Christine Lagarde tells US that debt crisis threatens world economy

IMF chief says US politicians must overcome shutdown and raise US debt ceiling before 17 October deadline

Shares in New York fell sharply on Thursday after the US Treasury warned that the budget fight between Republicans and Democrats in Washington risked plunging the world's biggest economy into its worst slump since the Great Depression.

President Barack Obama turned up the pressure on Republicans on Capitol Hill after the Treasury and the International Monetary Fund joined senior Wall Street figures in urging a deal well ahead of the deadline for raising America's debt ceiling on 17 October.

"A default would be unprecedented and has the potential to be catastrophic," the Treasury reported.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The recession of five years ago was the most severe the US has suffered and the economy has recovered only slowly from the damage caused by the financial crash. A health check of the service sector showed a marked slowdown in activity even before large parts of the federal government were shut down as a result of the failure to agree a budget deal.

Obama accused the Tea Party wing of the Republicans of being "extremists" who were "demanding a ransom for doing their jobs". The president added: "Congress has to pass a budget that funds our government with no partisan strings attached."

Heightened anxiety in the financial markets was reflected in an early 170 point fall in the Dow Jones industrial average and a rise in interest rates for one-month US Treasury bonds.

Christine Lagarde, the IMF's managing director, urged America's politicians to settle their differences before the dispute harmed the entire global economy.

Speaking ahead of the fund's annual meeting in Washington next week, Lagarde said it was "mission critical" that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09.

"I have said many times before that the US needs to "slow down and hurry up" – by that I mean less fiscal adjustment today and more tomorrow," Lagarde said. She added that the world's biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending such as medicare that did not jeopardise short-term growth.

"In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.

"So it is 'mission-critical' that this be resolved as soon as possible."

Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.

Lagarde's speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington. The IMF managing director said America's recovery was being held back by over-hasty budget cuts. "Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low – below 2% – due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher."

Lagarde said: "We at the IMF are very familiar with the ebb and flow of economic cycles, with the shift from recession to recovery. Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer."

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

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Lloyds must help TSB, Office of Fair Trading says

Lloyds Banking Group now required to bolster TSB's profitability by £50m a year in its first four years while giving it another £40m

Lloyds Banking Group has been ordered to help the 631-strong TSB branch network become more profitable under a series of measures set out by the Office of Fair Trading to make the offshoot a stronger high street competitor.

The move will be seen as clearing the way for government to kickstart the sale of its stake in 39%-taxpayer owned Lloyds Banking Group, which was first signalled by chancellor George Osborne in his Mansion House speech in June.

But the OFT's verdict is a frustration for Lloyds which just two days ago launched TSB as a new brand with much fanfare. It will now be required to bolster TSB's profitability by £50m a year in its first four years while giving it another £40m. But Lloyds will be relieved that is not being forced to include more branches in the spun-off TSB, which is likely to be floated on the stock market next year.

The announcement by the OFT follows an analysis commissioned by Osborne in June of whether the sale of the TSB branches as well as the 315 outlets by Royal Bank of Scotland – ordered by Brussels as a condition of the 2008 taxpayer bailouts – will be enough to increase competition on the high street.

The OFT concludes that the RBS sell-off, codenamed Rainbow, does not need alteration. A separate analysis of splitting RBS into a good and bad bank, also commissioned by Osborne, is ongoing. Business secretary Vince Cable said: "We must not forget the potential implications of a 'good bank/bad bank' split of RBS".

The competition body acknowledges that asking Lloyds to put more branches in to the TSB network could risk "incurring further delay and additional sunk costs" but wants steps to be taken to ensure that the TSB offshoot attains a 4.6% share of the current account market. As currently constructed, the OFT estimates TSB's current account market share is between 4% and 4.5%.

The announcement by the OFT came as a top Bank of England official attempted to justify his claim that bad lending by the Britannia building society was the cause of the £1.5bn capital hole in the Co-operative Bank, which merged with the mutual lender in 2008.

Andrew Bailey, deputy governor of the Bank of England, wrote to the Treasury select committee to set out the cause of nearly £1bn of losses on loans at the Co-op.

Bailey provided the analysis of the Co-op's losses following evidence given to the committee last week by Neville Richardson, the former head of Britannia which merged with Co-op in 2008. Richardson, who ran the combined entity until 2011, told MPs that he had left the organisation with "no issues" and insisted that Britannia's loan book was well managed and in line with other lenders.

