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Friday financial focus

  • UK: Osborne sets the tone for the 2015 elections
  • UK: Moody’s upgrade UK lenders
  • USA: Fed seeks more evidence of recovery before slowing stimulus
  • USA: Consumer borrowing rising
  • Japan: BoJ predicts recovery for first time in 30 months
  • Italy: Borrowing costs fall despite downgrade
  • Africa: Economy “seeing fastest growth”
  • Energy: Offshore wind turbines increase in Europe but financing still slow

UK: Osborne sets the tone for the 2015 electionsGeorge Osborne yesterday said the Conservative party would not raise taxes if the party wins the 2015 general election, setting the tone for the forthcoming contest. Even though any future government will still be struggling to cut the annual deficit, the chancellor indicated that the welfare budget would be cut to meet his target of reducing spending by £23bn during 2017 and 2018.UK: Moody’s upgrade UK lendersBritish banks are getting stronger on the back of the economy’s emerging recovery, credit ratings agency Moody’s announced on Wednesday. It revised the banking system’s outlook from negative to stable on the basis that the economy’s stability should make borrowers more likely to pay back their loans, improving banks’ profitability. And once the banks increase their capital levels in line with instructions from the Bank of England’s prudential regulation authority, they “will compare favourably to their European peers,” said the agency.USA: Fed seeks more evidence of recovery before slowing stimulusMinutes of the Federal Reserve’s last policy meeting say officials want more evidence of a jobs market recovery before winding up stimulus measures. The minutes show that “about half” of the Fed’s board felt the USD 85bn-a-month stimulus programme could be phased out by the end of 2013. Speculation that the Fed might halt quantitative easing within a couple of months had unnerved Wall Street. But the news that there would be no immediate exit sent US markets higher.USA: Consumer borrowing rising Americans are once again spending more on credit, increasing their borrowing by $19.6bn in May, according to the US Federal Reserve. It is the biggest increase in borrowing in more than a year and reflects renewed confidence among US consumers. More debt could help increase consumer spending, which accounts for more than 70% of US economic activity. The total amount of borrowing reached a record $2.84tn, with student loans reaching $1tn. Borrowing in the category that includes credit cards was at its highest level since 2010. Economists say that is significant as credit card debt is often quickly translated into economic activity.Japan: BoJ predicts recovery for first time in 30 monthsThe Japanese central bank has predicted that the country’s economy is now starting to bounce back, suggesting a recovery for the first time since January 2011. The bank held interest rates at 0.1% yesterday, where they have been since the end of 2008. The policy board suggested that improvements were being made in line with the predictions they had made in April, when Bank governor Haruhiko Kuroda launched a programme of bond purchases and committed the bank to aim for 2% inflation. Policy makers yesterday predicted that 2% inflation would be reached in 2015, with CPI rising steadily upward over the next two years, noting the rise in some estimates of inflation expectations.Italy: Borrowing costs fall despite downgradeThe Italian government’s borrowing costs dipped back yesterday, after months of uncertainty in debt markets had held bond yields high. The troubled southern Eurozone state was downgraded by ratings agency Standard and Poor’s earlier in the week, but despite the warning investors bought the debt. Italy issued €3.39bn (£2.9bn) in three year bonds, borrowing at an interest rate of 2.33%. This was down from 2.38% a month ago and the lowest rate since May. And it also raised €1.46bn in 30-year debt, paying 5.19%. Analysts believe the one-notch downgrade to a triple-B rating is too small so far to have had an impact on the cost of borrowing, as it is still classed as investment grade and so matches the criteria of many investment funds and groups.Africa: Economy “seeing fastest growth”Africa’s economy is growing faster than any other continent, according to the African Development Bank (AfDB). A new report from the AfDB said one-third of Africa’s countries have GDP growth rates of more than 6%. The costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved. The continent’s middle class is growing rapidly – around 350 million Africans now earn between USD 2 and USD 20 a day. The share of the population living below the poverty line in Africa has fallen from 51% in 2005 to 39% in 2012. Africa’s collective gross domestic product (GDP) per capita reached USD 953 last year, while the number of middleincome countries on the continent rose to 26, out of a total of 54.Energy: Offshore wind turbines increase in Europe but financing still slowAround twice as many offshore wind turbines were added to the power grid in Europe in the first half of 2013 compared with a year ago, but financing for new projects has slowed, industry body the European Wind Energy Association has revealed.DATA AT 0730 UK (FT.COM)Index Value Changesince last sessionFTSE 100 6,543.41 +0.59%S&P 500 1,675.02 +1.36%Eurofirst 300 1,196.86 +0.57%Nikkei 225 14,506.25 +0.23%Shanghai 2,041.56 -1.52%Commodities Value Changesince last sessionWTI Crude $104.63 -0.27%Brent Crude $107.60 -0.12%Gold 100oz $1,282.30 +0.17%Copper $3.18 -0.22%Corn $716.00 -0.10%Forex Pair Value Changesince last session$ per € 1.3076 -0.14%$ per £ 1.5167 -0.11%¥ per $ 98.9500 -0.11%¥ per € 129.4400 -0.08%€ per £ 1.1596 +0.04%Bonds Rate Changesince last session10Y UK Gov 2.39% 0.00%2Y US