Amid fears of a slowing economy and rapidly rising inflation rates, the Bank of England has already issued two rate cuts. The interest rates now stand at 5.25%. The Bank of England’s Monetary Policy Committee cast a vote to further reduce the rates to 5% this month. This decision however, will not be easy to carry out, as the committee was divided three ways over the proposal.
Six of the 9 MPC members voted in favour of the rate cut but two members, Tim Besley and Andrew Sentance, wanted the rate to be kept put. David Blanchflower was the lone crusader for a larger cut to 4.75%.
While analysts expected a unanimous rate cut, to help bolster the economy, they feared that a delay in the cut would lead to a situation where drastic measures would have to be resorted to for damage control.
In the background is the constantly rising inflation rate. The Government would like it to remain under control at the 2% mark, but it seems to be showing no signs of remaining there. It jumped to 2.2% in January and was further increased to 2.5% in February.
David Blanchflower, who favours a larger cut, is afraid that a further delay in rate cuts would lead to an almost USA-like economic slowdown in the UK.
News of the possibility of a delayed rate cut sent the pound higher to $1.9973. Although a rate cut will boost the English economy, it would devalue the pound sterling as an investment option as compared to other currencies, which have higher rates.
Thomson Reuters’ shares took a 14% dive in its debut on the London Stock Market. Thomson Reuters was created when Canadian publishers Thomson took over Reuters in a deal estimated at £8.7 billion, so that Reuters now is in the same league as its main rival Bloomberg.
Market analysts are afraid that a global slowdown in financial markets will in turn lead to a reduction in the demand for services from Reuters. The financial market makes up for a massive chunk of Thomson Reuters’ clients.
Thomson Reuters’ shares, in London, fell by 266 pence, a 14.5 % drop, now making it 1560p in London. While the shares fell in Toronto too, the drop was only 3.6% taking them to 36.15 Canadian dollars (£17.97).
Thomson had bought over Reuters in a bid to expand its business base outside America, but the uncertainty of financial climes makes for questionable future profitability. The market data industry accounts for nearly 60% of Thomson Reuters’ revenue.
The Royal Bank of Scotland plans to ask shareholders to pitch in £10 billion to generate extra cash, so that it can better its financial position. Talks of this kind of capital increase has long been doing the rounds but were always shot down by the management of RBS. In case RBS goes through with this proposal, it would mark the largest capital increase in the history of Britain. It could also set off a trend, as many banks may follow suit, in order to pile up capital resources to tide over the global credit crunch.
RBS, England’s second largest bank, has still not issued any official statement regarding the issue, but has confirmed that a trading update is on the cards for next week, scheduled right ahead of the annual meeting due to be held next Wednesday.
The rights issue, which may be put out next week, is to demand new cash from shareholders and will not affect customers of the RBS in the least.
RBS, though hit along with all other banks by the global financial turmoil, has fared comparatively better than most other banks, making a loss of $3.2 billion as a writedown from toxic assets. It was also affected by the 71 billion dollars it spent last year in the take over of the Dutch bank ABM Amro.
RBS’ complete u-turn as regards to its stand on the rights issue, has prompted much speculation. It is largely believed that this decision comes as a result of news that the government has plans to reduce the stress in the mortgage markets by allowing banks to exchange mortgage-base securities temporarily in lieu of government bonds. This would encourage banks to start lending money to each other again and in turn increase lending to individual borrowers.
The success of this move will now depend on how RBS executes this rights issue, including its price and size and whether the bank will be pushed to make any further write-downs.
Speculations have been made that Goldman Sachs and Merill Lynch are arranging the RBS rights issue.
Wal-Mart Stores Inc. has announced that it will be branching out into electronic commerce this year in Brazil, where it intends to invest nearly 1.2 billion reais (£365.5 million). The idea behind the expansion is to keep up with rapidly growing consumer demand.
