Volatility rocked the markets once again last week with interest rate cuts from central banks around the world and further support measures from Governments and the International Monetary Fund failing to appease jittery investors.
The rising toll of the credit crisis carnage did little to dispel the gloom with Bank of England figures putting the cost at $2.8 trillion. Its half-yearly Financial Stability Report estimates that paper losses have more than doubled since its last update in April, with the UK calculated to have lost £123 billion so far.
The US is believed to have seen $1,577 billion disappear with Europe now €785 billion worse off. However, actual losses could come in between a third and a half less over the coming years.
Central banks and Governments around the world have made as much as £5 trillion available to the struggling financial sector since April. Going forward, the Bank wants tighter regulation on lenders, claiming there may be “need for a fundamental rethink of how to safeguard against systemic risk”.
Global markets were keeping investors on the edge of their seats. On Monday the FTSE 100 hit five-and-a-half-year lows during intraday trading with Japan’s Nikkei plummeting to a 26-year low and Hong Kong’s Hang Seng dropping back to its lowest point for four-and-a-half years.
But it was all change on Tuesday when Wall Street emerged from the gloom to notch up its second biggest ever one-day gains of 10% sending the FTSE 100 soaring on Wednesday. Rumours of a rate cut and a softer yen also breathed new life into the Nikkei.
However, the widely expected cuts in interest rates to resuscitate the ailing global economy received a mute response from investors as key indices laboured their way forward. The Nikkei ended the week in the red once again, suffering its worst ever monthly performance with Hong Kong’s Hang Seng enduring its worth ever monthly drop for 11 years. However a late rally on Friday lifted European shares to close on a high with the FTSE 100 up 2% to 4378.
In a last ditch effort to stem its economic downturn, the Federal Reserve slashed US interest rates by a further 0.5 percentage points to 1% – their lowest level since June 2004 with China knocking off a further 0.27 percentage points to 6.66% and Japan trimming rates by 0.2 percentage points to 0.3%. Hong Kong and Taiwan also reduced their cost of borrowing with Australia, the eurozone and the UK likely to follow suit next week.
IMF bails out Hungary
The pressure continued to mount on emerging markets with the International Monetary Fund (IMF) forced to step in to bolster the flagging Ukrainian and Hungarian economies. Ukraine is in line for a €10.4 billion loan while Hungary will receive a $25 billion rescue package – the biggest international financial lifeline for an emerging market economy since the credit crisis hit.
The IMF has also given the green light for a short-term financing facility for emerging market economies. Eligible countries with a good economic track record will be able to tap the fund for up to five times their IMF quota – usually they can only access three times their quota. Elsewhere Japan unveiled a five trillion yen (£30 billion) package to boost its ailing economy while struggling Iceland was forced to raise interest rates to an eye watering 18% and said it needs another €4 billion to keep its economy afloat.
Dutch insurer Aegon turned to its Government for a €3 billion financial lifeline while Deutsche Bank, Germany’s biggest bank reported sharp 73% fall in profits and further write-downs for the third quarter. However, its losses would have been far worse were it not for an EU rule that allows lenders to reclassify their toxic assets.
Barclays, meanwhile, turned to Middle Eastern investors in its efforts to boost its capital ratios by £7.3 billion without using the Government’s rescue programme.
The royal families of Abu Dhabi and Qatar are set to own more than a third of the UK’s second biggest bank once the deal goes through. The Qataris, who already have holdings in the bank, will take a 15.5% stake in return for around £2.3 billion.
Sheikh Mansour Bin Zayed Al Nahyan of the Abu Dhabi royal family is pumping in around £3.5 billion and could become the bank’s largest shareholder with a 16.3% stake.
In return for the cash injection, the Middle Eastern investors will get “reserve capital instruments” paying a dividend of 14% a year. These are similar to the preference shares that the UK Government will take in RBS and Lloyds-HBOS which pay 12% a year. They will also be able to buy further shares in Barclays at 197.775p at any time in the next five years.
Barclays is also looking to raise a further £1.5 billion from the sale of mandatorily converted notes to institutional investors.
Lloyds-HBOS merger cleared by Mandelson
On Friday, business secretary Peter Mandelson also cleared the planned merger of Lloyds TSB and HBOS. Only two of the nine positions of the joint board will be taken by HBOS senior executives.
In a busy week for company results, Santander-owned Abbey shone in the banking gloom with a 20% rise in pre-tax profits to £737 million for the first nine months of the year. Telecoms giant BT saw its value drop by around a fifth after announcing it would miss its second quarter earnings forecast due to the underperformance of its Global Services unit.
British Gas owner Centrica, has launched a £2.2 billion rights issue, hoping its shareholders can raise the funds necessary for a stake in British Energy.
Oil behemoths BP and Royal Dutch Shell sparked off the old debate on windfall taxes after third quarter profits hit dizzying new heights.
BP’s profits shot up 148% to a record £6.4 billion while Shell managed a 71% increase to £6.6 billion, boosted by oil hitting $147 a barrel back in July. The average price for a barrel between July and September stood at $111 compared to around $70 the same time the previous year.
Meanwhile oil slid to a 17-month low, falling below $64 a barrel before staging a brief recovery and then dropping back once again to around $64 a barrel. Earlier emergency production cut by OPEC made little impression on traders nervous about the onset of a deep global recession. Prices are down around 35% for October, its steepest monthly decline to date on the back of slowing demand.
On the currency front, the Japanese yen soared to a 13-year high against the dollar despite warnings from the G7 about excessive volatility. The pound hit a five-year low against the resurgent dollar on concerns that the UK is now facing a severe recession. Sterling has dropped by around 10% against the dollar in October, putting it on track to clock its worst monthly performance since October 1992, just after the pound crashed out of the European Exchange Rate Mechanism.
The housing market was once again back in the spotlight with figures from the Land Registry revealing that the average home fell a further 2.2% in value in September with prices down 8.8% year-on-year.
Nationwide’s monthly house price index heaped further misery on the market, registering a further 1.4% in October and dragging the annual rate of fall down to 14.6%. The average house cost £158,872 in October – nearly 15% (£30,000) lower than this time last year. House sales have fallen to their lowest level for 34 years.
Rhian Nicholson
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