Market Watch from www.legalandfinancial100.co.uk

During the week the Office of National Statistics confirmed that the UK recession was deeper than first thought, showing that the peak to trough decline in output was 6.4 per cent. This was six successive quarters of negative growth from spring 2008 until autumn 2009, the poorest for the economy since the Great Depression of the 1930s and even poorer than the recession of the 1980s.  The ONS confirmed that GDP in 2008 contracted 0.1 per cent, whilst the economy contracted by 4.9 per cent in 2009.  I believe there is a very strong chance that the UK economy will dip back into recession and Sir Alan Budd, Chairman of the Office of Budget Responsibility warned in the week that the recent coalition government has increased the likelihood of a double-dip recession as he was questioned by the Treasury Select Committee.  The MPs accused Sir Alan Budd of excessive optimism in his growth forecasts, as the OBR is suggesting national income will grow by 1.2 per cent this year, followed by 2.3 per cent in 2011.  An accusation I fully support and this will have implications for the speed at which we can pay down the borrowing deficit and the country’s credit rating. Having looked at the austerity budget, Standard & Poor, the rating agency confirmed in the week that Britain still remains at risk of losing its AAA rated status as it confirmed that the UK remains under review.  The other two heavyweights in the sector, Moody’s and Fitch, both confirmed Britain’s AAA rating as stable.  Whilst speaking to the Treasury Select Committee Sir Alan Budd said it was “not appropriate” to use OBR data to extrapolate comparisons on public sector employment numbers as the Prime Minister had done two weeks ago.  This was seen as a clear rebuff to the Prime Minister and his recent use of OBR data, which was pulled forward, to strengthen his position at question time.   Despite talk of a possible downgrade of British debt, Pimco, the world’s largest asset manager, has turned more optimistic about investing in the UK, following very heavy criticism from co-founder Bill Gross earlier in the year.  In January he warned that Government gilts were resting “on a bed of nitro-glycerin” and whilst the firm which managers around a trillion dollars worth of assets, (this makes it a significant player in the bond market) has turned more positive, it still generally remains caution on UK government borrowings.  As further detail emerges on austerity measures, Britton’s are now growing increasing more wary, with the Nationwide Building Society’s UK Consumer Confidence Index falling for a second straight month in June to its lowest level this year.  The index of sentiment declined to 63 from 66 in May, with consumers growing increasingly pessimistic about the outlook for the jobs market.  Visits abroad by UK residents fell by 1 5 per cent in 2009, the fastest rate since the 1970s according to the Office of National Statistics.  A total of 58.6 million trips were made last year, 10.4 million fewer than 2008.  The number of visitors coming into the UK also fell, but at a slower rate of 6.3 per cent, with 29.9 million overseas visitors entering the UK.  

 

Official data release in the week showed that the number of people claiming unemployment benefit fell last month, but the number of people unable to get full time work increased.  There was a further rise in the long term unemployed amongst the 16 to 17 year olds.  At 7.82 million the part time employment numbers are at their highest since records began in 1992 and represent more than a quarter of the total workforce.  Overall, however, the Office of National Statistics said that the claimant count fell 20,800 last month, slightly better than the predicted number.  The unemployment rate fell back to 7.8 per cent, slightly better than expected.  The numbers also revealed that long term unemployment for the over 50s has jumped by 47 per cent over the year to 787,000 in the three months to May, with more than half of over 50s out of work now classified as long term unemployed.  Overall, total unemployment fell by 34,000 to 2.47 million in the three months to May.  Employment increased by 160,000 over the quarter to reach 29 million. The falling cost of petrol and diesel fuel helped UK prices to rise more slowly in June than the month before, but the overall level of price inflation continues to remain above the Bank of England’s 2 per cent target.  The Consumer Price Index, whilst rising on the month by 0.1 per cent recorded an annual inflation at 3.2 per cent, down from the previous month’s 3.4 per cent.  The broader Retail Price Index rose by 5 per cent on the year to June, down from 5.1 per cent in May.  Inflation hawks, however, point out that if one looks at core CPI, which strips out the effects of goods with erratic prices, such as food, alcohol, energy and tobacco, then prices actually rose by 3.1 per cent and whilst this matched January and April’s numbers, these were the highest recorded figures since numbers started to be recorded in 1997.  Generally speaking, I believe inflation will fall very sharply over the course of the year and prospects of deflation remain of grave concern.  It is these concerns that will stop interest rates from moving up and will ultimately, I believe, we will see further quantitative easing being unleashed, leading to significant inflation further down the line.  According to the British Retail Consortium, prices rose 1.2 per cent on a like-for-like basis compared with June 2009.  Total sales, which include the effects of increased floor space, were up 3.4 per cent on the year.  

