Stock markets across the globe had another frankly miserable day yesterday.
The FTSE 100 dived by 190 points to 6,025, while the Dow Jones ended down 277 points at 12,501. What was the problem?
To be honest, it’s hard to know where to begin. There was inflation in the UK and poor retail sales in the US for one thing.
But let’s start with the obvious bad news – yet another writedown from Citigroup…
Citigroup posts $10bn loss and slashed dividend
US investment bank Citigroup (C) – the country’s largest bank – is cutting 4,200 jobs. Now Wall Street usually loves that sort of news. After all, fewer staff means less costs, which usually means more profits in the short-term, and the short-term is generally what Wall Street cares about.
But alas, along with the job cuts, came the news that the bank is also slashing its dividend by 40%. It’s the first such cut in ten years, and a timely reminder, for anyone who still thinks that banks look like bargains on the basis of their high dividend yields, that dividends can go down as well as up.
The main culprit, of course, was sub-prime, and once again, the associated losses surprised even the most pessimistic of forecasters. Citigroup wrote off a staggering $22.2bn, and posted a near-$10bn fourth quarter loss. It also had to raise $14.5bn in fresh capital, most of which is coming from the Government of Singapore Investment Corporation, and Citi’s key shareholder, Prince Alwaleed Bin Talal, not to mention former chairman Sandy Weill and the Kuwait Investment Authority.
Meanwhile, Merrill Lynch (MER) had to raise another $6.6bn itself – it issues fourth quarter results later today, and the fund raising suggests they won’t be great. That’s on top of $6.2bn already raised.
And as the massively indebted US investment banks were continuing to beg, steal and borrow capital from wherever they could find it, it seems that the massively indebted US consumer has run out of spending power. In December, retail sales fell by 0.4%, driven mainly by a slump in car and petrol sales. Petrol (or gasoline as they call it in the States) costs more than $3 a gallon. That might look dirt cheap to us here in the UK, but it’s eye-wateringly expensive by US standards.
Michael Metz of Oppenheimer & Co. told The Telegraph that he believed the country could already be in a consumer-led recession, adding that “I think it’s going to be the most serious of the post-war era.”
UK inflation comes in above expectations
Here in the UK, came the news that the consumer price index rose at an annual rate of 2.1% in December, unchanged on the previous month. It’s not far off the Bank of England’s target of 2%, but analysts had been expecting a fall.
Food prices on the high street have risen by 6.1% in the past year, the biggest increase in 17 years. And solid results from food producers Northern Foods and Uniq, suggest that suppliers are continuing to succeed in passing raw material price increases onto their customers, regardless of how tough-talking the supermarkets try to be.
With energy bills continuing to rise, there’s a very good chance that the inflation outlook could get worse before it gets better, which could make it a lot harder for the Bank of England to look at cutting interest rates as much as retailers and the City would like.
So not great. And just to cap it all, Britain is apparently no longer a free market economy. According to the Heritage Index of Economic Freedom, published by think tank Heritage, Britain has now dropped into the “mostly free” category, alongside countries such as Germany and Trinidad. Rocketing government spending is to blame.
Still, that will have to fall back as the tax take dries up this year. So perhaps there are some upsides to recession.
Turning to the wider markets…
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Stock markets slump on Wall Street woes
London’s leading share index slumped 190 points to close at 6,025 yesterday on bad news from Wall Street. Sainsbury’s was amongst a handful of risers, which benefited from poor results for rival Tesco. For a full market report, see: London market close
There were also heavy falls for stocks on the Continent. In Paris, the CAC-40 fell 140 points to close at a day’s low of 5,250. And the Frankfurt DAX-30 was down 148 points at 7,566.
Across the Atlantic, the major indices plunged to their lowest levels of the year so on poor retail sales data and worse-than-expected results from Citigroup. The Dow Jones tumbled 277 points to end the session at 12,501. The tech-heavy Nasdaq was 60 points weaker, at 2,417, by the close. And the S&P 500 was down 35 points, at 1,380.
Fears of a US recession spread to Asia, where the Japanese Nikkei sank 468 points to a 26-month low of 13,504. And in Hong Kong, the Hang Seng fell 1,386 points to 24,450, with Bank HSBC one of the biggest losers of the session.
UK property market ‘worst since 1992’
Having dipped by $2 on the Nymex yesterday, crude oil futures were had fallen further to $90.90 this morning. And in London, Brent spot was at $90.20.
Spot gold had fallen by over 1% today and was last trading at $889.20, compared to $899.50 in New York late last night. Silver had fallen to $15.96.
In the currency markets, sterling had fallen to 1.3232 this morning and was last trading at 1.9061 against the dollar. And the dollar was at 0.6748 against the euro and 106.1 against the Japanese yen.
And in London this morning, a report from the Royal Institute of Chartered Surveyors revealed that the UK housing market experienced its worst month in December since 1992. RICs spokesman Ian Perry said that the Bank of England may need to implement further rate cuts in order to keep the market in a ‘stable condition’.
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