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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Gold hits fresh record high; Fitch downgrades Thames Water parent company – as it happened

HSBC Argentina United States US Federal Reserve
Gold bullion bars after being inspected and polished at the ABC Refinery in Sydney.
Gold bullion bars after being inspected and polished at the ABC Refinery in Sydney. Photograph: David Gray/AFP/Getty Images

Closing post

Time for a recap.

Over in Panama, a criminal trial of 27 employees working for the law firm at the heart of the Panama Papers on money laundering charges has begun.

Eight years ago, leaked financial records from the law firm Mossack Fonseca sparked international outrage at the use of offshore companies by wealthy individuals to commit tax fraud and hide assets.

In 2016, files from Mossack Fonseca were leaked to reporters at the German newspaper Süddeutsche Zeitung and shared with the US-based International Consortium of Investigative Journalists. Reporters from more than 100 media organisations, including the Guardian, collaborated to investigate the 11.5m files.

The firm’s founders, Jürgen Mossack and Ramón Fonseca Mora, are among those facing charges. They have previously denied any allegations against them, arguing that they had no control over the offshore companies that the firm set up for its clients. If convicted, they reportedly face up to 12 years in prison.

More here:

IMF: G20 emerging market spillovers could hurt richer nations

Shocks from emerging markets are having a more serious impact on growth among rich countries, the International Monetary Fund has warned.

In a new report, the IMF highlights that spillovers from shocks in G20 emerging markets—particularly China—have increased since 2000, and are now comparable in size to those from shocks in advanced economies.

Trade, notably through global value chains, is a key channel for shocks to propagate through the global economy, the IMF says, in Chapter 3 of its latest World Economic Outlook.

The IMF points out that a pick-up in emerging markets could benefit wealthier countries, but cautions that policymakers should protect themselves from the threat of disruption.

The report says:

Spillovers generate a reallocation of economic activity across firms and sectors in other countries. Looking ahead, a plausible growth acceleration in G20 emerging markets, even excluding China, could support global growth over the medium term and spill over to other countries.

Policymakers in recipient economies should maintain sufficient buffers and strengthen policy frameworks to manage the possibility of larger shocks from G20 emerging markets.

One of AstraZeneca’s top shareholders has thrown its weight behind CEO Pascal Soriot, over the row about his multi-million pay package that comes to a boil this week.

Rajiv Jain, chief investment officer of Florida-based GQG Partners, says Soriot deserves the maximum package of £18.6m which has been lined up for this year.

Jain told the Financial Times:

“There is a compensation issue at AstraZeneca.

The CEO is massively underpaid . . . given AstraZeneca’s impressive turnaround since he joined more than a decade ago.”

Shareholders will vote on Soriot’s pay at AstraZeneca’s AGM on Thursday afternoon.

Soriot received almost £17m last year, taking his earnings over the last decade at AZ to around. £120m. The High Pay Centre has argued that such high earnings aren’t justifiable.

Updated

Fitch downgrades Thames Water parent company Kemble to 'C'

Credit rating agency Fitch has downgraded its rating on Thames Water’s parent company, Kemble, after it defaulted on its debts last week by missing an interest payment.

Fitch has cut Kemble Water Finance Limited’s rating to ‘C’ from ‘CC’, which is just one step above being in default.

Fitch explains:

The downgrade reflects Kemble’s missed payments of interest due last week and the consequent formal notice of default sent to its debtholders. Kemble has also sent formal notice of the cancellation of its undrawn £150m working capital facility to the relevant agent.

The company has appointed an advisor to support restructuring discussions with creditors.

Fitch adds that it would downgrade Kemble again to ‘Restricted Default’ (RD) once the grace period to make the missed payment has expired, or if the group is restructured.

As reported earlier, bonds issued by other water companies are suffering a knock-on impact from Thames (see 13.12pm)… while Australian investment bank Macquarie has emerged as a lender to Kemble.

Updated

King given first notes featuring his face by Bank of England chief

The King has been presented with the first banknotes bearing his portrait by the Governor of the Bank of England.

Charles received a leather-bound booklet containing the historic legal tender from Andrew Bailey at Buckingham Palace on Tuesday.

PA Media reports:

Charles inspected the four £5, £10, £20 and £50 polymer notes – the first low-numbered note of each denomination with 01 000001 serial numbers – and pointed and smiled at the details as Mr Bailey turned the pages, showing the front and back.

They were joined by Sarah John, the Bank of England’s Chief Cashier, whose signature appears on the currency, and the King gave a broad grin as he greeted his guests in the 1844 Room.

The money will be issued gradually into circulation from June 5, to replace worn-out ones and to meet any overall increase in demand.

Businesses such as retailers, train and car park operators, financial institutions, and ATM operators should update their banknote machines before 5 June, the Bank advises.