 

Lord Turner, Chairman of the Financial Services Authority, speaking in the week said that regulators plan to step up significantly their scrutiny of mortgage lending and investment product sales because they had concluded that disclosure and free markets do not do enough to protect consumers.  This is a huge shift in the psychology for the regulator and the FSA is expected to intervene directly to see that borrowers can afford their mortgages and sales incentives do not lead to mis-selling of financial products.  Lord Turner said the planed 2012 creation of the Consumer Protection and Markets Authority, which will assume the FSA’s retail responsibilities, offers a rare opportunity to consider the best way to protect consumers from abusive selling and their own bad choices.  The FSA also believes that self-certified mortgages should be banned.  Its analysis into lending decisions, looking at the causes of arrears and repossessions since 2005, found that 46 per cent of households who had no money left or had a shortfall after mortgage payments and living costs were deducted from their income.  It also found that almost half of new mortgages between 2007 and the first quarter of 2010 were provided without a customer having to verify their income.  It has, however, stepped back from setting a maximum loan to value ratio on mortgages, which would have ended 100 per cent mortgages.

 

According to the Royal Institute of Chartered Surveyors, surveyors are expecting house prices to fall in the coming months owing to more home sales and economic uncertainty.  Reporting in the week they said more agents were reporting falling enquiries about buying homes, whilst the number of properties coming into the market had risen, adding downward pressure.  In a separate report, published by accountants Price Waters Coopers, they believe that house prices might not reach the levels seen at the peak of the 2007 bubble for another decade.  Whilst demand and supply is very important for the housing market, I believe that the ultimate driver is the availability of credit, which we know remains under pressure. Capital Economics, led by Roger Bootle, the Deloitte advisor and telegraph columnist, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012. In total, the group predicts collapse in house prices of 23pc from the start of 2010, a deeper drop than the 19.3pc crash during the recession. Earlier in the week the Chancellor admitted that banks were inhibited in their lending by uncertainty about the amount of capital they may need to hold in the future under the new Basel III framework.  Speaking to MPs however, he denied that the new £2.5 billion levy on Britain’s banking sector would depress the overall level of credit in the economy.  He also tried to restore the tainted reputation of the Office for Budget Responsibility by offering MPs a right to veto his choice of who should lead it.  He said it was a matter of regret that some were already questioning the independence of the fledgling Organisation and set out plans to try to restore some credibility.  Mr Osborne said he wanted the Commons Treasury Committee to have the right to veto his choice of Chairman, who will serve a five year term, renewable once, and earn £142,000 a year.  

 

David Hobbs of the Office of National Statistics described the public sector balance sheet last week as an “open ended concept” as he outlined the liabilities that are considered to be “off balance sheet”, or not covered in official measures.  Liabilities that fall into this category include stakes in RBS and Lloyds Banking Group, which would add another £1 trillion to £1.5 trillion.  These are single largest potential liabilities revealed.  Meanwhile, unfunded public service pension obligations would account for a further £770 billion, to £1.2 trillion, whilst unfunded State pension schemes amounted to between £1.17 trillion and £1.35 trillion.  The report also highlighted an extra potential £200 billion of off balance sheet obligations from private finance initiative schemes and £40 billion in nuclear decommissioning liabilities.  Mr Hobbs also confirmed a further £500 billion miscellaneous grouping of guarantees and contingent obligations, some of which are more material than others.  In total, he estimated that public sector liabilities and obligations are between £3.68 trillion and £4.84 billion, significantly higher than the current public sector net debt figure published of £903 billion.  This would mean that every man, woman and child in the country is carrying a State debt of £65,000.  In the week the OECD, the Paris based think tank, told the Chancellor that whilst it supported austerity measures outlined in last month’s budget, it would recommend stronger incentives to “make work pay”, which included tackling “high levels of disability benefit claims”.  It is also thought to have pushed the Chancellor to scrap VAT exemptions on food and children’s clothing to increase the efficiency of the tax system and raise funds for investment.

