Closing summary
The rouble has fallen further and is now down 4.6% to 53.55 against the dollar, following Monday’s heavy losses. The reason? The Russian economy ministry reckons western sanctions will push the country into recession, with a 0.8% contraction forecast for next year. Oil is still trading below $72 a barrel (Brent is down 1.9% at $71.26, after leaping 3.4% on Monday).
European stock markets are still mostly higher, as is Wall Street. The FTSE 100 index in London is 1% ahead at 6728.56, a 72.3 point gain. Germany’s Dax is down 0.3% while France’s CAC is up 0.3%. Spain’s Ibex and Italy’s FTSE MiB have both gained 0.4%. On Wall Street, the Dow is 0.3% ahead at 17833.64 while the S&P 500 has inched up 0.2% to 2057.51 and the Nasdaq has gained 0.45% to 4748.82.
With this, I’m saying good-bye for today. Thank you for all your great comments, and we’ll be back tomorrow.
Sainsbury’s is the biggest riser on the FTSE 100 index now, pushing Tullow Oil into second place. The shares are up 4.5% at 242.14p. It appears to be a reaction to Citigroup reaffirming its ‘buy’ rating on the supermarket group, and the fact that “it’s been down six days on the trot – it can only last so long,” said Jasper Lawler at CMC Markets. Morrisons shares have also benefited, trading up 3.6%.
Wall Street has opened flat across the three main indices, the Dow Jones, Nasdaq and S&P 500.
Nicolas Ziegelasch, head of equity research at Killik, is also sceptical about the takeover, but for different reasons:
[Aviva] expects significant further value to be generated through capital, financial and revenue synergies over time, through offering Aviva’s product range to the 5 million current Friends Life customers, as well as getting access to the £70bn of Friends Life assets under administration. While the strategic rationale for the deal appears sound, we would be concerned that the execution risk may well be high due to the number of systems and platforms that will need to be merged.
Peter Gray, partner at Cavendish Corporate Finance, says:
Aviva’s £5.6bn deal for Friends Life will create an insurance powerhouse in the UK life insurance market. In one sense it’s perhaps understandable given the regulatory overhaul of the pensions market ending the compulsory purchase of annuities, which was previously a growth driver. However, it seems to go against the company’s previous plans for overseas expansion and also it increases their operations in a UK market that is mature and lacking in growth opportunities. So though the deal will deliver cost savings and synergies, far better for shareholders if Aviva had focused more on developing a coherent long-term strategy.
Julia Kollewe is back... many thanks to Jennifer Rankin.
Here’s some more reaction to the Aviva-Friends life deal.
Barrie Cornes at Panmure Gordon says:
Although we don’t share management’s assertion that it is a “compelling” transaction, given Aviva’s track record of integrating UK life businesses, we do think that it will prove to be a good deal. On balance we think that the execution risk is more than outweighed by the anticipated improvement in cash flow and consequent benefit to the dividend and funding for future growth.
UK regulator says banks "complacent" about preventing misconduct
Time to look at the UK and its scandalous financiers, as the City watchdog issues a stark warning that banks are “complacent” about reforming bad behaviour.
Martin Wheatley, chief executive of the Financial Conduct Authority, said banks were “culturally complacent” and still in “the foothills of cultural reform”.
At a speech at the FCA’s enforcement conference, he asked why messages about good behaviour were “like Chinese whispers, seemingly corrupted on the way down”.
It is worth quoting at length.
Certainly, nothing in my conversations with other chief executives leads me to believe UK financial sector leaders are anything other than wholly committed to achieving reform. Nor is there any lack of action at board level. So, not only do we have cultural change programmes in place across the country, as well as significant reforms in frontline reward incentives and the like. There are also far-reaching changes taking place in compliance that many here today have been heavily involved in...
All of which is obviously important and significant – but also leads to the inevitable public reflection: ‘Why is it that misconduct, like the FX case, seems to occur and then keeps on occurring?’
Why, six years on from an economic crisis accelerated by poor conduct; five years on from PPI; three years on from LIBOR – are more than half of financial service executives still insisting ‘ethical flexibility’ is important for career progression within their firms?
