Financial Spread Betting Report

The Financial Markets - 24 September 09

1. The economy has picked up “Information received suggests that economic activity has picked up following its severe downturn” (from “activity is levelling out”).
   
   
2. Housing activity is up “…and activity in the housing sector has increased.” (no mention of housing pickup in August)
   
   
3. “Strengthening” “policy actions … will support a strengthening of economic growth and a gradual return to higher levels of resource utilization” (from “…will contribute to a gradual resumption of sustainable economic growth”).
   
   
4. No immediate inflation threat Removed: “prices of energy and other commodities have risen of late”. Repeated: “substantial resource slack likely to continue to dampen cost pressures… ”.
   
   
5. Gradual phasing out of purchases on agency mortgage-backed securities and agency debt: “The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010”. Fairly plain and descriptive speaking. There was no indication of any reversal of policy any time soon.
   
   

• Don’t Panic – the Bank of England has called the UK’s big name economists together for an unprecedented meeting next week, reported the Daily Telegraph. It’s uncertain what the subject matter is, but the paper said there’s speculation it’s either connected to the deterioration in Sterling and fears over BoE’s liquidity efforts, or it’s the start of a consultation regarding the BoE’s policy framework. The Telegraph noted that banks appear to be sitting on their QE cash, rather than revolving it through the economy. The BoE will not be happy with this situation.
  
  
• Business Secretary Peter Mandelson tells the British Retail Consortium: “An approach to rebalancing the public finances that is too early, too hasty, or too indiscriminate would undermine the very growth on which locking in the recovery depends … Frankly those who advocate this course are either economically illiterate, or irresponsible, or both.”
  
  
• GBP weakness was a theme overnight after Bank of England Governor King said that a competitive exchange rate was helpful in rebalancing the economy and market’s shouldn’t get carried away with early signs of growth. Short-Sterling reds are also up by as much as 10 ticks on the day. It remains clear that the UK economy faces many challenges. Fiscal and monetary policy will have to be carried out with extreme care over the next 6/12months. In the case of Sterling it seems that what appears cheap can get a lot cheaper.
  
  
• Former BoE MPC member Blanchflower writes a rather scathing column in today’s Guardian: ‘Pity the lost generation’. Although much of it reads as a ‘why I was right and everyone else was wrong, so there’, it actually did have an important warning: that there is no way the various fiscal and monetary assistance programs should be lifted for a long time to come. ‘We must not repeat the mistakes of the 1930s by assuming a recovery is taking place and then cutting spending and raising interest rates too early. Such action could push the economy into a decade-long depression’.
  
  

• Russia has this morning announced that it is to put up taxes on beer by 50% a year until 2012, taking the tax from 3 Roubles (EUR0.1) a litre to 10 Roubles (EUR0.33) a litre. Carlsberg, which has around a 40% share of the Russian beer market, is the most exposed group, particularly since around 45% of group profits are derived from the country. It is difficult to ascertain the likely impact of the rise, but it obviously won’t be positive.
  
  
• Speaking at a Merrill Lynch/BofA conference yesterday, Cadbury CEO Todd Stitzer’s line was less hostile to a deal with Kraft, but concentrated upon justifying a far higher price. Stitzer stated that a deal between the two companies made “some strategic sense”, and that synergies would most probably be far higher than the $625m predicted by Kraft. As a result, implying Kraft should pay more to Cadbury shareholders. Moving onto PE valuation, Stitzer highlighted previous deals which had been done at 15 times EBITDA or more, as opposed to the 13 times sum being offered by Kraft. This would imply an increase of just over £1 to the original £7.45 offer price. This may be a clever strategy by Cadbury to try and bid up the price beyond which Kraft would be unwilling to pay, but in many peoples view it marginally increases the chance of a deal between the two going through (to about 65%).
  
  
• Wholesale prices for bananas in the UK remain strong with year-on-year increases of 11.6% last week. The demand bump attached to schools re-opening will have helped and the recent decline in Sterling may be helping too. This trend continues a pattern evident for almost a year now, and one which has helped banana importers including Fyffes generate solid progress in profitability and tow upgrades in the past six months. Although wholesale price moves do not accurately reflect retail action, they do point to a reasonably healthy market for all distributors.
  
  
• Hennes & Mauritz led retailers lower as a sales decline worsened. Europe’s second-largest clothing retailer said revenue at stores open at least a year fell 11%.
  
  
• Air France-KLM Group slid 2.7% after UBS recommended selling shares of Europe’s largest airline. Meanwhile, BA was also friendless, dropping 3.4% on a Citibank downgrade to a hold from a buy.
  
  
• 3i Group sank 3.3 percent as the pace of new investments dropped. Europe’s biggest publicly traded private-equity firm said the pace of new investments dropped 75 percent as a lack of debt financing nearly brought the buyout market to a halt.
  
  
• To the upside is Solvay, which rallied 3.3%, paring four days of declines today. Abbott Laboratories made a bid to purchase the pharmaceutical unit of Belgium’s second-biggest drug maker, the Wall Street Journal reported, citing people unidentified familiar with the matter.