US Dollars depreciates in November

A weak dollar is the natural corollary of the long string of current account deficits run by the US in the past. As early as in 2000, leading economists like Obstfeld and Rogoff had already warned about the need for real dollar depreciation in the range of 35% to 50%, on a multilateral basis. From its peak in the year 2002 and October 2007, dollar has fallen on a multilateral basis - approximately 28% in nominal terms or about 25% in real terms.

Now, the big question is that how much real dollar depreciation should be expected, and, most importantly, to what extent the dollar fall will be accompanied by a global realignment of Asian currencies, supposedly lifting the pressure on the Euro. The strong interest in exchange rate predictions should not overshadow the need to understand the specific mechanisms by which real dollar depreciation is an essential step towards global adjustment. These mechanisms will, after all, shape the macroeconomic outlook in the next few years.

According to the Federal Reserve Bank of Atlanta, the average monthly value for the trade-weighted dollar index of 15 major currencies decreased 1.6% in November compared to the previous month. The dollar fell against all major sub-indexes. The greatest loss was against the European sub-index that saw a drop of 2.7% in November. The Pacific sub-index fell by 2%, whereas both the American and Pacific-excluding-Japan sub-indexes declined by 0.5%.

The classic sub-index, which is the analogue of the original Atlanta index, fell by 1.9%. The overall monthly index was 8.6% below its year-ago level. On a daily basis, the overall index was up 0.8% from the end of October to the end of November but remained 6.9% below its value at the end of November 2006.

BoE lends £10bn to ease credit crunch

The Bank of England has lent £10 billion through auction to the banks and financial institutions. The borrowers bid for the cash at auction. The total bids received exceeded the £10 billion on offer by £850 million. The money has been lent for three months.

The move by the Bank of England is aimed at easing the credit crunch and lowering the borrowing costs. Those who bid at the lowest rate of 5.36% got 75% of the amount they had requested. The overall demand for money was lower than anticipated. Still, most of the banks paid above the prevailing base rate of interest.

John Wraith, head of UK interest rate strategy at Royal Bank of Scotland, said: “The rate was low and demand was relatively low which suggests that pressures might not be as intense as we perhaps might have thought. However, he added that: “Someone borrowed money at 6.6% and that definitely suggests that they were desperate to get some funding.”

The cost of inter-bank lending has remained higher despite the recent cut in the base rate of interest. The London Inter-bank Offered Rate (Libor) dipped to 6.386%, compared to 6.627% on the day when the central banks unveiled their rescue plan. When the Libor dips, it becomes cheaper for the banks to borrow money.

The present move by the Bank of England to lend £10 billion will ease the credit crunch and help in lowering the rate at which banks lend to each other. Many building societies and other lenders are trying to attract more deposits from the public to raise funds for mortgages and loans. The interest rate on savings has gone upto 7% and it is a good opportunity for those who can manage to save.

Interest rates review

The last base rate increase was made effective in July 2007. Now, after five months, the Bank of England has decided to cut the interest rate by 0.25%, bringing it down to 5.5%. The rate cut was a much needed relief for the borrowers. It is also intended that the cut in base rate will boost the slowing economy of the nation. The monetary policy committee of the Bank of England reviews interest rate every month and takes stock of the financial situation in the country.

In the year 2006, the Bank of England increased base rate two times – once in August and then in November. On both occasions, the interest rate was increased by 0.25%. The Bank increased its base rate three times in the year 2007 – once in January, then in May and July. Each time the base rate was increased by 0.25%. However, in the beginning of December, the Bank reduced the base rate by 0.25%. The interest rate review for the last more than two years reveal that it was never cut down except for this December.

Just prior to the December cut, the Council of Mortgage Lenders warned that lenders would not be able to meet the mortgage requirements in the year 2008 if the current credit conditions continued. As per an estimate by the financial services authority, at least 1.4 million short-term fixed- rate mortgages will come to an end in the year 2008.

The decision by the Bank of England to cut the interest rate in December was the first since August 2005. It came at a time when many Central Banks from different nations are trying to fight the risk of higher inflation and the global economic impact of the credit squeeze that originated from the U.S. soil.

New credit rating system to reduce default

Scientists at the University of Edinburgh revealed a new credit rating system that would prevent many people from falling into debts. It is believed that the new system will reduce the numbers of credit defaulters. This method uses extra criteria to accurately predict debt defaults.

Apart from the credit history, this method also takes into account your general economic conditions.

