Tuesday, June 11, 2013

Business news and markets: as it happened, June 10, 2013


Business news and markets: as it happened, June 10, 2013 - Telegraph

17.12 Just 24 hours before Germany's highest court hears arguments on whether the ECB's bond buying programme is legal, president Mario Draghi has insisted that the central bank would not use Outright Monetary Transactions (OMT) to save a country from bankruptcy. Speaking on German TV, Mr Draghi said:

Quote We will not intervene to generally ensure the solvency of a country.

He added: "German tax payers' risk is today significantly lower than a year ago". Mr Draghi also said that interest rates, which are currently at a record-low of 0.5pc, would rise when confidence in the eurozone returns.

16.55 US airline Delta will reportedly secure approval from European regulators to buy a 49pc stake in Virgin Atlantic from Singapore Airlines, in a deal that will enable both carriers to offer more flights at Heathrow, Europe's busiest airport.

Sources told Reuters that the European Commission did not see any competition problems with the deal, announced in December last year.

Although the EC is scheduled to decide on the deal by June 20, Delta and Virgin will also need to gain approval from US regulators, which may be concerned about the reduced incentive for the two airlines to compete with each other once they set up the joint venture.

16.41 The FTSE 100 has ended the day as it started: in negative territory. Hurt by weak economic data from China, the benchmark index has closed down 11.54 points at 6,400.45. The FTSE 250 is up 20.18 at 14,025.19 - a late mover on that index is Britvic, which has slipped 1.7pc on market talk of a placing of some 8.8m shares.

16.36 Paul Hollingsworth and John Higgins at Capital Economics examine the recent depreciation in emerging market currencies. Their verdict? Expect further falls:

Quote Three main factors explain the recent sell-off. First, concerns about the potential impact of a scaling back of the US Fed's unconventional monetary policy stimulus have dulled investors' appetite for risk. Second, some EM currencies have been buffeted by local factors, such as political instability and interest rate cuts. And third, falls in commodity prices have weighed on the currencies of commodity-producing countries.

We think these factors will weigh further in H2 2013.

For example, while we don't expect the Fed to raise rates until mid-2015 at the earliest, we think it could start tapering its asset purchases as early as September this year. Meanwhile, in Emerging Europe and parts of Asia, low inflation and weak economic growth give scope for further rate cuts. And finally, we expect commodity prices to fall further. This should put more pressure on Latin American currencies, especially as some still appear overvalued relative to their EM peers.

Admittedly, many EM currencies have already fallen a long way and in some cases have now depreciated by even more than we had expected this year. But while we wouldn't rule out a bounce in some by the end of 2013, we still expect further declines in the majority.

15.56 India's rupee is in "freefall", amid growing concern about the health of the economy and robust US jobs data on Friday that dealt a double blow to Asia's third largest economy.

The currency slid to a record low of 58.16 against the dollar on Monday as a scramble by oil and other importers to buy dollars to pay for imports in the US currency also weakened the rupee.

The rupee also fell to a record low against the pound of 90.32.

"This is a freefall," Abhishek Goenka, chief executive of consultancy firm India Forex Advisors, told AFP.

15.36 Stuck in a rut? Feel like there is nowhere for you to go in your job? Want to be paid €100,000 to leave?

This is not a pipe dream if you work for the European Central Bank, which is helping those staff that feel their career has stalled to move on.

The ECB has launched the "Career Transition Support" programme which allows officials to leave the bank with up to fifteen months salary and additional help if they have been in the same salary band for between eight and 12 years.

That means some officials get could payoffs surpassing €100,000, paid for by cheaper salaries for replacements.

Reuters has the details:

The ECB says the departure scheme was created to address "the specific demographic structures of the ECB" - an implication that it wants to lower its age profile - and to help staff who had failed to get promotions and "may want to pursue external career steps".

The average age at the ECB is now 43, up from an average of 36 a decade ago. Half the ECB's staff are now in the 40-49 age bracket and the average length of service across the workforce is 9.8 years.

The voluntary departure package also comes as the euro zone's central bank prepares to add up to 800 supervisors to work as banking regulator, a new remit for the institution.

These new officials will largely need different skill sets than the ECB's current workforce, which is focused on economics and monetary policy.

An ECB spokeswoman said it is expected to be "self-financing due to the difference in salaries between leavers and newcomers" with full pay back over five to seven years,

The scheme was launched in January 2013 to run for two years and fund a maximum of 50 departures.

In its first five months, 19 have successfully applied, the spokeswoman said. All eligible applicants have been accepted.

15.26 The US is not the only country to be in S&P's good books today - Latvia has also been upgraded by the rating agency.