Over in Mexico, inflation has crept up, but was lower than forecast.

Consumer prices rose by 4.42% in the year to March, up from 4.4% per year in February, but lower than the 4.5% expected.

Last month. Mexico became the latest major Latin American country to cut interest rates, down from 11.25% to to 11%; policymakers will be relieved to see inflation below expectations today.

The firm behind the Wildwood chain of restaurants has revealed plans to shut a raft of sites as part of a major restructuring.

Tasty, which also runs sites under Dim T brand, said it plans to exit around 20 loss-making restaurants after a “challenging” start to the year.

The restructuring plan would see the group shut 18 of these restaurants, with two of these sites already closed to customers.

Thames Water’s troubles cause ripples in bond market

The crisis at Thames Water appears to be hitting the price of bonds issued by fellow water companies.

Bloomberg has spotted that the risk premium on two recently-issued bonds from the sector has increased since they started trading. This risk premium measures the gap between the yield on these bonds, compared to lending to the government.

BBG says:

Southern Water Services Finance Ltd. bonds have widened 13 basis points since their March 19 pricing. Northumbrian Water Finance Plc’s notes widened four basis points since pricing on March 22.

That makes them underperformers among investment-grade peers whose spreads mostly narrowed in new-issue trading.

Last week, Thames’ parent company, Kemble, defaulted on its debt, raising fears it could face a significant restructure or even ultimately collapse.

Today, it emerged that Australian investment bank Macquarie, which has been criticised for its role in the privatisation of England’s water industry, is one of Kemble’s lenders, and could play an important role in determining its future.

Updated

Gold price set for record 8-day run of record prices, says BullionVault

Before today, gold had already set a new record price for seven days running in the London bullion market, according to data from online market BullionVault.

Today’s gains mean it is on track to beat the record stretch of new daily records set in March 2008.

Adrian Ash, director of research at BullionVault, says:

“While the size of gold’s price gain isn’t unprecedented, its strength is.

So too is what’s underpinning this bull run, with heavy profit-taking by Western investors offset by central banks led by China continuing to hoard bullion as Chinese households also keep buying amid the country’s real-estate slump and economic slowdown.”

Updated

M&S to rein in methane-producing cows

Marks & Spencer is investing £1m in tackling the methane produced by cows by changing the diet of the herds that provide its milk.

The retailer is working with all 40 of the pasture-grazed dairy farmers in its supply base with the aim of cutting 11,000 tons of greenhouse gas emissions annually produced by cattle burps and manure. It said adding a new type of feed to the cows’ diet would reduce the carbon footprint of its main fresh milk by 8.4%.

The innovation comes as M&S said it was also setting up a £1m accelerator fund for its ethical project Plan A, working in partnership with longstanding and new suppliers to find new ways of achieving net zero carbon emissions.

Valuation gap could drive oil companies from London to New York

Could Shell deal a major blow to the City of London by moving its stock market listing to New York instead?

The oil giant’s CEO, Wael Sawan, has told Bloomberg that Shell would have to consider a shift if the gap between valuations in the UK and US doesn’t narrow.

Sawan told Bloomberg’s Javier Blas last month that he is trying to fix Shell’s problems by cutting costs, cutting underperforming units, and buying back shares with free cash.

Sawan added:

“If we work through the sprint, and we are doing what we are doing, and we still don’t see that the gap is closing, we have to look at all options.”

This morning, Sawan’s predecessor Ben van Beurden has fanned the flames, saying that the gap in valuations across the Atlantic is a “major issue” which makes it more likely that companies will consider moving their listings to New York.

Van Beurden told the FT Global Commodities summit that Shell was “massively undervalued”, while deeper capital pools and more favourable attitudes towards conventional energy companies make the US more attractive than Europe.

Shell is currently valued at £180bn, with a price/earnings ratio of 12.6.

New York-listed rival Exxon is worth $478bn (£376bn), with a p/e ratio of 13.59, meaning Exxon is more highly valued than Shell compared to its earnings.

Updated

Back in the markets, the pound has hit its highest level against the US dollar in over two weeks.

Sterling is up 0.25% this morning at $1.268, the highest since 21 March – when the pound tumbled after the Bank of England left interest rates on hold but hinted that cuts were coming.

Updated

Confidence among US small businesses have dropped to its lowest level in over a decade, as inflation worries dog firms.

The NFIB Small Business Optimism Index has slipped to 88.5 points for March, the lowest level since December 2012.

This is the 27th month running when the optimism gauge has been below the 50-year average of 98.

NFIB chief economist Bill Dunkelberg says:

“Small business optimism has reached the lowest level since 2012 as owners continue to manage numerous economic headwinds.

Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly.”