 

The US federal reserve last week added to growing concerns about the health of the US economy when, far from giving details on how it planned to wind down its emergency stimulus package, it confirmed that there may be a need for further bond purchases or quantitative easing, as it acknowledged a possible slide into deflation. This is after a period of zero interest rates, $1.75 trillion worth of stimulus coupled with a deficit of 10 per cent of GDP and all this has failed to lift the US economy out of its structural decline.   Commentators believe that the US Federal Bank is looking to increase its balance sheet from $2.4 trillion towards $5 trillion, in an exercise that would create grave concern to the USA’s largest creditor, China.   A recent report from the San Francisco Federal Reserve said US interest rates needed to be at minus 4.5 per cent to stabilise the US economy under the Federal Reserve’s model.   Consequently, as this is impossible, it only leads to the conclusion of more quantitative easing. The Federal Reserve has cut its 2010 growth forecast for the first time since the economic recovery began last year, as debate at the central bank turns from when to tighten policy to whether to ease it further. Minutes of the Fed’s June meeting, published on Wednesday, show its “central tendency” forecast is for growth of 3.0 to 3.5 per cent in 2010, down from the 3.2 to 3.7 per cent forecast in April. About half the Fed’s governors and reserve bank presidents said that there was a greater chance that growth would be below forecast rather than above. In April a large majority thought the risks were balanced. The US Federal Reserve growth cut is I fear the start of a worrying trend. Barak Obama’s chief spokesman, Robert Gibbs, caused some ructions in the week when he acknowledged that the Democrats could lose control of the House of Representatives in November and possibly even the lower house, as Mr. Obama’s approval rating continues to fall and is now hovering dangerously close to 40 per cent, according to a recent ABC/Washington poll conducted at the start of the week.   I suspect that Mr. Obama is going to follow a similar course to that of Bill Clinton, who so disastrously failed to win support in the mid term elections in 1994, having been given a clear mandate in the Presidential elections of 1992.   As a result of a 54-seat swing in membership from Democrats to Republicans, the Republican Party gained a majority of seats in the House for the first time since 1954. Ultimately, such inwardly coming high expectations prove unrealistic and the feel-good factor of the electorate quickly swings round to one that sees devastation in the mid-term elections. This saw Mr. Clinton’s administration limp along for the following two years, causing him to back track and water down most of his key Presidential aims of 1992. Goldman Sachs in one of the most quoted descriptions or recent times was described as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money"  said Rolling Stone magazine last year. On Thursday night Goldman’s agreed to pay $550m to American regulators and now faces numerous regulatory changes due to the passage of the financial reform bill through the US senate.  By paying the biggest ever penalty in a regulatory case, Goldman Sachs is admitting (although not in a legal sense) that it wrongly marketed a $1bn deal to investors which is a big blow for a firm that prides itself on a good name. But at $550m the fine is as much as the bank takes in trading revenue in just one week and it is a fraction of the $16bn it paid in bonuses to its bankers last year. The case against the bank was that it created and sold a package of poor home loans without telling the buyers that one of its biggest hedge-fund clients had hand-picked the loans and had bet that they would fall in value by taking the other side of the trades. Which, many regard as outright fraud. Then US reform bill, has now been passed as Senators approved the reform bill by 60 votes to 39. It was passed by the US House of Representatives earlier this month and proposes a single Financial Stability Oversight Council to monitor markets more closely, more derivatives to be traded in open view of the regulators and a mechanism for financial firms to be quickly wound up if required.  It also sets up a powerful consumer financial protection bureau, with powers to clamp down on abusive practices by credit card companies and mortgage lenders. Large banks will also be required to increase the amount of capital they hold in reserve against loans going bad. However, they will only be forced to do so after five years, as the government is keen that banks do not hold back on lending money during the economic recovery. The bill introduces the so-called Volcker rule named after the former Federal Reserve chairman Paul Volcker, who proposed it. Banks will be banned from what is called proprietary trading which is taking bets on financial markets using its own money. They will also be limited to investing a maximum of 3% of their capital in speculative businesses such as hedge funds or private equity funds. I believe that this is all very reasonable and sensible which just go to show how bad things had been allowed to get. The legislation has been described by US Treasury Secretary Tim Geithner as "the most sweeping set of financial reforms since those that followed the Great Depression". Bank of America Corp. led financial stocks lower on Friday after saying U.S. curbs on debit-card fees may trigger a $10 billion charge. This had led to speculation that rival banks have underestimated their own costs. The U.S. government had a smaller budget deficit in June compared with the same month last year as the economic recovery brought in more tax revenue. The excess of spending over income fell to $68.4 billion last month, down from $94.3 billion in June 2009 and it was the 21st consecutive deficit. For the fiscal year to date, the budget deficit totaled $1 trillion compared with $1.42 trillion during the same period last year; however the budget deficit is still forecast to reach a record $1.6 trillion this fiscal year as the government funds efforts to boost employment.  Year to date, the gap amounted to 9.2 percent of gross domestic product, down from 10.2 percent for the same period in 2009. So far this year corporate tax receipts are up 30 percent to $133 billion from the same period in 2009 and Individual income tax collections are down 4.4 percent to $655.4 billion. The U.S. trade gap unexpectedly widened in May to its highest level in 18 months as a rise in imports outpaced an increase in exports. The trade balance widened to $42.3 billion in May from $40.3 billion in April, surprising economists who thought it would narrow to $39.5 billion, as U.S. companies imported more capital equipment, automobiles and consumer goods.  The deficit with China rose to $22.3bn, up 15.4% from April and the widest since October last year. May's deficit rise came despite oil imports dropping by 9.1% because of a lower oil price and lower volumes. Manufacturing in the U.S. contracted in June by the most in a year and wholesale prices declined more than anticipated, underscoring the Federal Reserve’s reduced forecasts for economic growth and inflation. Factory output fell 0.4 percent in June, a Fed report showed in the week. Producer prices slid 0.5 percent after a 0.3 percent decline the month before, the Labour Department said. Both the Empire Manufacturing Index and the Philadelphia Fed index came in weaker than expected with the forward looking New Orders element of the Philadelphia Fed indicating contraction for the first time in a year. Confidence among U.S. consumers fell in July to its lowest level in a year, heightening the risk of a slowdown in economic growth. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.5, the lowest since August and significantly less than the forecast of 74. The sentiment figures showed a record-low of Americans expecting their incomes will rise in the next 12 months, adding to growing pessimism over employment prospects. Declining confidence will act as a brake on consumer spending, which accounts for 70 percent of the economy, and slow any recovery in coming months.

