predictions for 2008

I have five minutes to go before I have to leave so here are a few of my predictions for 2008

I had mentioned buying northern rock shares a while back, and i am pleased to see they took a 7% jump in the last few days. I think the rationale holds true, there is too much at stake for government to allow them to go bust, mainly because the Bank of England gave it more support than it ever should have. This predictions looks likely to come to a good end, just not for most of the shareholders

Next, I have a new prediction for today, and it has to do with the 40 billion cash injection that the Fed gave the market, the base rate may not get cut in the early new year but I have a feeling that the US interest rate will go down further, maybe as low as 3% before this worldwide crunch is over. The problem still boils down to interbank distrust because their rates are extraordinarily high. the Euribor hasn’t come down …

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Inflation in China 2007

In an article written last week called ‘whats all the fuss about the US dollar’ a point was mentioned regarding the fall of the Dollar and its affect on China’s economy, one of the things mentioned was the inflationary pressure that China will feel when a weak dollar means stronger currencies can purchase more and more commodities like oil.

layman interpretation: Oil is priced in US Dollars, so if the dollar gets weak (eg: at the moment we have a strong euro – so if you went to New York for christmas shopping you could get more for less) then oil becomes cheaper to buy, because everybody needs oil the stronger currencies will be readily able to purchase more and this drives up the price of oil because of demand. China needs oil and almost everything else to continue with growth and as they hold massive dollar reserves there is a twofold action taking place. Firstly their national reserves (in dollars) is worth less, so maybe thats why the Sovereign wealth fund of China is making moves to bail out …

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Pensions Panic is Largely Unfounded

Recent turbulence in the stock markets has panicked many investors contributing to pensions funds. The stock market falls of the past three weeks have left countless investors worrying about the state of their funds and wondering if their future returns will be affected. Some are even switching funds from equities to cash. A rash move by many, and one that may have been made too soon.

With such high growth levels being experienced in the three years previous, a market correction was somewhat inevitable. It was also necessary in order to weed out the less profitable investment funds from the more established investors. For the last couple of years, Irish pension funds had grown at a rate of over 16% per annum. Growth at this rate was not sustainable, yet despite the falls of recent weeks, most pension funds are still looking healthy.

Reasons behind the buoyancy of the pensions schemes include strong equities markets in 2006 leading into 2007 and continuous increases in interest rates. Higher interest rates lead to better returns from investments such as bonds, which pensions …

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Trichet Remains Cautious about Increasing Interest Rates

The European Central Bank has given rise to further speculation that it will decide against increasing the rate of interest next week. The bank has previously maintained a hard line on inflation, which has seen it increase interest rates eight times since December 2005.

There are a number of reasons why the European Central Bank would consider leaving interest rates at their current level. As yet, the full extent of the credit crunch is unknown. The increased complexity of financial markets during the past decade has meant that in the event of a crisis affecting global financial markets, it becomes difficult to identify all of the victims. It will be many months before the true degree of casualties is realised.

The ECB will be wary of introducing another interest rate increase so soon for a number of reasons. As a result of the current credit squeeze, there may be a significant decrease in the demand for money which would only be further aggravated by an increased interest rate. So far, this mostly concerns the financial sector. It is …

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CFD Anonymity Loophole to be Closed

Investors who use CFDs (contracts for difference) will soon be required to disclose details of their shareholdings, as regulations governing CFDs are to be amended. There currently exists a loophole whereby investors can hold stakes in companies anonymously. This is considered to be highly anti-competitive and allows many individuals to build up large stakes in companies before deciding to declare them publicly.

CFDs have become extremely popular with Irish investors in recent years and they are also commonly used by hedge funds who surreptitiously gain control of shares in companies. Some say that contracts for difference account for as much as 0.25 – 0.50 of daily trading on the stock exchange here. Much of the reason for this is the convenience they offer to investors, as they provide a means of borrowing and purchasing through the one financial instrument. Many institutions are nervous about lending to finance investment in volatile markets, so these instruments offer a welcome alternative to investors.

CFDs require investors to personally lay down a deposit, also known as a margin. Borrowing through the CFD is …

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Slowdown in House Price Growth Could Delay ECB Interest Rate Hike

House price growth in Eurozone countries has been steadily decreasing for a number of months. The current slowdown in Eurozone housing markets could jeopardize the region’s economies. Many Eurozone countries have experienced exceptionally high growth levels over the past number of years and may find it difficult to adjust their economies accordingly.