Chief executive of Wal-Mart Brazil, Hector Nunez stated the plunge into e-commerce would be a crucial part of the US retailer’s growth plans in Latin America’s largest country (Brazil), where an economic boom is lifting millions of people out of poverty. “We are entering into new channels - the most important one being e-commerce - which we will launch in the second half of this year,” he declared at the firm’s international analyst field trip in northeastern Brazil.
Wal-Mart Stores, the discount behemoth, is keen on expanding its international operations with an idea of supplementing its U.S. business where growth is somewhat slowing. The Wal-Mart Stores segment there had registered net sales of £121.106 billion in its latest fiscal year, up 6 per cent. In contrast to this, international sales registered for its latest fiscal year were up more than 17 per cent over the previous year.
Not only local authorities but also Government agencies are among clients who might have overpaid on billions of pounds of major building contracts, according to the findings of Office of Fair Trading (OFT). It has accused nearly 112 construction firms of bid-rigging.
Following a three-year elaborate investigation, the firms have been blamed of forming cartels along with their rivals in an attempt to bid an inflated price for work on hospitals, schools and other public projects. The list of firms accused of bid-rigging include many of the UK’s big construction companies. Those accused, if found guilty, could face huge fines. The allegations against them cover a wide gamut of construction projects in both the private and public sectors mainly in Humberside and Yorkshire.
The OFT has made the more serious claim that a minority of the business entities have produced even fake invoices - based on agreements with rivals - whereby the successful bidder actually paid a ‘compensation payment’ to the unsuccessful bidder. Raids have been carried out on many companies during the investigation for evidence. Many firms have volunteered data, trying to qualify for leniency in case fines are imposed.
U.S. based bank, JP Morgan, expects 40,000 jobs to be in jeopardy, in the London’s financial district, as a result of the grim global credit crunch scenario. This figure adds up to 5% of existent jobs and roughly mirrors the 7% that were lost in 2000-01 in the aftermath of the collapse of the dotcom boom.
Although JP Morgan had made an estimate, only last December, which put the job cut figure at 20,000, they now believe that 2008-09 will bring with it even more job cuts, after the initial 10% reductions are made in the debt securitisation, private equity and assorted investment sectors; all of which have been battered by the volatile financial markets.
A natural fallout of these job cuts will be an increase in the city’s vacancy rates, which are likely to peak at 12.2% in 2009, leading to a fall in rentals, around 2008-2010. This will also affect the areas favoured by the hedge fund markets, rents of which have already dropped 9% in this time span alone.
The only other city, featured in JP Morgan’s report, which is as badly hit as London, when it comes to office markets, is Spain’s Madrid. Madrid has been facing an almost stagnant job market and is slated to see a drop in rentals by a staggering 22% in the next three years.
Two senior managers at British Airways will pay the price for BA’s embarrassing debacle, when they shifted to Terminal 5. Gareth Kirkwood, Director of Operations and David Noyes, Director of Customer Services, will leave British Airways and will be replaced by a new Chief Operations Officer, who will handle the responsibilities borne by both these managers combined.
British Airways moved to the much-hyped Terminal 5 last month, and has been inundated by trouble with misplaced baggage and cancelled flights, running them into a loss of an overwhelming 16 million pounds, in less than a month. Although it is not certain whether the two top-level managers have chosen to leave or have been asked to do so, it is rumoured that this decision comes as a result of a meeting with shareholders.
British Airways has not been able to furbish satisfactory answers to explain this shifting –debacle and were much in need of fall guys. BA boss Willie Walsh, is also still in the danger zone when it comes to shareholders. However, he may be saved by his illustrious past with the airlines. He may not be asked to step down as his expertise could prove to be invaluable for the airlines to come clean through these troubled times.
It has not still been specified when Gareth Kirkwood and David Noyes will be expected to leave duty.
British Airways shares, in the meantime, have been languishing, and were down 3.1 percent on Tuesday and have plummeted an astonishing 12% since the opening of Terminal 5.