Professor Jonathan Crook of Edinburgh University's Credit Research Centre said: “Increases in earnings and the FTSE index - which are indicators of an improving economy - all provide conditions for reduced risk of default.” The FTSE is a commonly used benchmark for the performance of equities traded on the London Stock Exchange.

On the other hand, higher interest rates, greater unemployment and rising house prices directly affect people’s repayment capacity, resulting in higher risk to the lender.

Scientists believe that considering interest rates, consumer confidence and earnings will enable the lenders to accurately assess the risk of possible default. They hope that banks and building societies will soon test the system. Presently, most of the lenders rely on borrower’s credit history, income and occupation.

Generally speaking, the personal debt problems in the UK have increased manifold. The number of people seeking financial advice from debt charities is increasing. If this new system proves good, it will help many borrowers from falling into debts.

Credit crunch 'will not affect student finances'

A spokesman for the National Union of Students (NUS) has claimed that the fallout from the credit crunch has not had a major impact on this year's student intake.

He suggested that part of this could be down to the widening of the eligibility criteria for government grants - something that the NUS has welcomed.

"I have not seen too much to suggest that banks are overly worried about students. The risk outlay on students is that much less than for giving out a mortgage and they also take the view that a graduate is likely to be a customer for the rest of their life and they are willing to take that risk," the spokesman explained.

However, he suggested that the impact of the credit crunch may become "more apparent" in next year's intake.

Similarly, he suggested that it will take a "couple more years" before the full benefit of the widened criteria for government grants can be properly assessed.

Source- http://www.financialadvice.co.uk/news/12/ukeconomy/6259/Credit-crunch-will-not-affect-student-finances.html

Government action needed on long-term fixed-rate mortgages

The Council of Mortgage Lenders (CML) is urging the Government to act if it wants more homebuyers to take out long-term fixed-rate mortgages.

In July of this year the Government announced that it wanted to help lenders to offer more affordable 20-25 year fixed-rate products.

The CML describes the appetite for this type of product as “reasonable” in principle, but points out that borrowers remain concerned about the risks of being locked into costly products.

Long-term mortgages are common in the US, Germany and Denmark and can provide stability for those who prefer to know exactly what their repayments will be, rather than take a chance on fluctuating interest rates.

However, in the UK mortgage agreements lasting more than ten years account for less than 5% of the residential market.

Experts agree this is largely because early repayment charges are high in the first ten years or more.

In a recent survey, the CML found that over 40% of respondents liked the idea of a fixed-rate loan but the majority were not prepared to sign up for more than five years.

A quarter of all those questioned were adamant they could not be persuaded to take out a mortgage for more than 10 years.

Most were put off by fears of high early repayment charges, the mortgage becoming expensive because of a fall in interest rates, and being tied to one lender.

According to Bob Pannell, head of research at the CML, “In the absence of a major policy intervention from the Government, the take-up of long term fixed rates looks set to remain relatively small for the foreseeable future.”

The CML has also spoken out this week about a potential shortage of money available to fund mortgage markets “if capital markets do not open next year”.

Source- http://www.financemarkets.co.uk/2007/12/04/government-action-needed-on-long-term-fixed-rate-mortgages/

New York fund makes 500% return

The $156.6bn (€106bn) New York State Retirement fund, the third-largest US pension plan, made a return of 500% on a private equity investment in June after a year, highlighting the role by alternatives to the scheme’s returns.

The fund, through High Peaks Venture Partners, invested $447,000 in May last year in Pump Audio, a New York music-licensing company as part of its in-state private equity investment program.

Photography Company Getty Images bought Pump Audio in June for $42m, providing the plan with its most successful investment.

The in-state program was launched in 1999 and a total of $836m is now allocated with $564m available for investment through 16 private equity managers. However, the global private equity portfolio was $514.7bn at the end of March, 9.4% of the scheme’s total funds.

Thomas DiNapoli, New York state comptroller, said: “Investors are always looking for a smash hit. We have found one right here in New York State.”

DiNapoli is sole trustee of the New York State Retirement fund. The scheme comprises the New York State Employees’ Retirement System, established in 1921, and the Police and Fire Retirement System, which the state legislature created in 1966. With more than one million participants, it is the second-largest scheme in the US and the third-largest by asset value.

The fund returned 12.6% last year, exceeding the 8% actuarial assumed rate of return and the 11.95% long-term average annual return. The report said particularly good results were generated from international equity, real estate and alternative assets.

