Calm After The Storm?

Posted on: 01 April 2008 by Gareth Hargreaves

Don't be a financial April Fool, find out what's going on with our lowdown from Graham Kerner.

As the FSA looks to investigate unfounded HBOS rumours, a period of calm enters the markets following recent volatility, and mergers and acquisition activity continues despite tightening of corporate finance. Also, as the end of the tax year approaches, investors should look to maximise their remaining ISA allowances.

A Period Of Calm?

As the end of the first quarter approaches, a degree of calm began to enter the markets, with many stock markets rallying as investors move away from the traditional safe haven of government bonds.

Despite losing some of the gains achieved earlier in the week, the FTSE 100, the leading indicator of the UK markets, finished the week up 3.6%. The FTSE Euro first finished up 3.2%, boosted by the positive mood on Wall Street and reassurance from European central banks that they would continue to offer support to the money markets. In Asia, the Nikkei closed 2.7% up on the back of strong market data from Hong Kong and Australia.

However in contrast, following a strong start to the week, the S&P 500 ended the week at a loss of 1.1%, with the Dow Jones Industrial Average finishing the week down 1.2%. This followed in the wake of the near collapse of Bear Stearns, and continuing fears that the US economy has entered a recession. Meanwhile over in the currency markets, both sterling and the dollar fell this week over renewed concerns over the level of borrowing within their respective economies and falling house prices.

The strain within the banking system was again highlighted with US, UK and Eurozone interbank rates increasing. However, the central banks have been taking steps to maintain liquidity within the system, none more so than the US Federal Reserve which lent a further $75 billion of Treasury assets.

David Smith in The Sunday Times, in contrast to what many perceive as an uncertain environment in the financial markets, highlighted the fact that the CBI has recorded export levels at their highest since 1995, helped in part by the relative weakness of Sterling against the Euro. A report called Global Challenge, issued by the Employers Engineering Federation, and accountants BDO Stoy Hayward, focused on the surprising point that British manufacturers were responding positively to the challenges laid down by India and China. Productivity growth has been stronger here than in any other part of the economy, and helps highlight the adaptability of UK businesses in the face of stiff competition from Emerging Market economies.


This week saw further bad news for struggling mortgage lender Paragon, highlighted by The Times, who issued a profits warning to investors. This follows on from last week's near collapse of the specialist buy to let lender, which was only narrowly saved by a £287 million rights issue. Paragon has recently cut back its mortgage lending after struggling to fund its lending business through the money markets and has found it difficult to securitise home loans. The company anticipates that its lending will be 50 percent lower than this time last year.

The Daily Telegraph this week went on to suggest that the UK housing market is "set for a 30 year low". Uncertainty among buyers and sellers has led to a gradual slowdown in transactions, and with the reduced level of available credit and the tightening of lending criteria among banks and building societies, the article went on to suggest that annual transaction levels will be driven down to 800,000.

This is in agreement with many commentators, who anticipate that house prices will fall significantly this year. This may cause distress for owners of buy to let properties, who face the prospect of being unable to dispose of falling assets in an uncertain property climate, and with the prospect of declining rental yields and higher interest rates may want to consider diversifying their portfolio.

Mergers and Acquisition activity continues despite tightening of corporate finance. There was renewed speculation in the City of a bid from JC Flowers, the US Private equity group, for the struggling life assurer Friends Provident. The Financial Times suggested a bid of between 150p and 160p may be sufficient, valuing the company at between £3.5 billion and £3.7 billion. However, there are suggestions that Friends are considering approaching the Takeover Panel and asking them to issue a "put up or shut up" notice.

This follows in the wake of the increased offer from JP Morgan Chase for the collapsed US bank Bear Stearns, their initial offer of $2 per share having been rejected by shareholders. The offer was increased some 400% to $10 per share, as well as agreeing to repay an additional $1bn of the $30bn loan currently in place from the Federal Reserve.

There was also news that Punch Taverns had pulled out of its bid to merge with beleaguered rival Mitchell and Butlers, however, they have not ruled out the possibility of a deal at a later date. M&B were put up for sale in January this year following losses of nearly £400m, which resulted in the loss of their Finance Director and Chairman. Under Punch's original offer, each set of shareholders would have owned 50% of the new company.

S&B Miller also ended talk with Scottish and Newcastle, the UK's biggest brewer, increasing the likelihood that Carling and Heineken's offer of $7.8bn will be accepted. Reports suggested that S&B were preparing to make a rival bid of at least 850p per share, however, after extensive talks with potential backers they have failed to achieve the level of funding required to make this a viable option. Despite this, Scottish and Newcastle remain willing to accept a higher bid, leaving the door open for further speculation or further bidders.

FSA Plans Crack Down On Market Scaremongers

Following on from the recent unfounded speculation over the financial security of the HBOS Group,which saw shares fall by 17%, the FSA said that it would no longer tolerate traders spreading "false rumours". Following this, the Treasury is to be given the power to grant immunity from prosecution to those who provide evidence of market manipulation.

In an interview with The Guardian, the Chancellor Alistair Darling said that the new powers were needed in this period of "unprecedented uncertainty".

He went on to say, "I can't allow us to get into a situation where people quite deliberately manipulate markets for personal gain and with the potential to destabilise the financial system. We have a duty to ensure we have clean and efficient markets. We will come down hard on people manipulating the system."

Under the powers, the regulator would get "specified prosecutor status", giving it plea bargaining powers similar to those enjoyed by the Serious Fraud Office and the Home Office and those currently in place within the US. The Times went on to suggest that the FSA is considering issuing a report on the HBOS short-selling scandal, even though it may not find the actual culprits, thought to be from the Far East, who caused the banks shares to plunge, only to see them recover later in the week. The FSA is conducting an extensive enquiry into the event, and is considering making the report available to the public, having already received evidence from the compliance departments of a number of investment banks.

An article in The Daily Telegraph went on to suggest that the Financial Services Authority is planning to target City high flyers in a recruitment drive following in the wake of its handling of the Northern Rock crisis. The FSA reportedly plans to increase its budget by as much as £15 million to hire as many as 100 new recruits. The plan is to attract more staff with experience of financial markets, particular those with a trading background, and need the extra funding to offer the level of salary that bankers will demand to leave their jobs.

New Tax Year Resolutions

New Government figures released last week showed that the rate at which families are saving is at a 48 year low. The Daily Telegraph commented that these figures showed that the proportion of income being put aside in savings, pensions and investments fell to just 2.9% in 2007. Figures from the Office of National Statistics show that consumers are beginning to tighten their belts.

With this in mind, and the end of the tax year approaching, The Daily Mail reminded readers not to forget to make the most of their remaining ISA allowances before the 5th April. Time is running out to take advantage of the tax breaks offered through an ISA.

Holders of Personal Equity Plans may also wish to note that when the new regime comes into force at the beginning of the new tax year, uninvested cash held in the Stocks & Shares ISA account will be subject to a 20% flat rate deduction by HM Revenue & Customs. To avoid this, investors may wish to consider moving any existing holdings out of cash and into a more diversified fund.

31st March 2008

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