And it is this latter question, I think, that is most challenging for the sector in terms of moving things forward. Why are conduct messages, like Chinese whispers, seemingly corrupted on the way down, from top to bottom of organisational hierarchies? And how long are leaders prepared to wait for corporate reform programmes to take effect?
Are we looking, as suggested in last week’s joint report from New City Agenda and CASS, at change that will take a generation? Or is there, as I’ve been arguing, a need for much greater urgency? And for me, there’s an uneasy contrast here between the relative success of many firms in reconstructing their prudential positions, with their inability to reconstruct cultures....
He concludes that it may be easier for banks to address balance sheet issues than bad behaviour.
One of the reasons, no doubt, is because post-crisis, firms tackled systemic issues as more pressing priorities than cultural ones.
But it may also reflect the fact that industry has more well-established mechanisms, and methodologies, for assessing the likes of market risk and credit risk than it does in the conduct space.
Read the full speech here.
Updated
Timothy Ash, head of emerging markets research at Standard Bank thinks that Russia’s minister of finance Anton Siluanov is sounding “pretty optimistic” about the strength of the rouble ( see 11.59).
[The] general view from investors seems to be that the rouble has moved a long way in a short period of time but is unlikely to change its overall weakening trend unless there is a significant break in some of the underlying fundamentals drivers - low oil prices, sanctions/Ukraine, and maybe better growth/macro fundamentals.
More woe for Russia: state energy giant Gazprom’s exports to Europe have fallen sharply. An industry source told Reuters that Gazprom’s exports to the European Union and Turkey fell by a quarter in November.
The EU buys around 60% of Gazprom’s output, so a reduction of 25% is a serious matter.
Gazprom declined to comment.
The figures emerge just one day after Russia announced it was abandoning plans to build the South Stream gas pipeline that would have given it an even bigger share of Europe’s energy market
Jennifer Rankin taking over from my hardworking colleague Julia Kollewe for a while...
Another consequence of Russia’s currency turmoil is that ordinary consumers will pay more for Ikea’s billy bookcases and Sheby lamps.
The Russian office of the world’s largest furniture store has announced it is “reviewing its basic prices”, citing the cost of materials and transport, according to a report in the respected daily Vedomosti today.
Although 60% of the goods sold in Ikea’s Russian stores are made in the country, the Swedish furniture maker said it couldn’t avoid the consequences of “external factors” - a reference to the falling rouble.
Foreign carmakers have also been increasing prices for Russian consumers in response to the sharp fall in the value of the currency. Mercedes Benz has put up prices by 6-8%, Volkswagen by 2-5%, following similar moves by Chinese automaker Chery, BMW, Ford and Land Rover. Chery said it could raise prices by a further 10-15% next year if currency turbulence continues.
Russia’s economic ministry forecast today that inflation could hit 7.5% by the end of 2015, against an earlier forecast of 5-6%. But many analysts think inflation is on course to hit double digits.
Food price inflation has been running at 11% for the first 10 months of the year, according to Rosstat. The Institute of Strategic Analysis estimates that Russia’s ban on foreign food products has cost the Russian consumer 45bn roubles ($856m) because of higher prices.
Source: Vedomosti
Updated
Friends Life is still among the biggest risers on the FTSE, after agreeing a £5.6bn takeover by Aviva.
Britain’s largest union Unite warned Aviva against slashing jobs and eroding terms and conditions. The union, which represents over 4,000 members across both companies, is fearful that a dash to cut costs in the newly formed insurance company could lead to customer service levels deteriorating if jobs are cut.
Unite national officer Dominic Hook said:
We would urge Aviva to resist the temptation of using the takeover as an excuse to slash jobs and erode terms and conditions of staff who have turned the company’s fortunes around in the last couple of years.
Any moves to do so risks a deterioration in customer service and a loss of important skills and knowledge to the new company. We will be seeking urgent meetings with both Aviva and Friends Life to press for clarity and assurances about the future of the combined workforce in the new company.
Aviva boss Mark Wilson declined to spell out likely job losses this morning, amid reports that the deal could lead to 2,000 job cuts.
