BoE May Widen Purchase; UK Bonds Fall

Arthi Gupta
22 Sep, 2010
New York City

The UK indexes declined on the growing speculation that the Bank of England may be forced to widen bond purchase and increase the asset purchase program. The Confederation of British Industry lifted growth outlook for 2010. Mining companies rallied as copper and precious metals edged higher.

[R]4:30 PM London – The UK indexes declined on the growing speculation that the Bank of England may be forced to widen bond purchase and increase the asset purchase program. The Confederation of British Industry lifted growth outlook for 2010. Mining companies rallied as copper and precious metals edged higher.[/R]

Stocks in London edged lower but resource sector companies traded higher. UK government bonds declined on the worries that the Bank of England may follow the U.S. Fed and widen its purchase of bonds and debts.

The policy makers of the Bank of England decided to retain the key rate by a split vote for the fourth time after the two-day meeting ended on September 9. The committee also decided to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion. But, the Bank of England may be forced to increase its asset purchase plan.

The minutes of the Monetary Policy Committee meeting released today showed that eight members including Governor Mervyn King voted to hold the interest rate at a record low of 0.5%, while Andrew Sentance sought a 25 basis point increase.

The minutes suggest possibility of further policy easing. For some members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased, the minutes showed.

In London trading, FTSE 100 Index fell 13.05 or 0.23% to 5,563.78 and the pound edged higher to close at $1.5678.

In another report, Andrew Bailey, a senior Bank of England policymaker said new Basel III banking rules, which propose a substantial rise in banks'' capital reserves will only work if banks do not dilute them ""under the banner of arbitrage masquerading as innovation.""

In a speech in London, he said that financial services is an industry where arbitraging rules and regulations is habitual, even addictive, but doing the right thing and preserving financial stability means accepting the spirit of the rules.

The Confederation of British Industry, in its latest economic forecast, said the UK economy will grow 1.6% in 2010, up from 1.3% in its previous forecast in June. This upward revision reflects better than expected growth in the second quarter as companies began rebuilding their stocks.

The CBI forecasts 0.3% and 0.6% growth in the third and fourth quarters of 2010. With the increase in VAT, inflation is expected to remain above the Bank of England''s 2% target through to the end of next year. Monetary stimulus is expected to be withdrawn gradually, and rates are forecast to reach 1.25% by the end of 2011, the CBI added.

The CBI forecasts public sector net borrowing to reach £141 billion in 2010/11, before falling to £116 billion in 2011/12, representing 9.5% and 7.6% of GDP respectively.

SnackTime plc agreed to acquire the entire issued share capital of Vendia UK, for a maximum consideration of £10.98 million. SnackTime expects the acquisition to be accretive to earnings in the year ending March 31, 2012.

Redhall Group plc, the engineering firm announced a deal to buy Mount Engineering plc for around £16.42 million in cash.

As per the deal, each Mount shareholder will get 70 pence in cash, representing a premium of 26.13% over the closing price of 55.50 pence per Mount share on September 21, being the last day prior to this announcement.

Commenting on the offer, Redhall''s Executive Chairman David Jackson said, ""We believe this acquisition will deliver significant improvement in operating margin and will strengthen the Redhall Group''s presence within the global oil and gas markets.""

Gainers & Losers

Altitude Group plc surged 7.69% to 10.50 pence after the company engaged in promotional merchandise and marketing services sectors stated first-half group revenue increased 10% to £9.92 million from £9.04 million in the comparable period. Pre-tax profit in the period surged 742% to £303,000 from £36,000 a year earlier.

BrainJuicer Group PLC rose 1.65% to 185.00 pence after the international online market research agency said revenues increased 49% to £7.21 million from £4.85 million in the past year. Profit in the period surged 88% to £345 thousand or 2.6 pence per share compared to a profit of £184 thousand or 1.3 pence per share in the previous year.

EG Solutions plc soared 8.80% to 68.00 pence after the operations management software company reported first-half revenue rose 15.3% to £2.41 million from £2.09 million a year earlier. Pre-tax profit in the period increased 39.3% to £78,000, compared to £56,000 last year.

GlaxoSmithKline plc fell 0.51% to 1,275.50 pence after the company and biotech company Theravance Inc announced positive results for the phase II combination trial of chronic obstructive pulmonary disorder a disease of the lung.

Imperial Tobacco Group PLC gained 1.53% to 1,922.00 pence after the international tobacco company confirmed that its anticipated financial performance for fiscal 2010 remains “in line with the Board''s expectations.” For the financial year to September 30, tobacco net revenues are expected to increase around 3%.

RSM Tenon Group PLC plunged 5.93% to 55.50 pence after the provider of accountancy, taxation and business advisory services announced fiscal 2010 revenue increased 26% from a year ago to £190.42 million. Net profit in the period declined 50% to £4.09 million, compared with £8.21 million a year ago. The company''s board also recommended a 7% increase in dividend.

Ultimate Finance Group plc increased 3.66% to 16.33 pence after the specialist providers of invoice finance and factoring facilities fiscal 2010 revenue increased 35% to £6.44 million from £4.76 million in the comparable period. Pre-tax profit grew 9.9% to £446,000 from £406,000 last year.