S&P raised the Baltic state's sovereign credit rating on to BBB-plus from BBB citing the expected adoption of the euro as its official currency in January 2014. The outlook is stable.

In a statement S&P said:

Quote We anticipate that becoming a member of the monetary union would reduce Latvia's foreign exchange risks and improve its monetary flexibility.

S&P cites a positive assessment in the European Commission's latest convergence report, which said Latvia "fulfils the conditions for membership of the eurozone (European Economic and Monetary Union."

Latvia, which has endured years of tough austerity measures to rehabilitate its economy after a 2008 crisis, is set to become the 18th member state next year.

Latvia will become the 18th member of the eurozone.

15.09 HSBC has leapfrogged France and Germany's largest lenders to take the top spot on a league table of Europe's biggest banks as its assets grew to more than €2 trillion (£1.7 trillion).

Banking editor Harry Wilson reports:

The Asia-focused bank supplanted Deutsche Bank as the largest European bank, rising from third-place in 2011 behind France's BNP Paribas to head data provider SNL Financial's list of Europe's biggest financial institutions.

HSBC is reckoned to have total assets of €2.04 trillion, putting it just ahead of Deutsch with €2.02 trillion, according to SNL Financial.

Of Europe's 10 largest banks, four are British, with Barclays, Royal Bank of Scotland and Lloyds Banking Group. Together the banks hold total assets worth €6.64 trillion, meaning their combined balance sheets are equal to more than three-times the size of the UK's economy.

HSBC is also Europe's largest bank by market capitalisation, with a stock market value of €147bn, more than double the region's second largest lender, Spain's Banco Santander, which is worth €62.7bn.

The next largest British bank by market value is Standard Chartered, which was worth €46.8bn at the end of last year, according to SNL Financial. Half of Europe's most valuable banks are British, while just one is French and none are German.

HSBC has topped a ranking of Europe's largest banks by assets

14.43 There is also good news for Britain's economy as well. The Organisation for Economic Co-operation and Development (OECD) says the UK remains in growth mode, supporting hopes that the recovery is gathering strength.

Emma Rowley reports:

The Paris-based think-tank's latest composite leading indicators (CLIs), which have a good record for predicting changes in growth, showed that the UK economy continued to expand at a little over its 'trend' trajectory in April.

Specifically, the indicator climbed to 100.8 for the month from 100.7 in both March and February, and 100.6 in the previous two months. A reading of 100 represents the trend for an economy's activity.

The report will add to signs that the UK remains safely in growth mode, if not expanding at a rapid rate, as it comes after the release of other positive UK data.

"In fact, survey evidence for May for the UK has been markedly firmer, not only overall but across a wide range of sectors of the economy," said Howard Archer, UK economist at IHS Global Insight.

"As a result, we have upgraded our UK GDP forecasts modestly to 1pc (from 0.8pc) in 2013 and to 1.6pc (from 1.4pc) in 2014."

14.35 News that credit rating agency Standard & Poor's had upped its outlook on the US to "stable" from "negative" has helped push the FTSE 100 into positive territory, with the index edging up about 2 points. Over in the US, trading has just begun with the Dow Jones Industrial Average also 23 points higher.

14.28 The change is outlook has only been announced 30 minutes ago and many analysts have already dismissed it. While it may have a short-term impact on trading, they do not think it will make a material difference.

Todd Schoenberger, managing partner at Landcolt Capital

Quote This is great news, and good to hear, but Wall Street traders don't put a lot of emphasis on rating agencies. This may raise eyebrows, but it won't have a big impact on rates or anything else. Realistically this will just have a short-term impact. I don't expect the rise in futures to hold, but stocks are attractive right now and there aren't any real negative headlines.

Camilla Sutton, chief currency strategist, Scotia Capital

Quote This should have a limited impact on the dollar because we were not expecting a downgrade anyway. This is more or less a reflection of the stronger-than-expected decline in the deficit and a growth outlook that hasn't been hit as negatively as expected with the sequestration. But overall, I don't think this would have any impact on Fed tapering.

Lou Brien, market strategist at DRW Trading

Quote On the margin I think it's of note, I don't think it's something to base a trade on.

Hugh Johnson, chief investment officer of Hugh Johnsom Advisors

Quote Frankly, the markets don't put a lot of weight on the S&P's evaluation of the credit-worthiness of the US government.

They haven't and I don't suspect they will. This might psychologically give the markets a very short term lift, but I don't think anybody really believes the ability of the federal government to pay its bills is anything but stable and the appropriate credit rating for the U.S. government is AAA. I don't mean to demean S&P, but I don't think this is a market mover.