In a letter obtained by the BBC, Bailey tells the committee's chairman Andrew Tyrie that some 75% of the £970m of bad loan losses at the Co-op between the beginning of January 2012 and the middle of 2013 were in the bank's non-core book, which in turn is made up of between 85% and 90% of former Britannia loans in 2013 and around 75% in 2012. Of the £970m, £288m were from the core lending book and £682m from the non-core book.

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UK economy: a miraculous recovery – or a blip in a longer-term decline?

The UK seems to be experiencing a remarkable economic turnaround – but how is it comparing with the US and Europe?

In Newcastle-upon-Tyne, property prices are racing ahead. Over the last year it ranks as Britain's top performing city, with an 11% jump in the cost of buying a home.

London lags behind the capital of the north-east with a 5.2% increase, though it remains the most expensive region.

The forecast is that prices will soar over the next couple of years as the turnaround in Britain's economic fortunes begins to feed into the property market.

In the last month, the economy has stepped up a gear. Manufacturing and construction industries have fallen in step with the already resurgent service sector to push the UK well ahead of Germany, France and the rest of the eurozone in the growth stakes.

When the latest GDP figures appear next month, the UK could outstrip the US, which has propped up the world economy since the financial crash of 2008.

Economists are now asking whether George Osborne has found a magic formula. Such is the confidence in Britain's new-found vigour that some experts are questioning the Bank of England's low-interest policy, which Threadneedle Street said only last month should last until 2016, such is the underlying weakness of key sectors in the economy.

So is the UK recovery real? Is it just a short-term burst in property dealing before the longer-term realities of a slow decline reassert themselves? And how does the UK compare with other countries?

UK unemployment. Credit: Guardian graphics

Employment/pay

Since the financial crash, workers across the developed world have been forced to price themselves back into work. Workers in Spain, Ireland, Germany and the UK have accepted the equivalent of zero-hour contracts that come with low pay and few benefits.

Britain's unemployment rate is now below 8% – although still above the 7% level being targeted by the Bank of England. As a result of immigration, there are almost 2m more people in the UK than in 2008, and many have found jobs.

However, this expansion in activity has not fed through into wage packets. The TUC has calculated that in the last five years average pay has fallen by 6.3% in real terms. A worker putting in 40 hours a week is £30.30 a week worse off, taking inflation into account, than in 2008.

Studies shows that four in every five jobs created since 2010 have been in low-pay sectors.

Wage rises in 2013 are averaging 2%, while inflation is running at 2.8%. A report on Monday by the Recruitment and Employment Confederation (REC) and KPMG shows the sharpest rise in salaries for full-time staff since 2008, but the REC also found that short-term appointments are at their highest since July 1998 – showing that employers are still seeking a flexible workforce.

A surge in the number of new jobs in the last 18 months has cut the US unemployment rate to 7.3%, its lowest for four years. But much of the fall is due to people leaving the job market altogether, mainly due to baby boomers retiring, younger people staying in college, and poorer workers claiming disability benefits. The US employment rate is 63.2% compared with 71.5% in the UK. In July a lacklustre 169,000 extra jobs were created, less than the 400,000 needed before the unemployment rate falls meaningfully.

In July, EU unemployment was at 11% , with the eurozone at 12.1% – both up half a percentage point on July 2012. That meant 26.6 million unemployed – roughly equal to the entire population of the Netherlands and Belgium combined.

The situation is much more concentrated among young people, with 5.5 million under-25-year-olds jobless.

Despite the crisis, salary levels have risen everywhere in the EU in recent years, with the notable exception of Britain and the bailed-out countries of Greece, Ireland and Portugal.

The EU's highest earners, the Danes, enjoyed gross average earnings of €60,000. Its poorest, the Bulgarians, get €4,668.

Exports

The financial crash of 2008 brought with it an inbuilt spur for recovery – a low exchange rate. While the indebted countries of the eurozone were tied to an exchange rate dictated by Germany, the UK could cash in on a 25% decline in the value of sterling.

Exports of goods are up, but the rise has disappointed ministers, who believed manufacturers would grab a golden opportunity to win market share in fast-growing countries such as Brazil, China and Turkey. Manufacturers have increased their output in response to an increase in domestic demand and turned away from cultivating export orders.

Without the revenues from North Sea oil and gas production, which have proved insufficient to counter energy imports since 2004, the UK's industrial position looks weak.

The service sector, which includes the City, the advertising industry and £9bn education export business, has maintained a surplus over imports throughout the last five years. However, exports of services have remained flat.

