The Word From Hansard – 11th November 2008

China , the biggest contributor to world growth, has unveiled a USD 586 billion plan to stimulate its economy. China ’s cabinet pledged "fast and heavy-handed investment" in housing and infrastructure through 2010 and a "relatively loose" monetary policy. GDP growth in China fell below 10% in the third quarter, down from double digit growth in the first two quarters. The Chinese economy, which accounted for around 27% of global economic growth in 2007, is a key source of demand for raw materials and consumer goods. The strength of the economy is important for Asian and global markets alike so news the Chinese government is going to tackle growth is seen by market analysts as a welcome relief. China ’s extra spending may boost the nation’s economic growth by 2 percentage points next year.

China ’s announcement saw the price of crude oil and copper rise more than 5%. Oil also gained after Saudi Aramco, the world’s biggest state oil company, told South Korean and Japanese refiners it would reduce December supplies. Crude oil for December delivery rose to USD 64.30 a barrel on the New York Mercantile Exchange.

The yen declined for a second day against the euro on speculation that China ’s stimulation package will give investors more confidence to buy higher-yielding assets using money borrowed in Japan . The yen fell 1.7% to 127.10 per euro. Against the dollar, it declined to 99.14 from 98.24 at the end of last week. The euro rose to USD 1.2821 from USD 1.2718. The pound rose against the US dollar on speculation rising stocks are reviving risk appetite, boosting demand for sterling. The pound increased 0.5% to USD 1.5724 from USD 1.5643 at the end of last week.

Treasury two-year notes, the worst performing US government securities in the last year, may beat longer-term debt as the Federal Reserve cuts interest rates to stimulate the US economy. The difference between yields on two- and ten-year notes, known as the yield curve, may widen to a record 3 percentage points from 2.44 percentage points now, according to strategists at Morgan Stanley and Credit Suisse. Shorter term yields are falling on expectations the Fed will reduce its target for overnight loans between banks to mitigate the effects of recession. Ten-year yields are likely to rise as the government borrows to support the US financial system.

"A combination of weakening fundamentals, technical selling and sheer panic is producing stock prices that are at extreme odds with companies long-term prospects", according to fund manager Schroder. They added that the dividend yield on the UK market is now greater than that on government bonds – even excluding financials. "This has happened exceptionally infrequently over the last 80 years and, in each case, has provided a remarkable opportunity for investors to buy cheap stocks and generate strong long-term outperformance. The scale of recent stock-price falls now offers long-term investors the chance to buy shares at prices they could only have dreamed of previously."

Spotlight on Europe

The European Central Bank lowered its deposit rate last week to 2.75% from 3.25%. However, it may be forced to lower the rate further if banks continue to deposit huge amounts of cash overnight. Deposits have exceeded 200 billion euro (USD 255 billion) for 16 of the last 17 working days (as at Friday last week).

HSBC Holdings plc, Europe’s biggest bank, said third quarter profit rose even as it set aside a more than estimated USD 4.3 billion to cover bad loans in the USA and forecast "further deterioration". Still, business in Asia is resilient and the bank won’t cut the dividend or seek government help to raise capital, Chief Executive Officer Michael Geoghegan said today.

D Carnegie & Co, the 205 year old Swedish investment bank, has had its licence revoked by the country’s regulator and will be put under supervision of the national debt office. The Stockholm-based bank may be able to regain its licence under the stewardship of the debt office, the regulator has said in a statement. They added that Carnegie took "exceptional risks" awarding loans.

Spain will guarantee bond sales by its banks for as long as five years under a 200 billion euro (USD 256 billion) program to encourage lending. Spain will back banks’ new senior unsecured debt for as many as three years under normal circumstances and five years in exceptional cases. Prime Minister Zapatero said in October that the plan was a "precautionary" measure to protect the country’s banking industry.

Santander will raise 7.2 billion euro (USD 9.2 billion) selling new stock in a rights issue to boost capital, joining Barclays, Royal Bank of Scotland and Italy’s biggest bank UniCredit in similar moves.

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