The fund’s private equity portfolio, which uses Hamilton Lane Advisors as a consultant, aims to provide returns 500 basis points above public equity markets. It includes venture capital, special situation funds and funds of funds.

Private equity generated a 28.7% one-year return and accounted for 6.5% of the fund’s total investments in the last financial year. The allocation is unlikely to change because state laws limit the fund’s investments beyond investment-grade bonds and domestic equities.

The scheme expects to carry on to allocate between $3bn and $3.5bn per year, about 7% of its money, to private equity, although the commitment period is likely to increase as credit conditions have worsened. The fund has significant exposure to the large buyout firms that make up about 60% of its annual commitments.

The fund has committed $1.3bn to private equity group Blackstone in six funds as at March 31, 2007, according to its website. In 1993 it committed $50m to Blackstone Capital Partners II. By 2005, the pension fund’s commitment to Blackstone Capital Partners V had risen to $675m.

Other long-running relationships include Kohlberg Kravis Roberts, Warburg Pincus and Providence Equity Partners, which specializes in media buyouts. The fund has committed $1.6bn to KKR in five funds since 1987, including $600m in the KKR 2006 fund. The scheme’s contribution of $370m in KKR’s 1987 fund has also more than doubled to $827m.

The scheme has committed $1.3bn to Warburg Pincus since 1989 and $834m to Providence since 1996. Its $50m commitment to Providence has more than tripled to $181m.

Source- http://www.financialnews-us.com/?page=ushome&contentid=2349313302

Christmas season set to boost UK economy

The festive season could help to shore up the UK economy this year after a rocky few months, it has been claimed.

According to Richard Dodd, head of media and campaigns for the British Retail Consortium (BRC), Christmas is arriving at just the right time to help perk up the slowing economy and improve retailers so as to help the overall economy.

It has been suggested that this year Christmas will be worth a massive £12 billion to British retailers and this was demonstrated by the vast number of people on the streets of central London at the weekend.

Oxford Street, Bond Street and Regent Street were all closed to traffic on Saturday for the first time and it is believed that the one million shoppers that took to the car-less streets spent in the region of £100 million on that one day alone.

Commenting on the expected increase in sales during this year's festive period compared to 2006, Mr Dodd said: "We think like-for-like enlargement will probably be around 3% or slightly less, according to our figures, which is similar to last year when it was 2.5% like-for-like."

Source- http://www.financialadvice.co.uk/news/12/ukeconomy/6257/Christmas-set-to-boost-UK-economy.html

UK banks face further writedowns

RBS (Royal Bank of Scotland) expected to writedown up to £1.9bn while A&L warns 2007 profits will be £55m lower.

UK banks may be forced into further write downs against the values of some of their high risk loans.

Alliance & Leicester and RBS are both set to reveal the extent of their losses this week.

A&L is expected to write off a further £50m against its so-called 'toxic loans' in the first half of next year, on top of the £55m charge announced last week.

The bank issued a trading statement previous week outlining the fall in the value of its holdings of structured investment vehicles, collateralised debt obligations and other complex financial instruments.

The bank announced a £40m write-off against SIVs but also revealed that following the charge, the holdings of the instruments were in the books at £346m - £52m more than their current market value of £294m.

RBS is likely to write-down up to £1.9bn, analysts say, on the back of the recent turmoil in the markets.

Sanford Bernstein analyst Antony Broadbent predicted that RBS would announce total writedowns of £1.6bn to £1.9bn for 2007, which included those for ABN Amro.

But RBS writedowns on SIVs are projected to be 'negligible' according to Sanford, since neither RBS nor ABN had material exposure to SIVs.


Source- http://www.accountancyage.com/accountancyage/news/2204818/uk-banks-face-further

Gov't asks Northern Rock to consider more bids

Chancellor of the Exchecquer Alistair Darling has asked troubled mortgage lender Northern Rock to consider rival bids to the one launched by Richard Branson's Virgin Group, the Financial Times said Monday.

The paper, which cited people close to the deal, said that private equity groups Cerberus and JC Flowers had submitted separate bids, after Northern Rock named a consortium led by Virgin as its preferred long-term saviour a week ago.

"Clearly it makes sense to have more than one interested party, from the taxpayer point of view and also from the standpoint of Northern Rock shareholders," an unidentified official close to the deal was quoted as saying.