14.19 In a statement from the rating agency it said:

Quote The stable outlook indicates our appraisal that some of the downside risks to our 'AA+' rating on the US have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three.

We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers' in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

...

We believe that the US monetary authorities have both the strong ability and willingness to support sustainable economic growth and to attenuate major economic or financial shocks.

14.10 S&P has just upgraded its outlook for the US, but held its rating at AA+, the second highest.

The change in outlook means it is less likely now that the US will face a further ratings downgrade.

The move by the S&P today comes almost two years after it became the first ratings agency to strip the world's largest economy of its prized AAA rating.

13.57 S&P has upgraded its outlook on the US to stable from negative.

13.52 An unusual protest has popped up outside the Cyprus Central Bank which is meant to depict the country's economy going the toilet.

Artist Andreas Efstathiou has placed 20 toilets, made out of plaster, outside the bank, in what he calls a "symbolic protest" to highlight the pain Cypriots have suffered since the country secured a €10bn bailout from its international lenders, which saw the unprecedented step of bank savers being hit.

The 20 toilets in two rows outside the central bank

Designed by artist Andreas Efstathiou

13.28 Over to Germany, where the finance minister Wolfgang Schaeuble has said the effects of global monetary policy are causing huge problems.

Reuters has more:

Ultra-loose monetary policy around the world has triggered concerns about excessive liquidity and how such policy positions will be unwound, Schaeuble said at a book launch in Berlin.

"At the moment we are having huge problems with the consequences of global monetary policy," he said.

Germany's finance minister Wolfgang Schaeuble

12.50 The news that Greece's government has failed to privatise natural gas firm DEPA (see 12.17) has led to the country's main stock index falling by more than 5pc in Monday trading.

Takis Zamanis, Athens-based trader at Beta Securities, said:

Quote The DEPA sale surprisingly failed and that's very bad for investor sentiment at a point when Athens looked like meeting its (international bailout) targets.

Greece's main stock index

12.32 Over to the Netherlands, where the Dutch central Bank (DNB) has revised down its forecasts for growth for this year and next.

It now expects the economy to shrink by 0.8pc this year, worse than its forecast in December for a 0.6pc contraction. It also halved its forecast for growth next year to 0.5pc from 1pc and said more austerity would be needed.

DNB said:

Quote After the credit crisis, the Dutch economy has much trouble of getting out of the downturn. In 2013 and 2014, GDP growth is still well below the level which is normally feasible.

In it semi-annual economic outlook, the DNB said the weaker outlook would result in a budget deficit of 3.9pc of economic output next year, up from 3.5pc this year. It had previously forecast a stable deficit of 3.5pc in 2013 and 2014.

The Netherlands, the euro zone's fifth-largest economy, is in its third recession since 2009 and is implementing €46 billion in budget cuts and tax hikes to bring down government spending.

DNB said:

Quote The forecast course of the factual and structural deficit in 2014 does not meet the recommendations given in May by the European Commission to correct the excessive budget deficit in the Netherlands. Extra consolidation measures are therefore necessary.

The European Commission last month gave the Netherlands until next year to reduce its deficit to 2.8pc of GDP from an original deadline of 2013. It urged the Dutch government to cut spending by €6 billion next year to bring the deficit below the EU's official ceiling of 3pc of GDP.

Aerial photographs of tulip fields in the Netherlands. Photo: Normann Szkop

12.17 Not such good news for Greece is that it has failed to attract any binding bids for its natural gas firm DEPA, two Greek officials close to the sale told Reuters on Monday.

This means a key sale to meet the country's privatisation targets under its international bailout has floundered.

A senior official involved in the sale told Reuters on condition of anonymity:

Quote Greece has received no binding bids for DEPA and one bid, from Azerbaijan's SOCAR, for (gas grid operator) DESFA.

The deadline to submit binding bids expired at this morning.

Russia's Gazprom had been the key contender to buy DEPA.

Russia's Sintez and two other Greek contenders also dropped out of the race for DEPA or DESFA, sources told Reuters earlier on Monday before the deadline expired.

12.09 Over to Greece now....the preliminary figures on the debt-laden country's budget deficit at central government level shrank in the first five months of the year, remaining on track to meet fiscal targets under the country's international bailout.

The reading, which excludes the budgets of local authorities and social security organisations, narrowed to €1 billion, deputy finance minister Christos Staikouras told reporters.

That compares to an interim target for a primary deficit of € 4.2 billion.

11.56 Another company with its eyes on expansion is Birmingham Airport - today it is unveiling its plans to become a hub carrying more passengers and handling more flights than Heathrow.

