, told the Financial Times. The Fed had not even started to cut back its purchases of bonds, Fisher said. "I don't want to go from Wild Turkey to 'Cold Turkey' overnight," said Fisher.

John Higgins, chief markets economist at Capital Economics, said the potential removal for stimulus by the Fed was the main cause of the upheaval in bond markets but said, though, that a "bloodbath" should be averted. Even if US Treasury bond yields rose to 3.5% by the end of the year – from around 2.5% now – it would be low by historical standards, Higgins said.

In China, concerns about a rapid expansion in lending have dogged Beijing's economic management as consumers seek to maintain their living standards by borrowing cash from these local finance companies rather than main stream banks, although much of the lending can ultimately be traced back to the banking sector. Deutsche Bank has estimated that the among credit extended by non-banks could account for as much as 40% of Chinese GDP.

Capital Economics' China analyst, Mark Williams, said investors were factoring in lower growth as the credit squeeze takes effect while the Nomura analysts said the liquidity squeeze was the first real test for China's new leaders, in office for just three months.

"If the new leaders maintain their current approach, we believe it will add downside risk to growth in 2013 but in our opinion this would help reduce systemic financial risks, supporting long-term sustainable growth," the Nomura analysts said.

China's economy has already slowed in recent months: manufacturing contracted and property construction weakened in May, leading most analysts to say that hopes earlier this year of a bounce in growth have proved misplaced.

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

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Petrol price rigging inquiry contacts oil traders

Glencore and Vitol among those receiving 'request for information' as part of cross-border investigation

Glencore and other big oil trading companies have been asked to provide information to the cross-border investigation into alleged petrol price rigging. There is no suggestion that these companies are being investigated.

European commission officials have asked the trading houses to answer questions related to allegations that oil companies have colluded to manipulate the price of oil and petrol for more than a decade.

Glencore, the Swiss-based commodity trader that is one of the biggest companies in the FTSE 100, and Vitol, the world's largest oil trader, are among those known to have been contacted by the commission. Glencore had previously sought to play down any links to the oil price fixing probe.

Glencore – founded by Marc Rich, a commodities trader best known for being charged by US authorities with selling oil to Iran during the 1979-81 hostage crisis - declined to comment on the record. A source close to the company said the "request for information" letter from the commission's investigators had been sent to "every man and his dog" in the oil industry and was no indication of any wrongdoing.

A spokeswoman for Vitol said: "Vitol, along with other market participants, has received a request for information from the European commission. There is no suggestion that Vitol is under investigation."

Trafigura, the world's third-largest oil trader, which hit the headlines for dumping toxic oil waste in the Ivory Coast in 2006, said the company was not aware whether or not it had received the letter from the commission.

Other oil traders, including Gunvor and Mercuria, were reported as also receiving the letter. They either declined to comment or could not be reached.

The commission declined to comment on the progress of its investigation, which was launched last week with dawn raids on the London offices of BP, Shell and oil price reporting agency Platts. Norwegian oil company Statoil was also raided. The companies said they are helping investigators with their inquiry.

David Cameron has warned that anyone found guilty of the "hugely concerning allegations" will face the full force of the law. The prime minister said the allegations were "very, very serious" and major consequences would follow as he pledged to ensure that laws passed after the Libor scandal would apply to oil price fixing in the future.

European investigators said any alleged price fixing could have had a huge impact on the price of petrol at the pumps

 "It's totally unacceptable for firms to fix prices and force consumers to pay more. That's why we are looking at how to extend this criminal offence to the energy sector to make sure that those who manipulate benchmark prices feel the full force of the law," he said last week.

The Serious Fraud Office is considering launching a criminal inquiry into the alleged price fixing, which European investigators said could have been going on since 2002 and could have had a huge impact on the price of petrol at the pumps "potentially harming final customers".

The price of petrol has risen by more than 80% since 2002 to about 135p a litre.

The commission said the big oil companies may have "prevented others from participating in the price assessment process, with a view to distorting published prices".

It added: "Any such behaviour, if established, may amount to violations of European antitrust rules that prohibit cartels and restrictive business practices and abuses of a dominant market position.

"Even small distortions of assessed prices may have a huge impact on the prices of crude oil, refined oil products and biofuels purchases and sales, potentially harming final consumers."

Luke Bosdet, of the AA, said British motorists would be relieved that the "lid is finally being lifted off the dark and murky world of oil pricing".

"Because prices are set in secret, drivers and consumers have no idea whether or not the price they pay at the pumps is a fair reflection of the wholesale price."

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