Maintaining Washington's spending budgets between 2009 and 2012 against attacks from conservative forces in Congress kept the economy growing. That is the Keynesian view inside the White House and among liberal commentators, who argue that the reason the US economy is larger than it was in 2008 (the UK economy is still 2.7% smaller) is the result of government spending and investment.

Like Germany, the US has benefited from huge demand from China and the far east for industrial equipment and cars. As a result, exports have grown steadily and proved a major impetus to growth.

Germany, along with China, is the global export champion, and while the crisis has hurt purchases of German goods in parts of the EU, its performance continues to excel, helping the EU to a rising exports record.

German exports grew 4.3% last year to over €1tn, according to the federal statistics office, with a more than 10% increase in sales to non-EU countries compensating for stagnation in European exports.

EU exports collapsed by more than €200bn in 2009 compared with the previous year, but have since recovered.

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

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GSK ran hospital bribery programme, say Chinese police

State media report claims wrongdoing was part of GlaxoSmithKline's corporate strategy and not caused by rogue salespeople

Chinese police claim to have found evidence showing GlaxoSmithKline organised a bribery programme targeted at major hospitals at a company level in China, dismissing suggestions that abuses may have been the result of overenthusiastic or rogue sales staff, according to a state media report.

An increasing number of individuals reputedly involved in corrupt payments are said to have made confessions, according to the Xinhua news agency. "As the investigation is moving on, it is becoming clear that it is organised by GSK China rather than drug salespeople's individual behaviour."

GSK issued a statement denying that wrongdoing had been part of a sanctioned corporate strategy. "The issues identified would be a clear breach of our corporate values and we have zero tolerance for any behaviour of this nature."

GSK accepted in July that some of its executives appear to have "acted outside of our processes and our controls to both defraud the company and the Chinese healthcare system". The drug firm is accused of funnelling up to 3bn yuan (£312m) to travel agencies to facilitate bribes to doctors and officials.

The GSK chief executive, Sir Andrew Witty, told investors the company's headquarters had "no sense" of the "shameful" and "deeply disappointing" allegations.

Tuesday's report from the Xinhua news agency quoted Huang Hong, a general manager for GSK in China and one of the detained executives, saying the company had set goals for annual sales growth as high as 25% – 7% to 8% higher than the average growth rate for the industry.

"Huang admitted that the growth rate of sales could not reach such a high number only by the efforts of the salespeople themselves if there was no dubious corporate behaviour," Xinhua reported.

Chinese police reportedly claim to have evidence that GSK China "went through the motions in internal auditing so as not to discover these violations".

The Xinhua report followed an article in the official People's Daily newspaper that quoted Guo Jianhua, head of recruitment at GSK China, saying the company had turned a blind eye to illegality.

"When the problems were exposed, the company pushed all responsibilities to individual employees," Guo said. It was unclear to which problems Guo was referring or if he was one of the detained executives.

Official media routinely get access to detainees in China. Other detained GSK executives have been interviewed on state television.

Bribes in China's drug industry are reportedly commonplace, fuelled in part by low salaries for doctors. A number of other multinational drugs firms are facing investigations similar to the GSK inquiry as whistle-blowers have come forward.

GSK's continuing controversy in China comes after the drugmaker last year reached a $3bn (£1.9bn) deal with criminal prosecutors in the US, pleading guilty to a raft of offences linked to the illegal promotion of drugs. Many of the allegations related to extravagant travel provided to doctors whose business GSK was courting.

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

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Barclays fights US electricity price manipulation fine through the courts

Bank intends to 'vigorously defend' $470m fine for allegedly manipulating electricity prices

Barclays has pledged to fight a $470m (£300m) penalty for allegedly manipulating electricity prices in California by taking the case through the US judicial system.

Faced with an order by the federal energy regulatory commission (Ferc) to pay a $435m fine and hand $35m of profits to low-income households, Barclays insisted that its trading activities had been legitimate and did not break any laws.

"We intend to vigorously defend this matter in federal court, where the Ferc will have the burden of proving its allegations and we will be able to present a balanced and full presentation of the facts," Barclays said.

The penalty from Ferc is based on allegations about Barclays' trading of electricity for two years to December 2008. It was first mooted in October and late on Monday was upheld by the Washington-based regulatorwhich gave the bank 30 days to pay the fine or appear in court. The proposed penalty is being levied at a time when the bank's new management team, led by chief executive Antony Jenkins, is attempting to rebuild its reputation following the £290m fine for rigging Libor which led Jenkins' predecessor Bob Diamond to quit the troubled bank.