 

As speculation continues to grow about the break up of the Euro zone EU finance ministers have given final approval for Estonia to adopt the euro as its currency on 1 January 2011. Of the EU's 27 member states, 16 currently have the euro as their currency. Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Austria and Finland adopted the currency in 2002 and Slovenia joined in 2007, followed by Cyprus and Malta in 2008, and Slovakia in 2009. The tiny Baltic state, population 1.3 million, will become the 17th member of the single currency. Meeting in Brussels, it was decided to use the existing exchange rate of 15.6466 kroon to one euro as the final conversion rate. Industrial production in the 16 countries that use the euro increased for the third consecutive month in May. Eurostat, the EU's statistics office, said production climbed by 0.9% from the previous month, the same as the increase seen in April, economists had forecast a rise of 1.2%. Euro zone manufacturers, especially German, have benefited from the lower value of the euro, as this makes their goods cheaper in countries outside the bloc. Greece successfully sold government bonds in its first attempt since the huge EU-IMF loan bail-out was launched in early May. It raised 1.25bn Euros, with the offer being oversubscribed as bids totaling 3.6bn Euros. Greece abandoned plans to sell 12-month bonds, and switched to six month duration after the original plan received a very lukewarm initial response. Because the bonds sold had such a short maturity, the sale was not a good indication of how much faith investors have in Greece's long-term prospects. The bonds had a return rate of 4.65%, which is lower than IMF loans. Having already suffered three emergency budgets, the Irish Government was told in the week by the IMF that it is likely it will have to make additional spending cuts or tax increases to meet its goal of cutting its budget deficit to 3 per cent of gross domestic product by 2014.  In its annual review of the Irish economy, the IMF expects GDP to increase 2.3 per cent in 2011, compared with an April projection of 1.9 per cent growth.  It expects the economy to grow by 2.5 per cent in 2012.   However, the forecasts remain well below the Government’s expectations of 3.3 per cent growth next year and 4.5 per cent growth in 2012. Hungarian assets could come under selling pressure on Monday after the International Monetary Fund and European Union postponed the conclusion of a budgetary review in Budapest, insisting that the government must rethink its proposals and withdrew a €20bn financing deal for it.