Gov 0.33% 0.00%10Y US Gov 2.56% -0.02%10Y Japan 0.83% 0.00%10Y Bund 1.62% 0.00%+44 161 962 1506 | office@execteam.co.ukThis newsletter has been compiled to give you an overview of the financial headlines of the week. It should not be relied upon as a source of investment advice.We gratefully acknowledge our sources of information, which includes We gratefully acknowledge our sources of information, which includes Hansard.com, Hansard.com, FT.COM, Bloomberg, Reuters, City A.M. and other news reporting websites. FT.COM, Bloomberg, Reuters, City A.M. and other news reporting websites.www.ft.com | www.reuters.com | www.bloomberg.com | www.cityam.com | www.hansard.comFinancial Focus12th July 2013 execteam.co.ukCurrencies: USD set for weekly decline as Asian currencies riseThe dollar headed for a weekly drop against most of its major peers as comments from Federal Reserve policy makers caused investors to push out expectations for when the central bank will reduce stimulus. The news had the opposite effect further east, and Asian currencies are set for the biggest weekly gain in 10 months.Gold: Mining shares trading below NAVShares in gold mining companies have fallen 64% since their peak in August 2011 and are trading below their net asset value for the first time since 1980, potentially reaching a point where investors will find them attractive once more, according to Hargreaves Lansdown’s senior investment manager Adrian Lowcock. The metal itself has fallen 35% from its peak of USD 1,900 in September 2011 to USD 1,235 as at 8 July, and both of these declines compare with a rise of 35% for the MSCI World Index from August 2011 to June this year. Trying to call the bottom of the gold market is a bit like trying to catch a falling knife. However, all investments have a price at which point they become very attractive to investors. Momentum remains very much against gold mining shares and as Sir John Templeton once said ‘if a particular industry or type of security becomes popular with investors the popularity will always prove temporary and, when lost, may not return for many years’.UK Property: Risky house loans rise to highest since 2008Large property loans, for buyers with a deposit worth less than 15% of the house’s value, are more available now than at any point since the financial crisis. According to data released by LSL Property Services Group today, more high loan-tovalue mortgages were extended to people buying houses in June than in any month since September 2008. Loans that are large in comparison to the value of the property tend to be considered more risky.EU Property: Cyprus, Spain & Portugal see Q1 fall in pricesIn the euro area, the picture for property is much less buoyant than the UK. House prices fell by 2.2% in the first quarter of this year, in comparison to the first quarter of 2012. Prices fell considerably during the financial crisis, and have struggled to recovery since. The countries which saw the largest falls are on the EU’s struggling periphery: Spanish and Cypriot prices fell by 5.1% and 4.8% respectively, and Portuguese prices dipped by 3.2% in the same period.Focus On: Prospects for the Chinese EconomyBy Adrian Corkill, Hansard.comNapoleon Bonaparte said “Let China sleep, for when she awakes, she will shake the world”. In the following two centuries, the country has indeed spent much of the time in a fairly dormant state. Alongside Japan and the rest of East Asia, China accounted for over half of global activity and 60% of world industrial production in 1820; by 1875 their overall share had fallen below 20% – similar to that of the United Kingdom.Through a combination of wars, occupations, revolution and political upheaval, China remained in this state until well into the 20th Century. But since “waking up”, following a series of reforms in 1979 and entry into the World Trade Organisation in 2001, the global impact has been profound. China’s share of world exports rose five-fold during this period, to just over 5% of global GDP, as its economy has consistently expanded at 8-9% annual rates. The impact of this major new trading partner has been felt both in global goods and commodity markets, with substantial weakening of price pressures in the former and rising prices a feature of the latter.More recently, however, China’s growth rate has slowed; interbank lending rates have risen to record highs; and worries have begun to emerge about a “hard landing” for the economy. Are these concerns justified?One worry has been the fact that rapid credit growth in China has not translated into stronger economic activity. In 2013 Q1, credit expanded at an annual pace of over 20%, more than twice the rate of nominal GDP growth. This “gap” has been widening since early 2012. It could be that there is just a natural lag between borrowing and investment, implying a pick-up in investment growth in 2013. However, there is little sign of this in the latest data: fixed-asset investment decelerated to a below-expectations annual growth rate of 20.6% in the first four months of the year from 20.9% in the first quarter. One concern is that, rather than financing productive investment, new credit is being used by corporates and local government to refinance old debt – creating potential risks for both the official banking sector and the burgeoning ‘shadow’ financial system of wealth management companies, insurance companies and trust loans.Precursors to a ‘hard landing’ for China, which could reduce annual GDP growth to a 3% annual pace at its height, could therefore include an acceleration in ‘shadow’ borrowing, at increasingly short maturities and higher rates; reports of financial problems in local government or companies; and developments that increase the risk of a policy error.

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