The penalty from Ferc is larger than the Libor rigging fine and led to some concern among bank analysts that it could have an impact on the complex legal agreements struck by Barclays with regulators at the time of the interest rate manipulation case a year ago.

Sandy Chen, banks analyst at Cenkos, said the Ferc fine could trigger a review of the non-prosecution agreement with the department of justice from last July. He cited two elements of the agreement which stated that for two years the bank would "commit no United States crime whatsoever … and bring to the fraud section's attention all criminal or regulatory investigations, administrative proceedings or civil actions brought by any government authority in the US by or against Barclays or its employees that alleges fraud or violations of the laws governing securities and commodities markets".

Barclays to fight US power fine in the courtsThe allegations by the Ferc date back to 2008 so it was not immediately clear if they fell under the terms of the Libor agreement with the DoJ. Barclays said the allegations by the Ferc were one-sided and did not provide a "balanced and full description of the facts or the applicable legal standard".

Four former Barclays employees, Daniel Brin, Scott Connelly, Karen Levine and Ryan Smith, are required to pay fines – $15m in the case of Brin and $1m each for the others – for building positions in the electricity market to manipulate index prices. In an 85-page document Ferc used emails between the four to set out its case, in which they talked about "propping up" an electricity index. In another Connelly is alleged to have "laughed" at suggestions he risked being reported to the commission about his activities.

Barclays argued that the correspondence had been "cherry picked".

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

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Rail franchise timetable already showing signs of delay

Department for Transport grapples with lengthy negotiations to extend current contracts before franchise contests can resume

Train operators fear the revised rail franchise timetable announced in the wake of the west coast fiasco is already slipping as documents for the first contest appear likely to be delayed until autumn.

The invitation to tender for Essex Thameside, a competition paused during inquests into the Department for Transport's (DfT) botched award of the London-to-Glasgow line, is due in July. But companies have now been told the schedule may not be met.

The DfT has been grappling with contract extensions that, while intended as breathing space before longterm franchises could be awarded, have themselves required lengthy negotiations with the existing train operators.

The recent extension to National Express's current c2c service on Essex Thameside was signed off a week before the old franchise expired, and on more favourable terms.

Virgin is still renegotiating its west coast contract, while struggling FirstGroup has been frustrated with the progress of discussions for the extension of the Great Western franchise. Any agreement will be heavily scrutinised because FirstGroup has activated a termination clause that allowed it to avoid £800m in premium payments to the taxpayer, but is now negotiating a contract extension that is expected to be on more favourable terms.

Although the train companies want franchising restored, the current swath of extensions offer some security. Stagecoach's finance director, Ross Paterson, last week said that extensions on Southwest, East Midland and Virgin Rail – 49%-owned by Stagecoach – meant his company had "nine years of cash flows and earnings guaranteed".

Labour has called for the retention of the East Coast service as a 'public sector comparator' because it is currently run by the state-owned Directly Operated RailwaysBut the agreement reached with FirstGroup will be politically sensitive, with Labour considering whether the Great Western service could be brought into public hands should it win the election.

Labour has called for the retention of the East Coast service as a "public sector comparator" because it is currently run by the state-owned Directly Operated Railways. However, the coalition has brought the London-Edinburgh train service to the front of the queue for new awards once the "paused" Essex Thameside and Thameslink competitions are completed.

That means East Coast should be in private hands before the 2015 general election. However, the invitation to tender for Great Western is due just weeks before the election is called – potentially allowing an incoming Labour government to void the competition.

The DfT announced a revised programme for awarding franchises in March after the 2012 debacle, in which the award of the west coast service to FirstGroup was scrapped after legal challenge. An inquiry by Sam Laidlaw, the chief executive of British Gas parent Centrica, identified serious errors in an under-resourced and overstretched department, warning that there were "significant issues about the ability of the DfT effectively to conduct rail franchise competitions".

An interim franchising director, Peter Wilkinson, who was appointed to bolster the staff, is due to leave next month. The DfT declined to comment on whether his contract would be extended. The department has also been labouring with the procurement of Thameslink rolling stock. The controversial deal was signed off this week two years after Siemens was chosen to build the trains.

A DfT spokesman said: "The Department for Transport is working hard to deliver the ambitious rail franchising schedule that the secretary of state announced on 26 March. We fully expect to deliver both the Essex Thameside and Thameslink franchises to the published timetable."

