July 4, 2020

British Recovery Plan Threatened by Weak Growth

The Office for National Statistics said government borrowing in October was £8.6 billion, or $13.7 billion, compared with £5.9 billion ($9.4 billion) in October 2011. Corporate tax receipts were down 9.5 percent while spending on social benefits increased 7.7 percent from October 2011.

Although Britain emerged from recession in the third quarter, with a 1 percent increase in economic growth, analysts have cautioned that that was distorted by special factors like the Olympic Games and that the outlook for growth remained feeble.

The figures Wednesday support that thesis, suggesting that the chancellor of the Exchequer, George Osborne, will struggle to hit his target of limiting borrowing for 2012-13 to £120 billion ($191 billion). In the longer term some analysts say they also believe that Britain’s prized AAA credit rating is at risk.

Sam Hill, fixed-income strategist for Britain at RBC Capital Markets, said in a note that borrowing for October had exceeded the consensus expectation of £6 billion ($9.5 billion).

“With data for seven months of the fiscal year now in, the government have borrowed 61 percent of the full year target of £120 billion, about four percentage points higher than trend over the last three years,” he said. “We believe this is consistent with our forecast for an upward revision to the £120 billion borrowing target of £5 billion.”

The lack of clear signs of a return to robust economic growth remains the main concern for most analysts.

“The underlying story of this year is tax receipts coming in weaker than expected,” said Robert Wood, chief economist for Britain at Berenberg Bank in London. “That’s because growth has stalled.”

Mr. Wood said it remained “touch and go” as to whether the government would meet its deficit reduction targets.

“I still think that the credit rating is more likely than not to be downgraded over the next few years,” he added.

The government argued that the figures indicated that it was keeping control of spending.

“The economy is healing, but it still faces many challenges,” said a spokesman for the Treasury, who in line with policy asked not to be identified. “These numbers illustrate that, but also show the government’s plans to bring spending under control are on track for the year.”

The spokesman said that corporate tax receipts were affected by lower-than-expected energy production from the North Sea.

In a separate development, minutes of the last meeting of the monetary policy committee of the Bank of England revealed divisions at the central bank over how to manage a return to growth, with one member calling for more economic stimulus.

David Miles argued that an asset-buying plan, intended to improve growth, could be increased by £25 billion ($40 billion) without stoking inflation. But the committee, which has already pumped £375 billion ($597 billion) into the economy via such quantitative easing, elected not to expand the program.

The panel also discussed reducing the benchmark interest rate from its record low of 0.5 percent, but unanimously voted not to change it.

Article source: http://www.nytimes.com/2012/11/22/business/global/figures-show-fragility-of-british-recovery.html?partner=rss&emc=rss

Financial Stocks Lift Wall Street

Bank stocks rose more than 4 percent by the close of the trading session, backtracking on the steep losses incurred on Monday that helped send the main stock indexes back into negative territory for the year.

By the end of the day, the Dow Jones industrial average was up 1.58 percent, or 180.05 points, at 11,577.05. The broader Standard Poor’s 500-stock index climbed more than 2 percent, or 24.52 points, to 1,225.38, while the Nasdaq composite index was up by 1.6 percent at 2,657.43.

The Dow finished fractionally below where it started the year, and the Nasdaq was 0.17 percent higher for the year to date.

The Treasury’s 10-year note fell 6/32, to 99 18/32. The yield rose to 2.18 percent, from 2.16 percent late Monday.

“Every day does not have to follow exactly the pattern of a yo-yo, but sometimes that is what happens,” said Lawrence Creatura, a portfolio manager at Federated Investors. “Yesterday’s downdraft was large, and it is reasonable to have investors looking for bargains today.”

Some analysts said the late-day gains might be attributed to exchange-traded funds. A Guardian newspaper report, quoting unidentified diplomats, saying that France and Germany had agreed on a plan to bolster Europe’s rescue fund could also have inspired such a reaction. That was “entirely plausible,” said Brian Gendreau, market strategist for the Cetera Financial Group. He and others noted that the market was highly volatile.