Transport editor David Millward reports:

The blueprint would see a revamped two-runway airport opening in 2026 around the same time as the first stage of the 225mph rail service to London, which would slash the journey time from the airport to the capital to 38 minutes.

Birmingham, which is owned jointly by local authorities, private investors and its own management, had previously pushed its case for being London's fifth airport.

But the latest blueprint is far more ambitious and would see the airport catering for 70 million passengers and 500,000 flights a year.

This would slightly outstrip the 69.4 million passengers and 476,000 flights currently passing through Heathrow.

The "new" airport would be built within the existing footprint and would use wasteland rather than requiring the destruction of any properties.

The enlarged airport would mean that 15 million people will be within one hour's travel from the airport.

11.49 Time for some positive news - AstraZeneca has announced that it is to buy US respiratory drug specialist Pearl Therapeutics for up to $1.15bn (£741m) as Britain's second biggest drugmaker steps up a drive to rebuild its product pipeline via deal-making.

The acquisition of the privately held company secures AstraZeneca a position in the emerging market for a new class of lung treatments known as LABA/LAMA drugs that promise improved patient compliance and disease control, without steroids.

Reuters reports:

Some industry analysts believe that LABA/LAMA inhalers are set to dominate future therapy for chronic obstructive pulmonary disease (COPD), which causes debilitating breathlessness and affects an estimated 210 million people worldwide.

AstraZeneca said on Monday it will pay an initial $560m plus up to $450m if certain development milestones are hit as well as sales-related payments of up to a further $140m.

The transaction is an important bet by new chief executive Pascal Soriot, who took over last October, on the British company's respiratory business, which he has identified as a core business area.

AstraZeneca's sales and profits are falling as older medicines lose patent protection and the company badly needs new products to replace former big sellers like the antipsychotic Seroquel, which lost exclusivity last year

11.45 Shares in under-pressure G4S are down 1.3pc despite the security guard supplier disclosing that the Bill & Melinda Gates Foundation and Cascade Investment, Gates' investment vehicle, has a 3.23pc holding in the group. The company said:

Quote We are delighted that the Bill & Melinda Gates Foundation Trust and Cascade Investment have acquired a substantial shareholding in G4S.

11.39 Mobile phone giants are set to profit from the data they hold on millions of phone customers - they are going to use that data to sell advertising on the internet later this summer.

The Telegraph's consumer affairs editor Steve Hawkes reports:

A venture set up by Vodafone, O2 and EE will look to profit from the data they have collected from customers by placing advertisements on behalf of multi-national corporations such as carmakers and food and drink giants.

The three operators have pooled together data on an anonymised basis - such as men over 40 with Samsung handsets with a high income.

Their joint venture, Weve, will use this information to help corporate clients launch targeted ads on mobile internet sites and apps. Weve already uses the data to target customers with location-based texts - such as trying to lure them into a car showroom they are walking past.

David Sear, Weve chief executive, said: "Mobile is your first screen, the one you look at most and longest - it is now the primary way to interact with the world digitally."

Weve insists that the information being used is completely anonymous. While advertisers will know age groups, location and device information they will never know names or phone numbers.

The three operators have pooled together data on an anonymised basis.

11.18 Following on from those reports that Mulberry's creative director Emma Hill is leaving (see 10.33) - the London-listed company has now confirmed it, although her leaving date is TBC.

Shares are down 7.2pc following the announcement.

A statement from Mulberry said:

Quote Mulberry confirms that Emma has informed the Company that she wishes to leave after a very successful period at Mulberry during which she has built a strong and talented creative team working for her.

The main SS14 collection has been completed and Emma continues to work in the business finalising the London Fashion Week collection which will be launched on 15 September 2013. The timing of her departure is currently under discussion and has yet to be finalised.

Mulberry handbags

11.06 Back in the stock market, shares in Punch Taverns have jumped 5.9pc following an update on the group's debt restructuring. Bond investors spurned an earlier proposal back in February and executive chairman Stephen Billingham said of the new plan:

Quote The revised restructuring proposals reflect the results of an extensive process with stakeholders. Importantly, these proposals achieve an equitable solution by directing more of the group's finite cash resources to the senior classes of notes, whilst still providing good value recovery for the junior classes of notes.

Support is required from a number of stakeholders who will have a range of views on the revised restructuring proposals. We will continue to engage with all stakeholders and will be inviting all stakeholders to attend a meeting this week to discuss the detail of the revised restructuring proposals and next steps before progressing to implementing a restructuring in June 2013.