According to the FT, the JC Flowers offer has been deemed an "approved bid" by the finance ministry because it meets the government's goals for the sale and recovering billions of pounds (euros/dollars) of taxpayer funds loaned to Northern Rock.

JC Flowers's bid pledges to repay 15 billion pounds (21 billion euros, 30.8 billion dollars) of government loans to Northern Rock without delay and the rest will be repaid over 3 years at a commercial rate of interest.

Since Northern Rock was forced to seek an emergency loan from the Bank of England, Britain's central bank, earlier this year in the aftermath of the credit crunch in the financial markets, the government has lent the bank some 25 billion pounds, and guaranteed all savings held there.

"The government would like this to be resolved quickly but we need to make sure we get the right deal," a finance ministry spokesman told the FT.

Source- http://uk.news.yahoo.com/afp/20071203/tuk-britain-banking-company-northernrock-a7ad41d.html

Hedge fund assets approach $3 trillion

Hedge fund assets soared to $2.7 trillion (€1.8 trillion) at the end of September, boosted by significant growth in Brazil- and China-based funds and undercut by liquidations that sharply reduced gains from new launches in the second and third quarters.

Total assets rose by $339bn in the first three quarters of 2007, according to the report published by financial news publisher Institutional Investor and news service Hedge Fund.net. Assets grew 3.3% in the third quarter from $2.59 trillion in the second quarter.

The increase was partially powered by emerging market hedge fund assets which approached $300bn in the third quarter, a $48bn increase from new allocations in the first nine months of the year.

China and Brazil were standouts in the sector. Funds targeting China rocketed 89% to $22.8bn through the end of September, from $20bn for all of 2006. Assets for Brazil-focused funds jumped 57% for the year through the third quarter to $7.7bn, compared with $4.4bn for all of 2006.

The credit crunch has created greater competition for less money, leading to increased consolidation in the hedge fund sector. Competition for investors has increased and is likely to continue as established fund managers carry on funds open longer, making it more difficult for new and young hedge fund managers to raise money.

The collapse this summer of Bear Stearns' two highly leveraged hedge funds whose underlying assets were fixed to sub-prime investments, was the first high profile victim. Others soon followed, including: Sowood Capital Management; Galena Street Fund; a hedge fund under the Braddock Financial Group; Basis Capital Fund Management's Yield Fund; and money manager Sentinel.

Last week, Peter Clarke, the head of Man Group, one of the largest hedge fund managers in the world, predicted that one out of 10 funds would go out of business, according to the Financial Times. He said the rocky market climate had reduced the number of startups by a third.

Source- http://www.financialnews-us.com/?page=ushome&contentid=2449302637

Profit growth lags rise in assets

Fund managers increased the value of their assets by 13% to $53.4 trillion (€36 trillion) last year, although their average profit margin was unchanged on the previous year, according to Boston Consulting Group.

The average operating profit margin of asset managers in a Boston Consulting survey published today was 42% last year, compared to 42.2% in 2005. However, results varied widely. The most profitable manager was a retail fund manager with a margin of 70% and the least profitable had a margin of about 20% and was a pure institutional manager.

Retail managers posted an average operating profit of 36 basis points in 2006, compared with 14 basis points for those managers with retail and institutional clients and 8 basis points for pure institutional managers.

However, managers in the retail segment also had the highest costs of all managers, which Boston Consulting said reflected the cost of pursuing retail investors over institutional ones.

The US market, which is home to 48% of global assets under management, remained the fastest growing region, expanding by 15% last year, Europe grew 11% and Asia increased by 10%.

This trend is contrary to the desire on the part of US fund management groups to secure greater interests in Europe and Asia, which they believe have stronger future growth prospects. Managers including Baltimore-based Legg Mason and Denver-based Janus Capital Group, are among those US managers that are seeking to grow their international assets under management.

Actively managed funds represented three quarters of global assets under management last year. Boston Consulting said it projected these products to grow at a compound annual growth rate of 10% through until 2011, although their share of global assets under management should fall to about 64% by that year.

Boston Consulting said the fall-out from the sub-prime crisis this year would have important implications for asset managers, reflecting the ways in which they have been increasingly playing in the same field as investment banks.

The report said: "If asset managers wish to continue playing on the same field as investment banks regarding innovative products - and they should because structured finance is here to stay - they will increasingly need to improve their structuring and pricing capabilities, as well as invest in systems and processes aimed at enhancing their overall risk control capacity."

Source- http://www.financialnews-us.com/?page=ushome&contentid=2449301689