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George Osborne to offset further spending cuts with capital investment

Mersey Gateway and HS2 projects will be announced this week as Vince Cable is last cabinet minister to settle with chancellor

Gorge Osborne agreed the final details of spending cuts worth £11.5bn for 2015-16 on Sunday, ahead of an announcement this week that will also see the Treasury unveiling a multi-billion, six-year infrastructure investment programme.

Vince Cable, the business secretary, was the last cabinet minister involved in the spending review to settle, although defence, education, local government, health and international aid also kept negotiations with the Treasury going until very recently.

At one stage Osborne said that ministers who refused to cut their budgets for would be summoned before the "star chamber" for a grilling on why they could not find savings. In the event the "star chamber" was never convened for this purpose, although Treasury sources insisted that the threat of a summons did help to concentrate minds.

Osborne will announce details of the 2015-16 spending review cuts in a statement to the Commons on Wednesday.

In a move which suggests that the chancellor wants to prevent Labour being seen as the party most committed to capital spending, the Treasury will this week combine the spending review with the announcement of a series of infrastructure investment projects running from 2015-16 to 2020-21.

Given that the total sum allocated in the budget for capital spending in 2015-16 alone is £50bn, the headline sums involved could be huge.Danny Alexander, the chief secretary to the Treasury, will announce the details in the Commons on Thursday.

Details of the first tranche of work on the HS2 high-speed railway are expected to be madeThe infrastructure investment programme will be funded from within the Treasury's long-term spending envelope and it will include spending on road, rail and high-speed internet. The projects are expected to include upgrading the A14, a new Mersey Gateway bridge in the north-west and the first tranche of work on the HS2 high-speed railway.

Alexander agreed the final details of the spending review with his Lib Dem colleague Cable on Sunday morning. At around the same time, Osborne and his Labour opposite number, Ed Balls, were both raising the prospect of further spending cuts after 2015-16 in interviews on the Andrew Marr show.

Osborne told the programme that on Saturday he reached a settlement with the Ministry of Defence that would protect frontline service personnel but lead to the loss of civilian jobs. Several hundred posts are expected to go, with the rest of the estimated £1.5bn savings achieved through cuts to civilian allowances, efficiency measures and contracts with suppliers being renegotiated.

"There will not be a reduction in our military capability," Osborne said. "We're not going to reduce the number of soldiers, sailors, airmen, and in fact we're actually going to be able to spend some money on things like cyber [security], which is the new frontier in defence."

The Labour party has already announced that it will accept the coalition's overall day-to-day spending plans for 2015-16, although it reserves the right to change how current spending is allocated, and to increase capital spending. But yesterday Balls went further, saying he expected to make cuts beyond 2015-16.

"Do I think after 2015-16, the next Labour government will be making very difficult decisions which will involve some cuts? Yes," the shadow chancellor said.

Some in Labour are strongly opposed to this. In a letter in today's Guardian, Peter Hain, the former cabinet minister, Neal Lawson, chair of the pressure group Compass, and other signatories say that continuing austerity measures beyond the next election would be "politically and economically disastrous".

Balls has already announced that Labour would cut winter fuel payments for wealthy pensioners after the general election, saving £100m a year. The government is committed to keeping winter fuel payments for all pensioners until 2015 and until now, senior Conservatives have said very little about whether or not they would renew that pledge.

But Osborne suggested that a rethink was now under way, stressing that benefits for pensioners had to be "sustainable".

"On pensioner benefits, including the winter fuel allowance, we made a very clear promise about this parliament, and we believe in keeping our promises to the British people," Osborne said.

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Stock markets lose nerve on fears of end to quantitative easing

Britain's top companies lose £36bn in value as stock markets react to US warnings on QE and drop in Chinese manufacturing

A day after the FTSE 100 came within 90 points of its December 1999 all-time high, the index slumped 143 points yesterday to 6696, wiping £36bn off the value of Britain's top companies.

The 2.1% fall was the index's worst in one day since it lost just over 2.5% a year ago to the day, on fears that Greece could leave the eurozone. But after its recent strong surge this latest fall in the blue-chip index merely wipes out the gains made since last Friday.

Stock markets around the world tumbled from their recent highs as investors took fright at weak Chinese manufacturing data and signs that the US Federal Reserve might end its bond-buying programme sooner than expected.

A trader on the floor of the New York Stock Exchange reacts as markets fall around the world

Markets have been buoyed in recent months by the various measures taken by central banks to stimulate the global economy by flooding it with cash. Measures include printing money, buying up mortgage-backed bonds and keeping interest rates at historic lows. Much of the recent economic data indicated the policy was having the desired effect, while the long-running eurozone crisis seemed to have entered a period of relative calm.

