UK markets might have been overshadowed by the Compreshensive Spending Review (CSR) this week but they were certainly not bowed by it.
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The FTSE 100, after recording day losses on Thursday and Friday, gained 39 points Monday on the back of strong performances from energy companies BP, who had suggested that dividend payments would soon be resumed, and BG Group.
A report by the Ernst & Young ITEM club suggested that UK GDP will grow by 1.4% this year and 2.2% the next and that the spending cuts would not cause a double-dip recession.
Over in the US, Apple released net profits for the fourth quarter of $4.3 billion which was up 70% from last year and easily beat analysts expectations. Revenues were up too at $20.3 billion as Apple sold 14.1 million iPhones in the quarter. The sales figures of its iPod and iPad were disappointing though.
On Tuesday, the Japanese government said that the economy is at a standstill thanks to the rising Yen and the slowdown in demand for Japanese goods.
China unexpectedly raised its interest rates in a bid to keep inflation under control. China’s one-year lending rate moved from 5.31% to 5.6% and its one-year deposit rate from 2.25% to 2.5%. The big mining stocks in London on Tuesday morning were early casualties of this move, Xstrata being chief among them – this despite releasing a third quarter interim management statement saying that it expected strong momentum for copper, coal and nickel for the quarter.
Goldman Sachs reported third quarter net income of $1.9 billion down from $3 billion in the same quarter last year and some 14% down from the previous quarter but it was better than analysts were expecting and ahead of all of its rivals.
Bank of America released a net loss of $7.3 billion which was much bigger than it’s $2.2 billion loss in the same period last year; the figure was better-than-expected and included a one-off $10.4 billion write-down preparing for new legislation regarding credit and debit card reform, revenues rose 2.3% lower that analysts were expecting.
Thanks to a write-down on a casino project and poor equity trading figures Morgan Stanley would release a third quarter net loss of $91 million on Wednesday, figures that disappointed analysts.
And then the day of reckoning in the UK was upon us. In the morning on Wednesday, the minutes from the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting revealed that among the nine members one had voted for more quantitative easing (QE) and another had voted for interest rates to be raised but otherwise the majority were in favour of no change.
At 12.30 pm (London time) UK Chancellor of the Exchequer, George Osborne, stood up, broadened his shoulders and took a deep, deep breath, ready ¬– in what was an already feverishly excited House of Commons after a robust Prime Minister’s Questions ¬– to deliver the government’s Comprehensive Spending Review (CSR).
The spending cuts will amount to £81 billion over four years, with the cuts to government departments totalling 19% instead of the 25% expected.
Beyond their interest in the government reducing its debt dependency and protecting its credit rating UK business heads seemed generally happy with the CSR especially the protection of the science budget, education and the announcing of certain transport initiatives.
Banks will be taxed at the ‘maximum sustainable’ rate so as not to ‘let banks off making their fair contribution, nor do we want to drive them abroad.’
His welfare budget cuts now amount to $18 billion with disability payments, child benefit for higher-rate taxpayers and housing benefits the main changes due.
Chancellor Osborne predicted the cuts will result in 490,000 public-sector jobs being lost but he expects the private sector to compensate by creating 1.5 million jobs. It remains to be seen how many jobs will be lost in the private sector as a result of these public sector job losses and if the UK’s economy is fundamentally strong enough to provide the growth needed.
The FTSE mirrored the mixed media reaction to Chancellor Osborne’s CSR but would end the day up 25 points as there wasn’t really many surprises in it. The pound fell against 14 of its 16 major currency peers on Wednesday though.
Also Wednesday eBay posted a 23% increase in net income for the third quarter and the Fed released it’s latest Beige Book. The report described a somewhat more colourful picture of the US economy than it has in recent months: ‘Reports from the 12 Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October,’ said the report.
UK retail sales declined for the second month in a row in September down 0.2% from August according to the Office for National Statistics on Thursday. After strong sales of its own brand ranges Retailer Debenhams released a healthy 16% rise in pre-tax profits and announced it planned to re-start dividend payments next year, its chief Rob Templeman said it was too early to measure what impact the spending cuts would have but warned that he remained ‘concerned’ about the retail environment.
The pound came under more pressure on Thursday morning falling to a six-month low against the euro.
Amazon announced a net profit of $231 million (+16%) and revenues up 39% ($7.56 billion). The Kindle ebook reader is, according to Amazon, its best-selling product on Amazon.co.uk. The US initial jobless claims figure dropped 23,000 to 452,000 for the week ending October 16th. This and the sheer weight and number of positive results from large corporations in the US, UK and Europe helped the Dow Jones gain 38.60 points and the FTSE 100 to close up 28.93 points.
China’s GDP figures for the third quarter showed that growth had slowed to 9.6% year-on-year, which was better than the 9.5% forecast but down from the 10.3% in the second and 11.9% in the first quarter. ‘The economic performance is generally sound.’ reassured Sheng Laiyun a spokesman from the National Bureau of Statistics.
With the FTSE 100 climbing to a six-month closing high on Thursday, and little on the radar for economic announcements on Friday, investors will point to the good corporate results seen so far this earnings season – achieved in difficult economic conditions ¬– and the decent results just in from US phone company Verizon and oil and gas industry technology and services supplier Schlumberger as reasons to be quietly optimistic moving toward the end of the year. Hints that the Chinese economy might be slowing will keep shareholders of mining companies on their toes in the short-term though, and, longer-term can anyone predict what the impact of the UK spending cuts will be?