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Broadgate: Market News 27/1

27 January 2012

The US Federal Reserve System low interest rate pledge may hurt lenders profits as they struggle to find securities or loans with yields high enough to support their net interest margins, a gauge of profitability that measures the difference between the cost of funds and what they earn on assets. Gross domestic product, the value of all goods and services produced in US, grew at a 3 percent annual pace after advancing 1.8 percent in the previous three months. Fed’s officials said their benchmark interest rate will stay low until at least late 2014 and they forecast unemployment will decline only gradually.

In Europe, Britain’s 2011 deficit is expected to be in the range of £150 billion ($234 billion), making it only marginally better than the previous year’s deficit of £170 billion ($234 billion) despite a full year of government spending cuts. The country’s debt to GDP ratio is still nearly 80 percent and with weaker growth expected in the coming year, this statistic could worsen. Yesterday, the yield on 10-year government bonds spiked above 15%, the highest level since the euro currency was launched, while yields on 3 year notes surged to nearly 21%. Both the Bank of England and the International Monetary Fund (IMF) recently downgraded earlier growth projections for 2012. The International Monetary Fund (IMF) slashed its prediction by a full percentage point and now expects the British economy to expand by only 0.6 percent this year, there is little the government can do with respect to solving the Euro zone issue, it will be interesting to see if the government moderates its drive to eliminate the deficit in deference to the slowing economy. The investors are worried about Portugal’s bleak economic prospects and the uncertain outlook for the euro zone in general. The Portuguese economy is expected to shrink 3% this year as austerity measures take their toll and the broader euro zone economy contracts.

The European Union (EU) officials said private bondholders were likely to accept a lower interest rate on New Greek bonds to clinch a deal, despite their public statements to the contrary. That could bring the projected 2020 debt down to about 125pc to 127pc, leaving roughly an additional 5pc of GDP to be found by governments and the ECB. That would amount to a funding shortfall of €12bn to €15bn roughly the amount of profit that the ECB would make if all the Greek bonds it bought at a discount were redeemed at face value, Talks on a Greek debt swap made some progress yesterday and continue today, Reducing the deficit is necessary, but it is impossible to dramatically slash spending without impacting growth. With growth already on the decline, it may be the government moderate its spending reduction plans at least until the economy gathers strength.

The information set out herein has been obtained from various public sources and is published by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.