But analysts have been warning that any signs the money taps were about to be turned off or that the global economy was not recovering as expected would be taken badly by the markets.

Thursday's rout began with comments late on Wednesday from the Federal Reserve suggesting that America could end its quantitative easing, or QE, programme in the near future, and accelerated after a Chinese survey showed factory activity had fallen for the first time in seven months in May. The Nikkei 225 dropped more than 7% overnight on Wednesday to 14,483, its biggest one-day fall for two years. However, analysts pointed out that the Japanese index had almost doubled in value since November, so was still well ahead for the year.

European stock markets fell, with Germany's Dax and France's Cac both closing around 2.1% lower, while Italy's FTSE MIB fell 3% and Spain's Ibex was down 1.4%.

On Wall Street the Dow Jones industrial average, which had reached an all-time high this week, fell sharply when trading opened on Thursdaybefore staging a recovery. By lunchtime the US index was down just 15 points following stronger than expected weekly jobless claims and home sales.

Rupert Osborne, futures dealer at City broker IG, said: "The stronger home sales and jobless claims … fit with the idea that the US economy is approaching a point where a reduction in stimulus is appropriate. This neatly illustrates the irony of the position; traders across the world are openly hoping for poor US data since this keeps the Fed involved."

Ben Bernanke, chairman of the Federal Reserve, had hinted on Wednesday about a possible easing of its $85bn-a-month bond-buying programme, in a testimony to Congress. These comments were later compounded by the minutes of the Fed's last policy-making meeting, which showed that some members thought such a move could come as soon as June, much earlier than any analysts had been expecting.

Michael Hewson, senior market analyst at financial spread-betting company CMC Markets UK, said: "There was an expectation after Bernanke's testimony on Capitol Hill that the latest Fed minutes wouldn't add too much to overall market expectations around the prospects for further easing against expectations of possible tapering.

"The release of the latest Fed minutes completely changed that dynamic with a single line, 'a number of participants express a willingness to reduce QE in June'.

"The disappointing Chinese manufacturing data gave markets the extra nudge over the edge that was needed and persuaded investors with money in the game to cash in."

In China the HSBC purchasing managers index fell to 49.6 points in May, from 50.4 the previous month. Any level below 50 produced by the survey of industry indicates a contracting sector. China is a major consumer of commodities, so the signs of a slowdown in the country put metal prices under pressure, with copper down more than 3%. Oil prices also slid lower, Brent crude falling nearly 1% to $102 a barrel.

But gold and silver edged higher as investors searched out safer assets amid the sell-off.

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US Fed's Ben Bernanke hails benefits of stimulus

US Federal Reserve chairman Ben Bernanke has told Congress that it is too soon to end the central bank's monetary stimulus programme or raise interest rates.

He said the Fed's policies were "providing significant benefits" and changing course now could harm growth.

He warned that a "premature tightening of monetary policy" would risk "slowing or ending the economic recovery".

US rates have been between 0% and 0.25% since December 2008.

However, later on Wednesday the minutes of the Fed's last meeting were released, highlighting divisions on the policy-setting Federal Open Market Committee over when the Fed should start to wind down its $85bn-a-month asset purchasing programme.

"A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth," the minutes said.

Mr Bernanke said the recovery could slow if the Fed changed its policie

"However, views differed about what evidence would be necessary and the likelihood of that outcome.

"One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so."

Deflation risk

US stocks turned negative after the minutes were released, with the Dow Jones down 25.84 points at 15,361.74.

Shares have been hitting record levels in recent weeks, held up by the prospect that monetary policy would remain generous to help strengthen the weak economy.

At the same time, the Fed's willingness to continue its support underlines the weakness of the US economy and is causing some investors to fear company profits may be held back by tepid growth.

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, said the minutes had been "largely superseded" by Mr Bernanke's testimony "but they do reinforce the idea that the doves - who are the ones making policy - will need a great deal of persuading to change their stance".

The Fed has pledged to keep US interest rates at their record low level until the US unemployment rate falls below 6.5%.

In his latest testimony to the Joint Economic Committee, Mr Bernanke noted that unemployment had now fallen to a four-year low of 7.5%, but the job market was still weak.

He added that inflation was running below the Fed's long-term target of 2% and said current monetary policy was helping to counter "incipient deflationary pressures".

The Fed's purchases of US government securities had "kept inflation from falling even further", he said.

The Federal Reserve buys bonds as a way of increasing the money supply and improving liquidity in the financial system, in the hope of sparking economic growth and supporting employment.

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