10.54 All eyes will be on Germany later this week when its constitutional court rules on whether or not the ECB's bond-buying programme is legal or not.

Ahead of the ruling, ECB heavyweight Joerg Asmussen has passionately defended the scheme.

Denise Roland reports:

Mr Asmussen, who will represent the ECB at Germany's constitutional court this week, warned there would be "serious consequences" if judges ruled that the Bank's outright monetary transactions (OMT) programme is unlawful, adding that the move averted eurozone disintegration.

A crucial hearing at Germany's top court this week will scrutinise the OMT programme, which sanctions unlimited bond purchases by the ECB to provide a "fully effective backstop" to stricken eurozone economies.

The case stems from legal complaints by 37,000 citizens, including the Left Party, the More Democracy movement, and a core of eurosceptic professors, most arguing that the ECB has overstepped its mandate by financing the deficits of bankrupt states.

"When we announced the programme, the eurozone was nearing uncontrolled decomposition," Mr Asmussen told German daily Bild.

"Serious business and banks began to prepare for it. At this time the ECB was the only European institution capable of acting fully and had to make clear to speculators: 'Do not mess with the ECB'."

10.33 A blow for Mulberry this morning if reports are correct that Emma Hill, its creative director of six years, has left the company following creative and operational disagreements.

The Telegraph's fashion writer Bibby Sowray reports:

Emma Hill, the woman credited with turning Mulberry into a globally-recognised high-fashion brand, is to leave the company.

Trade publication WWD reports that the creative director is parting ways with the brand following "disagreements with management over creative and operational strategy."

Neither Hill nor Mulberry have commented on the reports yet, and it is not known when Hill's departure will come into effect.

British Hill joined the English heritage brand in 2007 having previously worked on accessories at Burberry, Marc Jacobs and Gap. She succeeded fellow British designer Stuart Vevers - who left to head up Loewe - in the role of creative director at Mulberry, and took the brand in a new, highly-successful direction, playing on its English countryside roots and putting a larger focus on the brand's clothing collections.

It was Hill, 42, who created the best-selling 'Alexa' and 'Del Rey' bags, named after Alexa Chung and Lana Del Rey, and put a higher emphasis on celebrity endorsements, often lining the front rows of Mulberry shows with of-the-moment actors, actresses, singers and models. She was awarded a CBE in the Queen's Birthday Honours last year.

Shares in Mulberry are down 5.2pc in early trading on Monday.

Emma Hill, creative director at Mulberry

10.20 Some more bad news for Italy - industrial output was weaker than expected in April, falling for a third month running in a sign there is still no end in sight to the country's longest post-war recession.

Output declined 0.3pc from the previous month following a 0.9pc drop in March, ISTAT reported this morning.

After five years of stagnation and recession, industrial output in the eurozone's third largest economy is now down around 25pc from its peak reached in 2008.

On a work-day adjusted year-on-year basis, output in April was down 4.6pc after a 5.3c drop in March, registering its 20th consecutive annual decline.

ISTAT marginally revised down March's data from an originally reported -0.8 month-on-month and -5.2pc year-on-year.

10.08 I spoke too soon. It is not all good news in Europe.

Italy has revised down its first quarter growth estimate - the economy contracted by 0.6pc in the first three months of the year, down from the preliminary estimate of a 0.5pc contraction.

In the first quarter the economy was dragged down by chronically weak domestic demand and, in more bad news, exports also fell sharply and contributed to the overall fall in GDP.

The 1.9pc quarterly fall in exports was the steepest drop since the first quarter of 2009, the Italian statistics agency ISTAT said.

Italy is mired in its longest post-war recession, which has dragged on for seven consecutive quarters since mid-2011 and recent data shows no clear signs of recovery.

Most economists expect the euro zone's third largest economy to shrink by at least 1.5pc this year following last year's 2.4pc contraction, creating more problems for strained public finances.

Rome, Italy.

09.54 Confidence across the continent is strong this morning (see 08.45).

A survey out today shows that eurozone sentiment improved in June for a second consecutive month helped by the European Central Bank's decision in May to cut interest rates to a new record low and by a calmer political environment.

Sentix research group said on Monday its monthly index tracking investor sentiment in the 17-nation currency bloc rose to -11.6 in June from -15.6 in May, falling short of a consensus forecast in a Reuters poll of economists for a rise to -10.

Sentix said:

Quote The euro zone index rose for a second consecutive month and appears to have quickly overcome its weakness in the early part of the year when elections in Italy and confusion over the Cyprus bailout weighed.

A left-right government finally took power in Italy in late April, some two months after the election, while in Cyprus the parliament approved the painful bailout plan.

