FinancialExpat's Blog

Citigroup Inc, under severe pressure after its share value fell 60% last week, has received USD 306 billion of US government guarantees for troubled mortgages and toxic assets to stabilise the bank. Citigroup will also get a USD 20 billion cash injection from the Treasury Department, adding to the USD 25 billion the company received last month under the Troubled Asset Relief Program. In return the US government will get USD 27 billion of preferred shares paying an 8% dividend.

Meanwhile, the UK's second largest bank, Barclays Plc, has won shareholder support to raise USD 10.5 billion without surrendering control of its dividends or lending. The company has agreed to sell stock to funds from Qatar and Abu Dhabi, bypassing ordinary shareholders and the UK's bailout pool. Barclays made the "extremely difficult" decision to reject government money because it needed to act quickly to ensure certainty, said commentators.

Russia's central bank relaxed its defence of the rouble, allowing it to depreciate after having used up nearly a quarter of the nation's foreign reserves in less than four months in an attempt to stem the currency's decline. Russia's international reserves, the third biggest after China's and Japan's, have dropped by USD 144.6 billion as the central bank struggles to contain the country's financial troubles. The rouble has decreased 15% against the US dollar since 1 August brought mainly by declining oil revenues.

Three month Libor rates have dropped below 4% and are now only 98 basis points from the UK base rate of 3% at 3.98%. Mortgage lenders have defended their position of not passing on the recent base rate reduction to mortgage holders as Libor spreads have remained high. Now, as the Libor edges closer to base rate, lenders will be under increasing pressure to lower mortgage rates.

Fuel demand in the US fell 5.2% in the first 10 months of this year, the largest fall since 1981. Crude oil for January delivery is USD 52.23 on the New York Exchange. OPEC are scheduled to meet on 29 November. Slowing global demand has left a 1 million barrel a day over supply that needs to be removed by year end, Venezuela's oil minister said.

Gold has increased to a five-week high in London as German business confidence and dollar weaken, increasing the metal's appeal as a haven. Gold for immediate delivery rose to USD 819.54 an ounce in London. Gold has slipped 21% in London since reaching a record USD 1,032.70 an ounce in March as investors liquidated commodity holdings to raise cash as the credit crisis has deepened. ING Groep NV has cut its 2009 gold forecast by 19% to USD 750 an ounce. Platinum, silver and palladium estimates also lowered.

The yen rose against the US dollar as Citigroup received US government assistance, reducing appetite for higher yielding assets funded by loans from Japan. The yen rose to 95.33 against the dollar in New York and analysts believe it may strengthen further to 90 by year end. The yen also gained against the Australian and New Zealand dollars on speculation investors will reverse so called carry trades as profits for financial companies are reduced. The yen is popular in carry trades, where purchases of higher-yielding assets are funded in nations with lower interest rates. Japan's 0.3% compares to 5.25% and 6.5% in Australia and New Zealand respectively.

Spotlight on the United Kingdom

UK Chancellor, Alistair Darling, has announced a fiscal stimulus package in his 2008 Pre-Budget Report in the order of GBP 20 billion or 1% of the UK's GDP. He has predicted growth in GDP will be 0.75% for 2008 but it will fall by between 0.75% and 1.25% in 2009 with growth expected of between 1.5% and 2.0 % in 2010.

Key points of the package are:

• GBP 3 billion of capital spending on infrastructure to be brought forward from 2010/11.
• VAT will be reduced from 17.5% to 15% from next Monday for 13 months.

However, not all was good news:

• A new 45% higher income tax rate is proposed for earnings above GBP 150,000 from April 2011.
• National Insurance contributions will rise by 0.5% fro April 2011.
• The dividend rate for discretionary trusts will rise from 32.5% to 37.5% and the rate of income tax will increase from 40% to 45% on other income. The new rates will be brought in from 2011/12
• Air passenger duty will be increased for those travelling further.

The overall effect of the package means that UK government borrowing will reach GBP 78 billion in 2008 and GBP 118 billion in 2009 (or 8% of GDP). He predicts falls in subsequent years reaching GBP 54 billion by 2016.