Lunchtime round-up
Time for a lunchtime round-up. The rouble opened 1% higher against the dollar after Monday’s sharp falls but soon resumed its slide. It’s now down 3.4% at 52.9 roubles per dollar. Oil prices are also sliding, with Brent slipping below $72 a barrel, but the main reason for the rouble’s fall is the Russian economy ministry’s prediction of a recession next year.
With the exception of Germany’s Dax which is now flat after breaking through the 10,000 points mark this morning, European stock markets are trading higher, lifted by energy stocks. Oil prices have dipped but remain off the five-year lows hit on Monday.
The FTSE 100 index in London is up 1.2% at 6734.58, a gain of 78.26 points, led by Tullow Oil.
Brent crude drops below $72 a barrel
The price of Brent crude oil has dropped below $72 a barrel, giving up some of its gains after Monday’s rally from five-year lows. Brent slid 1.2% to $71.69 a barrel after leaping 3.4% on Monday.
CMC Markets analyst Michael Hewson told Reuters:
I am not surprised the price is going down. The market is looking for a renewed sense of direction and trying to figure out if we have hit the bottom or if we about to go lower again.
I think there is a lot of ebb and flow, and at the moment there is a battle going on between the bulls and the bears in light of the really strong rally we saw yesterday.
Russia's finance minister suggests rouble is undervalued
Meanwhile, the Russian finance minister, Anton Siluanov, suggested that the rouble is undervalued. He told journalists that the current exchange rate corresponds to an oil price of $60 a barrel, Reuters reported. He also said that the rouble could find equilibrium next year at below 45 roubles per dollar, if oil prices at $80 a barrel and Russia’s central bank keeps up its interventions in the currency markets.
Returning to the UK’s construction figures, which showed a slowdown to a 13-month low, led by civil engineering, Ed Goodworth, partner at business advisory firm BDO, said:
House builders are still concerned by the risk of inflation in the construction sector as a result of supply chain issues and skill shortages. Overall the house building sector remains relatively confident and any slight slowdown may be as a result of uncertainty caused by the impending election rather than a cyclical change.
Fiona Cincotta, a senior market analyst at www.finspreads.com, has looked at the John Lewis record sales figures for last week.
John Lewis has shown how important it is to diversify its sales channels between both offline and online. This balance helped it to reach more customers and the fact they also led the charge for Black Friday in 2013 makes the comparative sales numbers all the more impressive.
However, my biggest concern surrounding Black Friday for general retailers is to what degree has it now sapped the pre-Christmas sales market and has retailers brought forward discounts that would normally be reserved for boxing day and beyond in their desperation for sales volume? This could come at a huge cost to margins over a crucial period. These questions remain unanswered despite the seeming success of some of our retailers over the past week.
UK domestic mergers in Q3 fall to record low
In the UK, takeovers between British companies have hit their lowest level since records began 45 years ago, according to the Office for National Statistics.
The ONS said there were only 30 corporate acquisitions worth more than £1m in the third quarter, compared with 46 in the second quarter. The total value, however, climbed to £2.9bn, the highest since the start of 2013, and compared with £1.3bn in the second quarter.
The bulk of this was made up by the merger between Carphone Warehouse and Dixons Retail, which created Dixons Carphone in August.
Foreign companies bought 19 British businesses between July and September, matching a 25-year low set in the first three months of 2013.
— Katie Martin (@katie_martin_FX) December 2, 2014'Critics say Russian central bank had been taken over by feminist liberals + is a tool of the IMF' http://t.co/AGVkeMzpFq ht @sanctionswatch
Back to Russia. Its federal space exploration agency Roscosmos could be forced to close down or indefinitely delay whole projects, as the country’s economic malaise takes its toll. The plummeting Russian rouble has rendered the agency incapable of planning their spending ahead of time, national daily newspaper Izvestia reported, according to Newsweek.
Updated
More details on John Lewis’ best trading week ever: The department store group, which made headlines with its penguin Christmas ad recently, sold one tablet computer every second and a flatscreen 40-inch voice-command TV every minute on Black Friday, my colleague Jennifer Rankin reports. You can read the full story here.