“Markets buy the rumor,” Eric Viloria, a senior currency strategist at Forex.com, said in a research note that referred to the report. “Today’s price action highlights how sensitive the markets are to headlines.”

Investors sifted through news about France, after Moody’s Investors Service said the country’s AAA credit rating was at risk. It was the latest headline to remind investors of the challenges facing Europe.

“Europe continues to be the No. 1 negative,” said Nick Kalivas, vice president for financial research at MF Global. “We  just are not seeing any signs of resolution there.” He said he believed that the comments about France were keeping buyers cautious.

The debt crisis could also have an impact on China, the world’s second-largest economy after the United States. New data showed that growth in China in the third quarter had slowed slightly to 9.1 percent. But Mr. Kalivas said he suspected the data could be “a little bit supportive” of the markets because industrial production and retail sales were firm.

Although the markets have been beset by volatility in recent months, buffeted largely by the instability related to the debt crisis in Europe, corporate results trickling out are a major factor giving investors direction.

Analysts believed investors were studying corporate profits for direction, specifically with banks, although some believed investors were already trading them at a discount. 

“The rumor mill is so rampant,” said Michael A. Mullaney, vice president at the Fiduciary Trust Company. “The bottom line is, the one thing I have been mildly encouraged about, is the earnings reports have been pretty good, so on average that hopefully lends a degree of support for the market.”

Goldman Sachs reported on Tuesday that it had a loss of $428 million in the quarter, compared with a $1.7 billion profit a year ago. Bank of America said it had a $6.2 billion profit, and revenue was up 6.6 percent.

Bank of America was up more than 10 percent at $6.64 and Goldman rose 5.5 percent to $102.25.

Investors have been dissecting the fine print of reports for a glimpse into the future of the economy.

“We are in earnings season now, and managements’ forward-looking comments are likely to dominate other factors,” Mr. Creatura said. “Today, because of some strong announcements, we are seeing a nice bid to the markets.”

The EMC Corporation, for example, said it expected global information technology spending to grow. It rose 5.8 percent to $23.99 after reporting a 28 percent rise in third-quarter earnings. VMware Inc. rose 8.2 percent, to $96.86, after it said net income more than doubled.

But Mr. Creatura said more volatility could be in store for banks, depending on what happened in Europe.

Article source: http://feeds.nytimes.com/click.phdo?i=e74f674490418475978869eb0e2e930e

U.S. Inquiry Said to Focus on S.&P. Ratings

The investigation began before Standard Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S. P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S. P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S. P.

During the boom years, S. P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.

Since the crisis, the agencies’ business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits.

The Securities and Exchange Commission has also been investigating possible wrongdoing at S. P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

Ed Sweeney, a spokesman for S. P., said in an e-mail: “S. P. has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.” S. P. is a unit of the McGraw-Hill Companies, which is under pressure from some investors and has been considering whether to spin off businesses or make other strategic changes this summer.

The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington. Now members of Congress are investigating why S. P. removed the nation’s AAA rating, which is highly important to financial markets.

Representatives of the Justice Department and the S.E.C. declined to comment, as is customary for those departments, on whether they are investigating the ratings agencies.

Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case.

The government has brought relatively few cases against large financial concerns for their roles in the housing blowup, and it has closed investigations into Washington Mutual and Countrywide, among others, without taking action.

The cases that have been brought are mainly civil matters. In the spring, the Justice Department filed a civil suit against Deutsche Bank and one of its units, which the government said had misrepresented the quality of mortgage loans to obtain government insurance on them. Another common thread — in that case and several others — is that no bank executives were named.

Despite the public scrutiny and outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries — but not the United States — pay the agencies to receive a rating, the financial market’s version of a seal of approval. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp for investing decisions — which bolstered the agencies’ power.

A successful case or settlement against a giant like S. P. could accelerate the shift away from the traditional ratings system. The financial reform overhaul known as Dodd-Frank sought to decrease the emphasis on ratings in the way banks and mutual funds invest their assets. But bank regulators have been slow to spell out how that would work. A government case that showed problems beyond ineptitude might spur greater reforms, financial historians said.

Article source: http://feeds.nytimes.com/click.phdo?i=60344544f6092632cb2608f60de15e9a