Quote If latest trends continue in the next months then the euro zone can finally return to growth in the coming quarter.

"This year optimism on growth came promptly in May," it said, noting the ECB gave an "important boost" with its rate cut.

A sub-index of euro zone expectations rose to 7.3 in June from 2.8 in May, and the index on Germany also rose to 16.2 from a previous 15.2.

09.39 Back on the FTSE 100, ITV, up 4.3pc, is topping the table following a bullish analyst note from Liberum Capital. Lifting his price target to 200p from 155p, Ian Whittaker, who has a "buy" recommendation on the shares, said the broadcaster was his "top 'buy' pick in the media sector". Among the blue-chip losers, National Grid has dipped 0.9pc after Deutsche Bank reiterated its "sell" rating on the srock. Analysts at the bank said:

Quote National Grid's dividend payout is over 11pc of regulated equity, which we do not believe the company can cover from earnings in the long term. We believe asset growth over the current 8-year review period will be funded through scrip and leverage, while investors would be imprudent to assume regulators will allow double digit real returns to continue in perpetuity. The shares trade at roughly double regulated equity, a level well above its peers.

09.12 Some more corporate news out this morning - private equity firm Doughty Hanson has confirmed that it has sold cinema chain Vue Entertainment to another private equity company, Alberta Investment Management Corporation, for £935m.

That is more than double the £450m Doughty paid for the cinemas in December 2010.

In two-and-a-half years, Vue has turned from the third largest operator in the UK, into one of the largest in the world.

It has doubled the number of cinemas under its ownership from 70 to 146 and the number of screens has been increased from 678 to 1,321.

Julian Huxtable, a partner at Doughty Hanson, said:

It has been a successful and exciting investment, helping the company to develop into one of the world's largest cinema operators with the most advanced technology, and industry leading operating metrics.

We said at the time of the acquisition that Vue offered a strong platform for growth and we are pleased to have been able to take advantage of this opportunity to return significant cash to our investors.

09.03 Are we in a bond buddle that is set to burst? Roger Bootle thinks so.

In his latest column for The Telegraph, the managing director of Capital Economics writes that when that bubble does pop, a lot of investors are going to get hurt:

Two weeks ago, I suggested that the bond market was caught up in a serious bubble and that its potential bursting represented the greatest threat to financial stability. Since then, bond markets here and abroad have indeed been weak. But you ain't seen nothin' yet.

True, this isn't a bubble in the classic sense of markets holding unrealistic expectations (as they did, for instance, during the dotcom boom). It arises as a result of the correct perception of official policy. But the extent of the distortion this has caused in the bond markets is quite remarkable.

In the 1950s and 1960s, UK government bond (gilt) yields had averaged about 5pc. There had been periods when gilt yields had been much lower, for instance in the Great Depression of the 1930s. But not as low as now. At the recent trough, yields dropped as low as 1.5pc. Even after the recent bond weakness, UK 10-year yields are still only about 2pc.

Index-linked bonds currently present the most remarkable features. For most of their history, such "linkers" have yielded between 2pc and 4pc after inflation, that is, in real terms. Recently, however, real yields have been negative. That's right, investors have willingly held them at yields which are bound to lose money in real terms. And investors even have to pay tax on the interest.

So what is going to happen? What the appropriate level of interest rates and bond yields should be when things have returned to normal will depend crucially upon inflation. If inflation is expected to run at something like 2pc, then we can expect conventional long bonds to yield between 4pc and 6pc.

'The extent of distortion in the bond markets is quite remarkable.'

08.52 Mining shares are weak following the disappointing Chinese economic data that was released over the weekend. Anglo American has fallen 2.1pc, Antofagasta has lost 2pc and Vedanta Resources has declined 1.9pc. Ishaq Siddiqi, market strategist at ETX Capital, says:

Quote China's imports fell, industrial output is slightly lower on the year and retail sales inched up a touch but nothing too stunning. Inflation fell and money supply growth eased, leading market participants to believe the world's second largest economy has officially lost momentum during the first half of the year.

08.45 Some good news for the UK - British business confidence is at its highest point for more than a year, according to the BDO Business Trends report out today.

The report's Optimism Index rose from 93.0 in April to 93.6 in May.

Improving confidence is feeding in to businesses' hiring intentions.

The BDO Employment Index, which measures UK businesses' hiring intentions over the next two quarters, rose to 96.6 in May, the index's highest since August 2011.

This is the fifth consecutive month that the index has been at or above the crucial 95.0 level that represents employment growth, and indicates that the private sector will help to offset the effects of continuing public sector job cuts.