 

 

Following a meeting of EU finance ministers in the week we gained a further insight into the bank stress tests from comments and statements following their meeting. Firstly it seems as if the sovereign risk in the tests will be limited to allowing for price volatility but excluding default risk by taking haircuts on sovereign debt held in trading books, but not taking them on assets held to maturity. With the market pricing in a significant risk of default for several Euro zone sovereigns this massively reduces the credibility of the tests, although it gets around the problem of having to admit the possibility of a sovereign default. We were also told that the results to be published on 23 July will be at group consolidated level, including foreign branches and subsidiaries, but that national regulators may choose to publish further details of banks foreign subsidiaries two weeks later. EU Commissioner Olli Rehn, said banks that needed to should in the first place try to raise capital from the private sector, if this failed he said national rescue/recapitalisation funds should step in and only as a last resort would funds be available from the EU, through the European Financial Stability Facility if necessary, although only via the relevant national government. The Greek finance minister, George Papaconstantinou said he expected Greek banks to pass the stress tests. Greek banks have large holdings of Greek government debts and investors do not expected all to pass the stress test even if there is no haircut on assets held to maturity. A Greek newspaper reported, without quoting sources, that only 9% of Greek banks’ holdings of government debt was held on trading books, which if true makes a mockery of the exercise and the different accounting rules being applied to trading debt and that held to maturity. The tests worked in the US because nobody questioned whether the US Treasury could stand behind the system, or whether the US would hold together as a political entity, the same cannot be said for Europe.  It is therefore very unlikely that investors unwilling to lend to a Greek bank today will be inclined to lend following a stress test that ignores the risk of a Greek sovereign default on the held-to-maturity-assets. Stress tests on European banks should not reveal any "catastrophes" but the reviews should be tough, the chairman of euro zone finance ministers, Jean-Claude Juncker said.” I am not expecting any big catastrophes," he told Austrian newspaper Kurier. "But there cannot be any glossing over, the tests are based on reality," he said in an interview published on Friday. Juncker also warned against understating the severity of the economic crisis facing the euro zone. "Those that act as if all problems have been solved are guilty of misleading the public," he said. "The truth is that nobody knows how we will come out of the downturn. We need to rediscover our growth potential." He added that the single currency was strong and still attractive to its members. "The euro will survive its critics, it is not in danger." The stresses in the Euro zone were further under scrutiny in the week when it was revealed that Spanish banks borrowed a record amount of funding from the European Central Bank in June, when they borrowed a total of €126.3bn, a 48 per cent jump compared with May and the largest amount borrowed, according to the Bank of Spain, since records began in 1999.   This compares with a drop of 4 percent to 496.6 billion Euros provided to lenders by the ECB in the whole euro area, indicating just how severe the issues are. It was also confirmed that Spain successfully sold €3bn worth of 15 year bonds, with the offer being covered around 2.5 times, with an average yield of 5.1 per cent.   The last time Spain tapped the market was in April and a number of commentators have seen this as a sign of confidence returning, although it should be noted that the Chinese bought a third of the offering and without them things would have been very different. Personally I believe that the successful bond offering by the government was also helped by Spanish banks. I believe that they have dumped poorer quality debt with the European Central Bank and used the European Central Bank money to help them buy Spanish sovereign debt, as it carries a better rating for capital purposes.   By a back door route the Spanish authorities are therefore receiving funding from the European Central Bank, which is strictly outlawed by treaty, but by this covert operation a much rosier picture is being painted than the one that actually exists due to this circular finance motion. During the week, Moody’s cut Portugal’s credit rating by two notches, citing the country’s deteriorating public finances as the reason.   It warned that Portugal’s debt to GDP ratio will approach 90 per cent, while its debt to revenue ratio will rise to 210 per cent over the next 2-3 years. The Chinese Premier, Wen Jiabao,  speaking in Beijing alongside the German Chancellor, Angela Merkel said that China will continue to invest in European markets, despite the debt problems affecting many euro zone countries. She described his pledge as an important signal that China has confidence in the euro, but it needs to be remembered that china needs European export markets to remain strong in order to maintain slowing growth and a debt crisis would clearly hit demand for Chinese made goods in the euro zone hard, so his comments need to be treat with caution. Its purchase of 1bn Euros of Spanish debt in the week has a strong element of self interest.

