20 April 2017

Week in Brief:BUSINESS AND THE CITY

GOLD SORES:  You know that the problems are real when Goldman Sachs misses its own performance forecasts; especially when they and fellow investment banks have been making positive noises, albeit unofficial, about the beneficial effects on their businesses of political change in the USA and Britain . Goldman’s first quarter this year was expected to show the investment banking giant powering on, but in fact the performance was flat – good results in mortgage and interest instrument trading were cancelled out by underperformance in commodity trading, credit related businesses, and currency trading.  The core reason seems to have been that Goldman expected interest rates to start rising under the new President and positioned their book accordingly – buying early in the expectation rates would be on the up. Initially that looked like a good call but then rates have fallen back, leaving the trading books showing losses at mark to market.  Once upon a time of course banks could re-mark their books as longer term holds and avoid mark downs, but no longer, books must be valued as if being sold at the valuation date.  But do not despair too much for the struggling bankers – in spite of the weak quarter, net revenues were up 27% against the comparative quarter last year, with especially strong performance in areas which are added value – advisory based activities, such as underwriting debt or equity raises or investment management.

The news has knocked Goldman’s already retreating share price, down 5% since the November election, and also knocked the share price of some competitors who it is thought in the market may be experiencing similar issues – without the cushion of Goldman’s strong position in added value products.

IRON AGE:  One commodity price we do not follow in our weekly round-up of market trends is that of iron ore, a basic but highly essential raw material of many industrial (and domestic) products.  Iron ore is a bit like oil – for a long time the world looked as though world reserves were running out whilst use kept going up, but then the rising price made exploration more interesting and massive new reserves were found.  Just as, needless to say, the world started to be much more efficient at using metal so demand, whilst not dropping, slowed.  And unlike oil, iron can be reused, over and over again – as the scale of the world’s scrappage business demonstrates.  It is true that Europe is pretty much mined out, the big suppliers now being in Australia, India, and Brazil – and the big users in India and China, and to a declining extent, the West.  Ore prices have also been behaving like oil recently, recovering to highs of over US$95 per tonne at the beginning of the year as demand seemed to be picking up among steel manufacturers, but now sliding back to around $65 as steel production reaches new records – but world demand for the stuff slows.  The ore industry knows what will happen next and the price reflects sharp concerns that both iron ore and steel are being stockpiled – indeed ore reserves ready for processing are said to be up about a third in the first three months of 2017.  The slow up in demand is now starting to affect mines which are easing up on production; an especial problem for Brazil where mining is a big (and relatively well paid) employer, it is also hitting the share prices of the big public mining companies most of which are also suffering from the slide in copper prices over the last few months.

LOOSE RIGGING:  The LIBOR rigging scandal just will not go away.  After a series of trials of individual traders accused of attempting to adjust the market rates for interest rate products, for their own benefit or that of mates, which produced a few convictions but also a lot of acquittals, further suggestions have been made that the real impetus came from higher up.  Recently revealed evidence suggests that this reached as high as the Court of the Bank of England, and linked in the Treasury, which is said to have wanted interest rates pushed down as low as possible to help in the crisis of 2008 – but it goes back  further than that.  The allegations have now been picked up by John McDonnell, Labour’s shadow Chancellor of the Exchequer and a close ally of Jeremy Corbyn, who has called for a public enquiry into exactly what went on and who knew what.  Given other distractions for politicians this week and into June, it seems unlikely the government will oblige him, but there may be more revelations to come about the relationships between the Bank, the regulators, and the clearing banks.

NOT GOOD ENOUGH: The legacy of 2008 still hangs over one major bank.  RBS was supposed to sell its recently carved out Williams and Glynn’s subsidiary (a loose successor to the bank of that heritage which was centred in the North West).  After years of trying to separate it off – complex reporting and management systems seemed to make that almost impossible – it was finally able to persuade the Treasury and is currently urging European Commission competition regulators to be allowed to keep it, provided that it injects about £750m into rather vaguely described initiatives to increase competition in the small business market.  RBS’s small competitors – the so-called “challenger banks”, do not like that at all, calling for the government to force RBS to divest itself of a range of assets into the market so that the RBS business can be shrunk and the challengers be given more of a leg up to become competitive.  They also want RBS to be forced to continue to provide basic services at cost so they do not have a one stop advantage over smaller banks that do not have capabilities in, say, foreign exchange or derivative provision.  The UK Treasury has said the RBS proposal is the best way ahead – but it is far from certain that the EC will take that view.

HEAVY BOOZERS: Good news for those facing the uncertainties and upsets of a General Election campaign – in 2016 45 new gin distilleries were opened, giving all the benefits of diversity and competition to a market which is so close to so many hearts.  Or livers.  For the first time gin sales exceeded £1billion, and HM Revenue and Customs, who has awarded itself the not unpleasant job of monitoring the sector says that British gin is exported to 139 counties.  Many of the new batch are artisan distilleries, capable of being run from a big garden shed or even a couple of back bedrooms.   A lovely way to sooth yourself to sleep.

KEY MARKET INDICES:

(as at 18th April 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, unchanged: 3 month 0.34% (steady); 5 year 0.64% (falling).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year -0.01% (falling)

US$: 1 mth 0.99% (steady); 3 mth 1.15% (steady); 5 year 1.83% (falling)

Currency Exchanges:

£/Euro: 1.18, £ rising

£/$: 1.26, £ rising

Euro/$: 1.06, € steady

Gold, oz: $1,285, rising

Aluminium, tonne: $1,915, falling

Copper, tonne:  $5,620, falling

Oil, Brent Crude barrel: $55, rising

Wheat, tonne: £147, steady

London Stock Exchange: FTSE 100: 7,123 (fall).  FTSE Allshare: 3.9204 (slight fall)

Briefly:    Mrs May’s election announcement seems to have affected many things – even in international commodity markets.  That traditional shelter, gold, rose; the traditional index of nervousness, oil, also rose; and everything else fell.  On the financials front, though there was very little movement – sterling was slightly up and most longer term interest rates fell.  Or maybe it is just that everybody is away for Easter?

 

If you enjoyed this article please share it using the buttons above.

Please click here if you would like a weekly email on publication of the ShawSheet