Countries such as Ireland witnessed unprecedented growth in the housing and construction sectors in the years leading up to 2006 when they peaked, and have steadily slowed since then. Much of this growth has been attributed to low Eurozone interest rates, which bottomed out at around 2%. The end of 2005 saw the beginning of interest rate increases, a trend which continued throughout 2006 and 2007 to date, and saw interest rates doubling. This put increased pressure on borrowers and contributed to the marked slowdown in the housing market. Ireland is particularly susceptible to interest rate hikes, given the large proportion of variable rate mortgages that exist here.

It is thought that the expected average rate of increase for house prices in the Eurozone will stand at …

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Financial Regulator Introduces New Stress-Testing Regulations

The Financial Regulator is set to introduce new regulations governing the stress-testing of mortgages in the near future. The changes, which are expected to be introduced next month will amend the current practice of stress testing mortgages to determine repayment capacity at a rate 2% above the ECB rate. The proposed changes will mean that future mortgage applications will be tested at a rate of 2.75% above that of the ECB.

Up to this point, lenders have stress-tested mortgages to establish whether borrowers could afford payments on loans at an increased rate of 2% above the ECB rate. Many lenders in the Irish market don’t stress-test applications that seek 5 year fixed rates. The new regulations will require that lenders stress-test all applications to make certain that borrowers can make repayments at the new higher rate of ECB +2.75%. The policy of some banks not to stress-test 5 year fixed rate mortgage borrowers, meant that many qualified to borrow larger sums than a standard variable rate mortgage would allow. These new directives will put an end to this practice.

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A Return of Section 23? ..Tax Incentives on Property Due for Re-Introduction

It has been reported this week that the government may be considering re-introducing tax incentive schemes in order to foster development in regions outside Dublin. Previous tax incentive schemes that have been introduced are due to finish some time in 2008. Earlier incentives include section 23 and section 50 initiatives. These initiatives were hugely successful in attracting investment to developing regional towns although they did attract some criticism as many felt that these tax incentives allowed wealthier landlords to avail of further tax breaks at the expense of locals.

The proposed incentives will be strongly linked to the National Spatial Strategy, 2002. This decentralization strategy was launched with the intention of drawing individuals away from the capital city and building a thriving nationwide business network instead. These proposed schemes are being designed with the midland towns of Athlone and Mullingar in mind. Other towns that will reportedly be designated these new tax incentives include Dundalk and Letterkenny.

It is also alleged that the ‘living over the shop’ scheme is due for re-introduction. This refers to tax incentives for …

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Surprise Move by US Federal Reserve Revives Global Markets – U.S. interest rate cut

Traders are relaxing slightly this evening as stock markets perked up, following a surprise move by the US Federal Reserve in which it cut its primary rate of interest. The move was implemented with the intention of calming nervous global markets, shaken by the US subprime crisis. Markets have been weighed down by huge doubts which saw global share prices plummeting in the preceding weeks. Credit restrictions have jeopardized global market stability in the aftermath of the US subprime crisis. The US Fed cited fears of ‘restrained economic growth’ as reasons behind its dramatic intervention.

The 50 basis point rate cut affects Fed loans to banks, and resulted in the interest rate falling from 6.25% to 5.75%. Already the effects of the rate cut have rippled through financial markets. European markets have seen some positive effects already, with Europe’s FTSE Eurofirst up 1.7% and Britain’s FTSE 100 up 2%.

The US Fed also said that it was ‘monitoring’ market conditions and that it may intervene further if required. Meanwhile long-term investors remain unfazed, maintaining their position that signs …

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Credit Squeeze – Could it Help to Cool Overheating Markets?

Although it may be of little consolation to investors, the recent credit squeeze could be just what is needed to help overheating markets cool down. Despite not being early enough to rescue the US housing market from crashing, it could still prove a blessing in disguise in helping to dampen the takeover boom from escalating to an uncontrollable level.

Debt markets will have to try to cope with huge impacts on a global scale. Hopefully lenders and borrowers alike will have learnt their lessons from the events of the past six months. Lending standards will be tightened, resulting in less risky lending deals such as PIK notes or ‘payment in kind’ notes, which are agreements where IOUs can be issued in place of cash payment on interest.

With great nervousness surrounding the debt markets at this moment in time, investors will be avoiding takeovers in this area. The stockmarket, which had been experiencing highs on the back of debt market takeovers, will find share prices continuing to fall. The majority of businesses shouldn’t have any major difficulties in accessing …

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