The Bank of England’s (BoE) monetary policy committee slashed interest rates by a quarter of a point - to 5 per cent - in an effort to counteract the impact of the worldwide credit crunch on mortgage markets. The latest move marks the third such rate cut in the last five months. It takes the BoE rate to its lowest in over a year.
In anticipation of the rate cut move, the pound had fallen to a record low against the euro at €1.247 to the pound, but remained largely steady and later even recovered slightly. The MPC came out with a statement noting it had cut rates, in spite of increasing inflation owing to the worsening credit markets scenario and also a worse economic growth outlook. A day earlier the International Monetary Fund (IMF) warned the global economy could be facing its most serious crisis since the 1930s ‘Great Depression’.
The Bank stated disruption in financial markets might slow the economy to pull inflation back below the 2 per cent medium term target, although it was concerned about it increasing in the short term. It said, “The balance of these risks to the inflation outlook at least in the medium term justifies a Bank rate cut in the committee’s judgment.”
American firm J.C. Flowers is showing no signs of backing off from the ₤3.5 billion bid, to buy out UK-based insurance group Friends Provident. Though talks for this deal had been doing the rounds since the start of this year, J.C. Flowers had officially vocalized the deal only last week, only to be promptly shot down by Friends.
J.C. Flowers had intended to pay Friends 150 pence per share which Friends believed to be a gross undervaluation. J.C. Flowers now intends to meet up with Friends’ share holders. They plan to fund the cash offer with debt and equity and claim to have the backing of the Royal Bank of Scotland, Morgan Stanley and Citigroup, in letters form them stating that, subject to certain conditions and assumptions, they believe that they are fully capable of underwriting the debt component of the acquisition consideration.
J.C. Flowers want to fund most of this acquisition in equities, which will be provided by Flowers itself, along with co-investors. They believe that they have ample resources, with capital available in amounts exceeding ₤6 billion.
Flowers already possesses 2.7 % stake in Friends, which was bought at an average of 155p to 165p per share. Flowers will now require a go-ahead from the Takeover
Panel if it wants to negotiate a takeover with an offer below 165p per share. Flowers has already called on board a committee of advisors, including former Prudential chairman Martin Jacomb, who will join Friends’ board as non-executives, should this deal materialize.
HSBC Bank has owned up to misplacing a computer disc with a compilation of details pertaining to 370,000 customers. The disc was lost in transit while being sent by courier from the bank’s life insurance offices in Southampton, roughly four weeks ago. Lucky for HSBC though, the CD contained only the details of the customer’s names, dates of birth, levels of insurance and policy numbers and smoking status; the CD did not reveal addresses and bank account details, thus limiting potential abuse of information. But is still a sign of how dangerous computer information can be when proper precautions aren’t taken.
While trying their best to retrieve the CD, the bank went on to explain that they generally pass on all this information to the insurers through an electronic link. The link had malfunctioned on that day, which forced the bank to send the database manually. They have accepted complete responsibility for the fiasco, made worse by the fact that the data was not encrypted. Though the information has been password protected, it should also have been encrypted. With the continuing advancement of the internet, it is a wonder why more organisations don’t opt for online backups as a method of ensuring business continuity in the event of an accident or data loss. They also remove the need for CDs as the data can be accessed securely from any location, given security measures such as a usernames and passwords.
HSBC now finds itself in a tough spot, as the Financial Services Authority (FSA) has decided to come down heavily on companies that manhandle customer information. An investigation into this situation will soon be launched. Following precedents, HSBC can expect to be heavily fined, as was the case with Nationwide Building Society and the Norwich Union Insurance company, both of which had lost sensitive customer data. The worst in such cases was the incident, which occurred last year, involving HM Revenue and Customs (HMRC), in which CDs containing the entire child benefit details of 25 million claimants, including complete bank and building society information have been lost, not to be recovered yet.
The HMRC incident, along with some other high profile customer information negligence cases had prompted a committee of MPs, only last month, to encourage the government to take the issue of data protection more seriously.