Peter Hemington, partner at BDO, said:

It's encouraging to see that UK business confidence has continued its upward trend, and that businesses have retained their healthy hiring intentions for a fifth consecutive month.

However the Government must do more to achieve the robust economic growth that remains tantalisingly out of reach. The Government must look to ensure more funds are reaching British businesses through lending, in order to help them drive the UK's economic recovery.

08.27 Shares in Severn Trent are the heaviest faller on the FTSE 100 after the water company on Friday evening rejected a sweetened takeover offer after the LongRiver consortium. Worries the bid approach may be abandoned have seen the shares fall 3.9pc this morning.

08.20 Some corporate news out this morning - Balfour Beatty has announced plans to close its offices in Dartford, Rochdale and Donacaster, which together accounted for £1.5bn of revenue in 2012, or 8pc of the UK business.

The infrastructure group, which has issued two profit warnings this year, has told employees there will be job losses, though it has not said how many.

The plans are the result of its "review of the viability" of its delivery units in its UK construction business.

Dartford was found to have "insufficient construction activity and a disproportionately high cost base" while the other two were deemed "no longer sustainable."

The group has announced the appointment of Nick Pollard, formerly of Bovis and Network Rail, as the new chief executive of its UK business.

08.06 European markets are now open. After jumping 1.2pc on Friday on the release of the latest US jobs data, the FTSE 100 has given back some of those gains this morning and has fallen 0.4pc in the wake of weaker than expected economic data from China.

07.59 MPs have announced that they are to launch an inquiry into the independence of the new Financial Policy Committee (FPC) and the way members are chosen after expressing "serious concerns" about the appointment of Dame Clara Furse.

Graham Ruddick reports:

The Treasury Select Committee (TSC) said it will examine the rules around the appointment of members to all key Bank of England bodies, including the rate-setting Monetary Policy Committee, because of concerns about "the wider serious inconsistencies and complexities in the structure of accountability of the Bank of England".

The FPC is the new Bank body charged with maintaining UK financial stability. However, there have been concerns about the independence of the FPC. Its remit was effectively created by a letter from the Chancellor, George Osborne, while Robert Jenkins and Michael Cohrs, two temporary and outspoken members of the prototype FPC, were not reappointed to the fully-functioning committee.

Andrew Tyrie, chairman of the select committee, said: "The FPC is still finding its feet. It is crucial that its independence is safeguarded from the start.

"It is therefore particularly important that the appointment process and early exchanges between the Treasury and the FPC don't give the appearance that it has been compromised."

Despite their concerns, the TSC endorsed Dame Clara last week, even though they described the former chief executive of the London Stock Exchange as "amazingly unimpressive".

Dame Clara Furse

07.50 Meanwhile, UK voters may have the chance to buy discounted shares in Lloyds Bankng Group, as the Policy Exchange think tank unveils proposals to take the bank back into private hands.

The Telegraph's Garry White reports:

UK taxpayers will be able to buy shares in nationalised bank Lloyds Banking Group at a discount under new plans being considered by chancellor George Osborne.

The taxpayer currently owns 39pc of Lloyds, with the share sale acting as a precursor to the auction of Royal Bank of Scotland (RBS) shares later in the year. RBS is 82pc state-owned and the auction of Lloyds shares could be announced in Mr Osborne's speech at the Mansion House on June 19.

The news comes as conservative think tank Policy Exchange unveiled a proposal that would see up to £34bn of the government's £48bn of shares in RBS and Lloyds end up in taxpayers' hands. It is proposed that voters are handed shares worth as much as £1,650, with no requirement to pay for them until they were sold.

The offer would be open to adult British residents who have a national insurance number and are registered on the electoral roll. The plan was devised by James Barty, a former head of equity strategy at Deutsche Bank.

07.38 European markets are not expected to have such a strong run today, with futures pointing to markets opening down on the back of weaker-than-expected Chinese economic data at the weekend, which is likely to reignite concerns about a much more pronounced slowdown in the previously robust Chinese economy.

Inflation data on both CPI and on input prices came in lower than expected, and seems to suggest continued weak demand, while Chinese bank lending also came in under expectations.

While retail sales in April came in as expected at 12.9pc, industrial production also showed worrying weakness slipping back to 9.2pc from 9.3pc in March.

Michael Hewson, senior market analyst at CMC Markets: said:

Quote It would appear that the better than expected Japanese economic data overnight has helped put a floor under Asian markets with the Nikkei rebounding from its recent lows but this data hasn't really shown much impact on pre-open European market prices.