Rouble sliding again
The rouble has given up earlier gains and is sliding again, after Russia’s economy ministry sharply revised down its GDP forecast for next year and blamed western sanctions for pushing the country into recession. The currency is now trading 2.4% lower against the dollar at 52.55 roubles per dollar.
Lower oil prices to keep rouble down; capital flight to continue
Vedev also said that lower oil prices are going to keep the rouble under pressure. The ministry now expects the currency’s rate to average 49 roubles per dollar in 2015 – some 12 roubles more than its previous estimate. Today, the rouble is trading around 51 to the dollar.
Vedev said:
The main factors for our forecast adjustments are expectations of lower than [earlier] assumed oil prices.
The fall in oil prices has caused a significant weakening of the rouble’s exchange rate, which gives rather [a] strong inflationary effect. And higher inflationary pressure reduces the purchasing power of the population, which reduces consumption.
The ministry is now projecting inflation of 7.5% at the end of next year, against an earlier forecast of 5-6%.
Capital flight is going to continue: the ministry raised its forecast for 2014 net capital outflows to $125bn from $100bn, and to $90bn in 2015 from $50bn.
Updated
The Russian deputy economy minister Alexei Vedev said western sanctions would push Russia into recession next year.
He told reporters:
We now assume that sanctions will remain in place throughout the whole of 2015. [The ministry had previously expected sanctions to be lifted by the middle of next year.]
This for us means closed capital markets for the majority of Russian companies and banks, as well as unfavourable conditions for investment – uncertainty and a lack of security.
Russian economy to shrink 0.8% in 2015 – ministry
The Russian economy ministry said the economy is likely to contract by 0.8% next year – compared with its previous estimate of 1.2% growth. The ministry also cut its forecast for the average oil price next year to $80 a barrel from $100 a barrel. Oil and gas are Russia’s main exports.
The rouble is likely to remain under pressure, with the ministry expecting it to average 49 roubles per dollar next year.
The slowdown was worst in civil engineering, which relies heavily on government-backed infrastructure projects.
The construction data come a day before George Osborne’s autumn statement, and a day after the government set out details of £15bn of new road schemes across Britain.
Tim Moore, senior economist at Markit, said:
A less favourable overall economic news flow was cited as the key factor dampening otherwise buoyant demand patterns across the UK construction sector.
However, some construction companies noted that uncertainties ahead of next year’s general election had weighed on business confidence and influenced clients’ willingness to commit to new projects.
UK construction grows at slowest pace in 13 months
Britain’s construction activity grew at the slowest pace in 13 months in November, as optimism waned. The Markit/CIPS construction PMI fell to 59.4, down from 61.4 in October. (Any reading above 50 indicates expansion; anything below points to contraction.)
John Lewis posts record week thanks to Black Friday
John Lewis is one of the winners of Black Friday’s shopping frenzy. Sales at its 29 department stores surged 21.8% in the week to 29 November to a record £179.1m – the biggest week in the firm’s 150-year history. Electrical items were particularly popular, with sales of tablets and computers surging 127% while TV sales leapt 131%.
Howard Archer, chief UK and European economist at IHS Global Insight, said:
The year-on-year gain was all the more impressive given that John Lewis had also taken Black Friday very seriously in 2013.
The spectacular John Lewis performance highlights just how keen consumers have been to take advantage of Black Friday bargains. While consumers are always keen to take advantage of bargains, particularly in the run-up to Christmas, the desire for bargains has undoubtedly been heightened for many people by the extended squeeze on purchasing power coming from prolonged low earnings growth.
Updated
Germany's Dax passes 10,000 mark for first time since July
Germany’s Dax has gone past 10,000 points for the first time since July. It is up nearly 0.6%, almost 58 points, at 10,021.24.
In early July, Germany’s benchmark index hit a record high of 10,029.43.
Thanks to Don Juan for drawing my attention to this analysis by US economist Paul Krugman at the New York Times: Being Bad Europeans.
FTSE rises 1.2% as commodity prices stabilise
European stock markets are trading higher: the FTSE 100 index in London has gained 1.15%, or nearly 77 points, to 6733.28, led by energy and mining stocks as commodity prices stabilised.