 

Gross domestic product in China expanded by 10.3 per cent in the three months to the end of June, settling back from the 11.9 per cent seen in the first quarter of the year.   This is in line with expectations as the authorities try to cool down what is seen to be an understandable boom.    There was also confirmation that China’s frothy property market may have peaked after a Government clampdown on speculators.   Property prices across 70 cities fell 0.1 per cent in June compared with May, the first monthly fall since February 2009.  In April, the Chinese Government introduced a series of new regulatory restrictions on the housing market that sought to restrict speculative activity.   These included higher down payments on housing purchases, stricter lending rules for property developers and limits on the ability of investors to buy more than one home.   Despite the monthly fall in June, property prices across China still remain 11.4 per cent higher than a year ago.   Weaker activity also appears to have curbed the recent surge in inflation, with the Consumer Price Index falling from 3.1 per cent in May to 2.9 per cent in June and getting inflation down from 7.1 per cent to 6.4 per cent.  The Shanghai Composite Index, however, fell 1.9 per cent following the release of the new data, extending a slide that has seen it plunge 26 per cent in 2010, making Shanghai the worst performing index in Asia. Having become dismayed with the West’s credit rating agencies, China has officially launched its own credit rating agency, accusing Anglo Saxon competitors of ideological bias in favour of the West.   Dagong, the Chinese agency has given much greater weighting to “wealth creating capacity” and foreign reserves than traditionally allocated.  On that basis the US falls to AA, whilst Britain and France fall to AA-.   Belgium, Spain and Italy are marked A- along with Malaysia.   Meanwhile, China, Germany, the Netherlands and Canada attract an AA+ rating. Interestingly it only rates Norway, Denmark, Switzerland, Singapore, Australia and New Zealand as the only countries with an AAA rated status.   Personally, I am more inclined to favour the Chinese weightings, as I feel in a number of instances credit ratings have not been downgraded where they should, as the western rating agencies try to stem a possible avalanche of reform following there obvious short comings in the build up to the credit crunch. Politicians of major indebted western economies know that if they push too much then the agencies may downgrade country ratings, pushing up funding costs and possibly sending some nations to the brink of bankruptcy. All told it's a very interesting standoff and it is why I prefer the Chinese ratings.

 

Japan’s public pension funds last year became net sellers of Japanese government bonds for the first time in nearly a decade, highlighting the problems facing further government debt sales as one of the biggest buyers historically reduces holdings as the population ages. The Government Public Investment Fund and other much smaller public pension funds sold a combined net Y443.2bn ($5bn) of Government debt in the year ending March, according to the Bank of Japan. Although the total amount of funds sold is small, compared with Tokyo’s total bond issuance in fiscal 2009 of Y158, 000bn, it highlights a significant change. This is likely to continue as the population ages and the government is forced to pay out more in benefits than it receives in contributions. Over the long term, Tokyo is likely to have to rely on more foreigners investors. Japanese government gross debt is now almost twice the size of the economy and it is estimated that it will be at least another decade before the budget deficit is paid back. During the week Singapore confirmed that gross domestic product for April through to June grew at 19.3 per cent from a year earlier, this was the fastest since the Government began releasing quarterly GDP figures in 1975. The yen’s recent increase to its highest level of the year against the dollar has lead to speculation that the Japanese authorities may intervention in currency markets this week. As it acts to protect it's exporters from the rising yen. It would be the first time Tokyo has intervened in the foreign exchange markets since April 2004.