Twenty-five percent of owners reported that inflation (due to higher input costs and wages) was their single most important problem in operating their business, up two points from February.

Over at News Corp, the Murdoch media empire, its UK newspapers are showing diverging fortunes.

News Group Newspapers, which publishes The Sun, has reported a loss of £66.5m for the year to 2 July 2023, an improvement on the £127m it lost in 2022.

Online reader numbers fell – with The Sun’s digital audience falling to 23.8m from 27.8m in 2022.

News Group Newspapers also used to publish the News Of the World, which closed in 2011 in the phone hacking scandal. In 2022, it failed to force a deadline on potential victims to make claims against it.

Today’s results show the ongoing costs of those legal claims; News Group Newspapers ran up over £50m of one-off charges, related to legal cases over allegations of voicemail interceptions (including £5.3m of claimants’ legal fees and damages), down from £128m in 2022.

The picture is brighter at Times Media, publisher of The Times and the Sunday Times, whose earnings are making up for The Sun’s losses. It made a pre-tax profit of £60.9m for last year, down from £73.2m in 2022, but turnover rose to £385m from £373m.

Updated

Gold is continuing to rise into uncharted territory, and has now reached $2,362 per ounce.

Mexican precious metals mining company Fresnillo is benefitting from the rally in gold and silver.

Fresnillo is leading the risers on the UK’s FTSE 100 share index this morning, up 4.4%, to its highest level since the start of January.

Ricardo Evangelista, senior analyst at ActivTrades, says gold is being driven up by “a surge in haven demand” due to the turbulent geopolitical background:

Iran’s explicit threat of military retaliation following Israel’s targeting of its Syrian embassy has escalated tensions, amplifying the spectre of a broader regional conflict with potentially unforeseeable repercussions.

Concurrently, the ongoing conflict in Ukraine exacerbates investor anxieties.

Gold, the world’s oldest safe-haven asset, has “gone on a tear this year” despite the negative pressure exerted by rising bond yields and a firmer US dollar, says Marios Hadjikyriacos, senior investment analyst at XM.

Hadjikyriacos explains:

Gold has been turbocharged by purchases from central banks, with China leading the charge as the nation seeks to reduce its dependence on the US dollar. Chinese consumers have also gone on a buying spree, searching for protection from the crash in local property and equity markets. Safe haven flows probably played a role too, amidst an unstable geopolitical landscape.

In the near term, the risk is that this rally has gone too far, too fast. Momentum oscillators detect extreme overbought conditions, warning of a potential pullback in gold prices.

But aside from the rally looking overstretched, the fundamentals still favor gold buyers. Gold represents only about 4% of China’s official foreign exchange reserves, so there is lots of scope for these purchases to continue. Similarly, gold can still benefit from falling yields as central banks begin to slash interest rates, particularly if the global economy loses steam.

The precise drivers of the gold’s price’s surge this year aren’t quite clear.

Gold commentator Ross Norman, CEO at Metals Daily, wrote last week that he was mystified by gold’s rally, pointing out that demand from institutions and western buyers has dropped this year.

He suggested that algorythmic traders – buying gold because it’s gone up, fuelling the rally.

Another possibility is that US mutual funds are buying gold in preparation for US interest rate cuts this year (as gold doesn’t provide a yield, it is less attractive when interest rates are higher).

Norman says:

Quite possibly it is a combination of Chinese and official sector buying from other routes, coupled in some sectors with mounting uncertainty over US debt and its manageability.

If so, then this could be regarded as extremely “high quality” buying in that it is unlikely to be reversed ... and this rally is strong and has legs to run ... on the other hand, if it is one of those damn algos then expect trouble ahead ... after all, momentum can travel in two directions.

Gold hits record high

Gold has hit a new all-time high this morning.

The spot price of gold has risen to $2,365.39 per ounce, above Monday’s record high, meaning gold has now risen by 14% since the start of 2024.

Gold is traditionally seen as a safe-haven in difficult times, and as a hedge against inflation.

Analysts say gold has been lifted by geopolitical tensions, with war in Ukraine and the Middle East encouraging some traders to put money into bullion.

Some central banks have also been adding to their gold reserves. with China’s central bank purchased gold for its reserves for a 17th straight month in March.

The price of other precious metals, such as silver, have also been rising, as Fawad Razaqzada, market analyst at City Index and FOREX.com, explains:

Both metals have been in demand, particularly gold, essentially because of years of high inflation chipping away at the value of fiat currencies, which is the same reason why Bitcoin has also been hitting record levels.

Up until a couple of weeks ago, silver wasn’t finding much love. But stronger industrial data from China earlier in the week pointed to stronger demand for industrial materials like copper and silver.

Shares in BP have hit their highest level in over five months, after it told the City that its oil and gas production rose in the last quarter.