Markets could be hit further later this morning when the latest French manufacturing data for April is expected to continue the gloomy tone with annualised figures expected to point to further weakness of -4% for industrial production, Hewson added.

It won't be much better for Italy, expected to show some improvement they are still expected to show a 3.6pc contraction.

The final estimate of Italian Q1 GDP is also expected to be confirmed at -0.5pc.

07.20 Overnight in Asia, Japanese stocks have rebounded strongly in Monday's trading.

The benchmark Nikkei 225 index, which lost 6.51pc last week, rose 4.94pc, or 636.67, points to 13,514.20 on the back of a weaker yen and better-than-expected US jobs data on Friday.

The US figures were solid but not strong enough to spawn new worry about near-term tapering of the Federal Reserve's stimulus

Japan was also boosted by figures which showed that its economy grew more than the government initially estimated in the first quarter, helping Prime Minister Shinzo Abe to sustain confidence in his campaign to defeat deflation.

GDP expanded an annualized 4.1 pc, compared with a preliminary estimate of 3.5pc, the Cabinet Office said in Tokyo today.

Consumer confidence in May was at its highest level since 2007, a Cabinet Office survey showed.

The Topix index of all first-section issues soared 5.21pc, or 55.02 points, to 1,111.97.

07.15 A quick look at The Telegraph's business section which leads with the story that water companies' high profits and tax-reducing corporate structures are "morally questionable", Jonson Cox, the chairman of industry regulator Ofwat, has said.

The Telegraph's energy correspondent Emily Gosden reports:

The claim, in strongly-worded critique of the industry, is likely to unsettle investors and reignite debate over companies' ethics as customers struggle with rising bills.

Mr Cox also accuses unlisted water utilities of failing to meet corporate governance rules. He vows to "lift the veil" on "practices that do not stand the test of public interest" and threatens to impose tougher regulation unless the industry voluntarily improves standards.

Writing The Telegraph, Mr Cox suggests some unlisted companies have a moral case to answer over allegations, by campaign groups and MPs, that they "use shareholder loans to avoid UK taxation" through "complex offshore holding structures".

"A good number use high-coupon shareholder loans to improve their equity returns," he says. "It appears that this reduces tax liability for the benefit of shareholders.

"Tax policy is not for an economic regulator and these structures may be legal and common in private equity. But some aspects are morally questionable in a vital public service."

Ofwat has already asked water companies to look at ways of sharing windfall gains with consumers.

07.10 The Times is leading with the story that Britain has given a back-door bailout worth around £10 billion to the Republic of Ireland in an arrangement that was never explicitly approved by Parliament.

The money has been pumped into Ulster Bank, a subsidiary of the state-owned Royal Bank of Scotland which was rescued by a public cash injection of £45 billion five years ago.

New figures show that Ulster Bank, which operates predominantly in the Republic despite its name, has accounted for approximately one in every four pounds of losses at RBS since 2008.

Well, The Telegraph reported this story earlier in the year and worked it out to be nearer £14bn via RBS and Lloyds Banking Group.

Almost one pound in every four injected into the two state-backed banks by the Government has gone directly into the Irish economy, the two lenders' subsidiary accounts show.

Between 2009 and 2011, RBS made "capital contributions" totalling €9.13bn (£7.6bn) to its Dublin-headquartered subsidiary Ulster Bank Ireland. Over the same period, Lloyds transferred £6.41bn to its Irish operation, Bank of Scotland (Ireland), before dissolving the business.

The total – £14bn – amounts to more than a fifth of the £65bn UK taxpayers injected into RBS and Lloyds in 2008 and 2009, and is expected to rise further. Analysts estimate that RBS transferred another £2bn last year.

RBS and Lloyds used the funds to write off billions of pounds of debt loaned to Irish commercial property developers and households in the "Celtic Tiger" boom years.

07.05 Here's a look at this morning's business pages

The Financial Times is reporting that the Obama administration came under mounting bipartisan pressure on Sunday to scale back electronic surveillance following revelations last week that have raised new questions about government intrusion into citizens' privacy.

The Guardian reports George Osborne will be urged today to fire the starting gun on a sell-off of the government's stake in RBS and Lloyds Bank Group by offering shares worth £1,650 a person to 48 million taxpayers.

The Independent has revealed that oil services company Petrofac spent $1.5m (£1m) on its boss's private jet and a further $189,000 on "client entertainment" provided by one of its own executives' businesses last year

07.00 Good morning and welcome to our daily business and markets live blog, your one stop shop for all the breaking business stories of the day.



Goay Joe Lie
Director of Joe Lie Beauty And Cosmetics

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