 

India's inflation rose to 10.6 per cent in June as food and fuel prices remained high, government figures showed on Wednesday. Surging inflation has caused India's Central Bank to raise interest rates three times since March. Earlier in the month, opposition political parties led a daylong protest strike across the country after the government hiked fuel prices, disrupting public transport and other services. Food inflation in June rose 14.6 per cent from a year earlier after a jump of 16.5 per cent in May. Fuel and power inflation accelerated to 14.3 per cent, compared to 13.1 per cent in May. In late June, the government deregulated the price of oil products resulting in a 6.7 per cent, or 3.5 rupee per litre price increase in petrol. The increase will be a factor in July's inflation data. April's headline inflation figure was revised to 11.2 per cent from 9.6 per cent. May's provisional number was 10.2 per cent.

 

Crude-oil futures declined on Friday as markets fell, with Nymex August West Texas Intermediate down 0.5 per cent to $75.69 a barrel and ICE September Brent dropping 0.8 per cent to $75.07. The International Energy Agency said on Tuesday that The rapid rebound in oil consumption is likely to slow next year as western countries use more fuel-efficient vehicles and the recovery faded and predicted that oil demand would grow by 1.35m barrels a day next year to 87.84m barrels a day, less than the 1.77m b/d gain in oil demand predicted for 2010 compared with 2009. Together with new supply from countries including Brazil, Colombia, Ghana and Oman, as well as ethanol refineries, it believes that this will protect prices from a rapid spike like the one that lifted crude to $147 a barrel in 2008. For the first time in three years in 2011 OPEC expects demand for oil to increase predicting that demand will increase by 1m barrels per day or 1.2pc next year due to China's growing need for energy and an improved world economy. Spot gold fell 1.9 per cent over the week to $1,189 a troy ounce.

 

During the week the Bank of England will issue their latest numbers on mortgage approvals due on Tuesday and these numbers are likely to confirm a weakening housing market, with the figures following the trend in May, which saw the number of approval rates falling, whilst overall mortgage lending rose due to higher refinancing.  The minutes of this month’s meeting of the Bank of England’s Monetary Policy Committee on Wednesday all shed further light on whether any other members have joined Andrew Sentence in voting to raise rates by a quarter percent. On Friday second quarter GDP figures are likely to confirm that the UK economy posted first quarter growth of 0.3 per cent, whilst Thursday’s retail sales figures are likely to show the high street increasingly under pressure although thanks to a world cup boost. They are forecast to increase 0.5 per cent on the month. This week marks the peak of the US reporting season with 12 Dow components expected to report and 122 S&P 500 companies. The calendar is fullest on Tuesday and Wednesday and includes names recently in the news, namely Apple and Goldman Sachs Group, along with Harley-Davidson, Johnson & Johnson, Yahoo and AT&T. By the end of July, more than 60% of the companies listed on both indexes will have released results. Of the 48 S&P 500 companies that have already reported, 75% topped analysts' expectations and 13% reported results inline with projections and 13% reported results beneath estimates. In A typical quarter, going back through 1994, 62% beat estimates, 18% matched and 20% missed, according to Thomson Reuters. Beyond quarterly results, Federal Reserve Chairman Ben Bernanke is expected to stick to a cautiously optimistic tone when he delivers his semi-annual monetary policy report to Congress on Wednesday. In the US, the housing market is expected to reflect weaknesses elsewhere in the economy. Housing starts on Tuesday are expected to have declined in June to 580,000, from 593,000 in May, while existing home sales, published on Thursday, are forecast to fall to 5.4m in June from 5.66m in May. According to the Bank of America Merrill Lynch latest survey of fund managers, for July, a net 12 per cent of those participating expect the global economy to deteriorate in the coming 12 months. This is the first time the pessimists have outnumbered the optimists since February 2009 and this represents a very abrupt sea change in views. The proportion of cash held in portfolios has also risen over the month from 4.1 per cent to 4.4 per cent. For the global picture investors are most concerned about the prospects for US equities, with a net 14 per cent saying the US is the region they least favour. In contrast emerging markets continue to attract support, with a net 34 per cent of fund managers overweight in the sector, up from 19 per cent in May.  Shipping costs as measured by the Baltic dry index extended their longest losing streak in almost 15 years on the back of a significant fall in demand for Iron Ore carriers as an oversupply of vessels hits the market. The index f