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US president-elect Barack Obama says that the US government will do "whatever it takes" to revive the economy even if it means large budget deficits in both 2009 and 2010. In the short term, his priority will be avoiding a deepening recession and providing government assistance to the ailing car manufacturing industry. Obama considers the failing of the industry as unacceptable due to the dire consequences it would have for the whole US economy.

World leaders at the G20 financial summit in Washington have pledged to work together to restore global growth. They said they were determined to work together to achieve "needed reforms" in the world's financial systems. US president George Bush said that finance ministers would now work on detailed reform proposals and then report back. Leaders of emerging economies, including China, India, Argentina and Brazil, said the summit marked an historic shift of power away from the richer countries.

Investors are shifting funds into European government bonds at the expense of Treasuries on speculation policy makers have more scope to cut interest rates than the US Federal Reserve. An investor who bought USD 10 million of the debt in June would have an average profit of about USD 678,000, compared with USD 380,000 if the money went into Treasuries, Merrill Lynch & Co index data show. Even with those gains European fixed income assets may be a bargain, with two-year German bunds yielding 1.01% more than Treasuries. They typically yield 0.15% less than US debt based on data over the last decade.

Bearish economic news continue to put oil prices under pressure which may signal a further cut in OPEC production, possibly in December. Crude oil for December delivery has dropped to USD 55.60 in New York on Friday. Brent crude for January delivery has dropped to USD 53.00 in London. Hedge-fund managers and other large speculators increased their net-short position in New York crude-oil futures in week ended 11 November, according to US Commodity Futures Trading Commission data. Net-short positions rose by 403% from a week earlier.

The yen declined further against the euro to 122.97 as gains in stock futures encouraged purchase of higher yielding currencies financed with loans in Japan. The yen has remained little changed against the US dollar. According to JPMorgan & Chase Co, the British pound will drop 13% against the US dollar and 8% against the euro as UK banks shrink foreign borrowings and the country's policy makers favour a weaker currency.

The European Commission announced last Thursday that it has adopted an amending proposal to the savings tax directive that will widen the scope of the legislation. Effective since 2005, the savings tax directive seeks to ensure that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. The Commission proposal seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures. The Commission proposes to extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurance products whose performance is strictly linked to income from debt claims.

China's stimulus package amounting to USD 568 billion announced on 9 November will have a ripple effect well beyond its borders. The Chinese economy is still the fastest growing among the world's 20 largest; and its plan, equivalent to 14% of gross domestic product over two years, would likely have the strongest impact in places that are its biggest supplier of goods, including Japan, Taiwan and South Korea. China aims to keep its growth close to 8% next year and Citigroup analysts in Hong Kong have commented that for every percentage point that China increases its growth, the rest of Asia will be boosted by half that.

Australia and China have agreed to speed up work on a free trade agreement, Prime Minister Rudd has said. He went on to add "this is really important for us and for the Chinese long term. China has great interest in the Australian market in terms of long-term access to energy and raw materials. We have a great interest to (having) greater access to China's market in goods and in services."

Malaysia's economic slowdown is prompting investors to bet the central bank will lower borrowing costs for the first time since 2003 by March as inflation cools, according to interest-rate futures contracts. The Kuala Lumpur interbank offered rate fell to 3.15%, 50 basis points lower than the 3.65% that local banks charge each other on three month loans at present.

Given recent turmoil in global markets, JPMorgan Asset Management analysts believe Japan has reached attractive levels of cheapness. They comment there are appealing levels of value to be found in world class companies such as Toyota, Nintendo and Canon. Many solid companies are now trading at less than book value - large profitable industrials that have been performing strongly for years. 40% of Japanese companies are cash positive, so they do not have to rely on borrowing so much at a time when credit is hard to come by. Japan should also benefit from increased trading links with it emerging market neighbours. Japan is prone to political uncertainty. But as a developed economy on the rim of the world's most dynamic economic region, with companies that have the strength to take advantage of global distress, JPMorgan believe Japan is well positioned for the next upturn in the cycle.

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

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

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

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

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

Spotlight on Europe

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

If you have a question, want to arrange for a free financial review or just want further information I can be contacted on +33 (0)325461631, via my website www.financialexpat.com or via e-mail steven.grover@spectrum-ifa.com  
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