Tullow Oil is the biggest riser, up 4.9%, followed by BG Group, up 3.2% and miner BHP Billiton, whose shares are 3% higher, while Royal Dutch Shell increased 2.5%. Crude oil has dipped slightly this morning but posted its biggest gain since 2012 on Monday and copper also rebounded.
Friends Life, whose board has agreed to be taken over by Aviva in a £5.6bn deal, is also among the biggest gainers, up 2.9%.
In Frankfurt, the Dax has edged up 0.2% while the CAC in Paris has risen 0.6%.
The rouble is little changed now, after rising against the dollar and the euro first thing this morning. It is trading at 51.31 against the dollar and at 56.94 against the euro.
Gleb Zadoya, head analyst at Profit investment house, said:
In case of a further fall in energy prices, the dollar is poised to firm to at least 55 roubles and the euro-rouble rate should reach 66-70 roubles.
Singapore-based trading firm Phillip Capital said:
[Oil] prices remain volatile as the market adjusts after last week’s 10% drop. We saw a huge recovery yesterday [but] this increase is likely to be short-lived as we see this as a consolidation of prices.
We also expect prices to overreact to any news in coming weeks with more volatility to come.
Oil prices dip again
The bounce in oil prices since Monday was short-lived. Brent crude is slipping towards $72 a barrel.
Brent slid 0.43% to $72.23 a barrel this morning while New York crude lost 0.78% to $68.46.
Updated
Aviva boss Mark Wilson would not be drawn on how many job losses will result from the company’s acquisition of smaller rival Friends Life, my colleague Jennifer Rankin reports.
Shore Capital analyst Eamonn Flanagan said the estimated cost savings, of £225m a year by 2017, are higher than he had expected.
Updated
Ofcom brushes off Royal Mail's competition concerns
Shares in Royal Mail have opened 2.5% lower at 406.76p, after Ofcom brushed off the company’s competition concerns. It’s a big blow for Royal Mail. The regulator said:
Having carefully assessed this evidence, including the confidential business plans of Royal Mail and its largest competitor Whistl, Ofcom does not believe the universal service is currently under threat from competition in the ‘direct delivery’ market, where operators collect and deliver letters themselves without using Royal Mail’s network.
The statement explains Ofcom’s view that, at present, competition is likely to provide Royal Mail with a further incentive to become more efficient.
Under the universal service, Royal Mail must deliver letters and parcels six days a week to every address in the UK at a fixed price. You can read Ofcom’s statement in full here.
However, Ofcom is going to conduct a broader review of factors affecting Royal Mail’s ability to deliver the universal postal service, to be completed next year. This will consider Royal Mail’s efficiency and its parcel delivery performance.
Updated
Merlin Entertainments, the company behind Madame Tussauds and Legoland, has issued an upbeat trading statement. Halloween events and the warm weather have drawn more visitors to its theme parks since the summer, and it’s still benefiting from the release of the LEGO Movie earlier in the year. The company expects to make full-year profits of £407m to £411m, beating the average analysts’ estimate of £404m.
Updated
Friends Life is up 2.4% to 375p in early trading, while Aviva has gained 1.3% to 507.48p.
Aviva agrees to buy Friends Life for £5.6bn
Here in London, insurer Aviva has agreed to buy Friends Life for £5.6bn in an all-share deal,creating a market leader with 16m life insurance customers.
Friends Life shareholders will receive 0.74 Aviva shares for each Friends Life share they own. The deal values each Friends Life share at 394p. The terms, agreed by both boards, are as previously outlined on 24 November.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The rouble, which suffered its heaviest losses since Russia’s 1998 financial crisis on Monday, got off to a better start this morning. It rose as much as 1% against the dollar at the opening and later traded up 0.6% at 50.89.
The Russian currency has been sliding for months as the Ukrainian crisis intensified, with western sanctions imposed on Moscow over its annexation of Crimea and support for separatists.
Russia’s central bank was forced to step in on Monday to defend the rouble, as fears over the impact of weak oil prices on the Russian economy sent the currency sharply lower.
It’s a quiet day for economic data, with the UK construction PMI figures out at 9.30am.
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