In a trading update this morning, BP guided that upstream production in the first quarter is expected to be higher compared to the prior quarter, with production higher in oil production and operations and slightly higher in gas and low carbon energy.

BP shares have gained 1.3% to 516p, the highest since the end of October.

Shares have been benefiting from the increase in the crude oil price this year, with Brent crude having risen from $77/barrel at the end of 2023 to over $90/barrel today.

Victoria Scholar, head of investment at interactive investor, explains:

“BP says it expects a strong first quarter for oil and gas trading as well as a quarter-on-quarter improvement in upstream production of low-carbon energy and oil & gas. It also expects an improvement to its oil refining margins this quarter when it reports results on 7th May in the first set of earnings since Murray Auchincloss became permanent CEO in January following the abrupt departure of Bernard Looney last year.

It looks like BP is poised for another strong quarterly scorecard after results in the final three months of 2023 outpaced expectations and the new CEO enticed investors by ramping up BP’s share buyback programme. Supporting BP and its rivals is an upward trend for underlying oil prices with geopolitical supply shocks and improving global demand pushing Brent crude above $90 a barrel this month, reigniting the possibility of $100 oil again in the months ahead.”

Updated

UK retail sales lifted by early Easter

An early Easter boosted consumer spending in March and gave Britain’s retailers their best month in more than two years.

Prompting hopes that the retail sector might be emerging from a protracted soft patch, the latest snapshot of spending in shops and online showed the value of sales above the current inflation rate for the first time since the early days of the cost of living crisis.

The monthly sales monitor from the British Retail Consortium and the accountancy firm KPMG said the value of sales was up by 3.5% in March on a year earlier. Inflation as measured by the consumer prices index stood at 3.4% in February and is expected to have fallen to about 3% in March.

Linda Ellett, the KPMG UK head of consumer markets, leisure and retail, said the Easter pickup in spending pointed to the possibility of “green shoots of recovery” for retailers.

US rate cut expectations for 2024 fall to lowest since October

Investors are losing faith that central banks will make hefty cuts to interest rates this year.

Futures traders have reduced bets on how much the US Federal Reserve will cut rates this year to the lowest level since October, LSEG data shows.

Traders now expect fewer than three quarter-point cuts to US interest rates this year, down from up to six cuts expected in January.

Reuters explains:

Fed funds futures contracts for December on Monday reflected expectations of around 60 basis points in rate cuts this year, compared to some 150 basis points that had been priced at the start of 2024.

The prospect of a first 25 basis point cut in June stood at 49%, down from 57% a week ago, CME Group data showed on Monday.

This repricing follows stronger than expected US economic data, such as last Friday’s forecast-beating US employment report showing 303,000 new jobs were created in March.

Yesterday, JP Morgan CEO Jamie Dimon warned that inflation coud be stickier than forecast, leading to higher interest rates than markets expect.

For the UK, traders expect the Bank of England to cut rates to 4.5% by the end of this year, from 5.25% at present.

Introduction: HSBC to take $1bn pre-tax loss on Argentina sale

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Argentina’s currency crisis has come back to bite HSBC, as it announces the sale of its operations in the South American country.

HSBC is selling its business in Argentina – which covers banking, asset management and insurance and $100 million in subordinated debt - to Grupo Financiero Galicia for $550m.

But, HSBC will record a $1bn pre-tax loss on the sale, as it will crystallise losses it has been running on the Argentinian peso-denominated book value of HSBC Argentina when converted into US dollars.

HSBC will also recognise $4.9bn in historical currency translation reserve losses when the deal closes. Those losses swelled by $1.8bn last year because of the devaluation of Argentina’s peso.

Last December, Argentina’s libertarian government led by Javier Milei devalued the peso by about half, as part of their economic shock treatment.

The sale will help fund HSBC’s pivot strategy of shifting capital to India and China.

Noel Quinn, HSBC’s chief executive, says the bank is pleased to have agreed the sale of HSBC Argentina.

This transaction is another important step in the execution of our strategy and enables us to focus our resources on higher value opportunities across our international network. HSBC Argentina is largely a domestically focused business, with limited connectivity to the rest of our international network. Furthermore, given its size, it also generates substantial earnings volatility for the Group when its results are translated into US dollars. Galicia is better placed to invest in and grow the business.

“We remain committed to Mexico and the US, and to serving our international clients throughout our global network with our leading transaction banking capabilities.”

The agenda

  • 7.45am BST: French trade balance for February

  • 1pm BST: Mexico’s inflation rate for March

  • 3pm BST: RealClearMarkets/TIPP index of US economic optimism

  • 6.30pm BST: IMF to publish chapter 3 of its Global Financial Stability Report

Updated

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