Financial thoughts

The European Central Bank raised its benchmark interest rate Thursday by a quarter percentage point to 4.25% in an effort to reign in escalating inflation in the 15-nation euro zone.

The move comes despite worries in some quarters that it could dampen growth. Bank president Jean-Claude Trichet was expected to explain the decision at a news conference, with attention focusing on whether more increases are coming.

Trichet has stressed that his main objective is to keep prices stable, and all but promised an increase this month at last month’s meeting. But he has also suggested that repeated interest rate hikes are probably not likely.

Inflation has been troubling central banks around the world as commodity prices including oil and food have spiked in a surge of new global demand. While higher interest rates slow inflation, they can also slow economic growth as money becomes more expensive to borrow; Trichet appears to have targeted inflation as the bigger threat.

At the ECB’s June meeting, Trichet said members of the bank’s governing council stated a case for raising rates to combat inflation even then.

On Monday, the EU statistics agency Eurostat said inflation in euro nations hit a record 4% in June, double the ECB’s inflation target of below or around 2%.

The Bank for International Settlements - a sort of central bank for central banks - also said Monday that world headline inflation has risen significantly to 4.75%.

Higher euro zone interest rates tend to send its currency higher against the dollar as investors park money where it earns more interest. Meanwhile a sinking dollar generally boosts the price of oil, which is denominated in the U.S. currency, as more buyers move in.

Earlier Thursday, oil reached another record high. Light sweet crude oil for August delivery on the New York Mercantile Exchange rose $2.28 to a record $145.85 a barrel in electronic trading by midday in Europe.

"The fact that a hawkish note from the ECB today could hit the dollar hard and in turn push oil prices to fresh record highs and on toward that massive $150 a barrel level also needs to be taken into account," said James Hughes, a currency analyst with CMC Markets in London.

"Couple this with the likes of the euro zone retail sales data and there’s going to be an awful lot to digest in the near term," Hughes said. 

Sourse

The slumping U.S. economy has become the top issue on voters’ minds, according to a new poll and that concern is likely to carry on up through election day.

According to a recent CNN/Opinion Research Poll released Tuesday, 93% of voters say the economy is "extremely" or "very" important to their vote for president this November. 84% of the more than 900 registered voters surveyed from June 26 to 29 said the situation in Iraq was their top concern.

In January, the economy was virtually tied with the Iraq war as the top concern for voters.

"With the poor economic environment right now, it’s not surprising at all," said Wachovia economist Mark Vitner.

As bad news out of Iraq has taken a back seat to dour economic news, Americans say the economy has become the issue that may decide the election in November, according to the survey.

Economic bad news continues to mount, with the S&P and Dow suffering their worst June since the Great Depression.

Adding to the pain, more than 324,000 jobs have been lost so far in 2008, and the mortgage and credit crises have crushed consumer confidence low rates payday advance. Also, rising food and energy costs are hurting Americans in the pocketbooks.

Accordingly, 77% of those polled felt gas prices were "extremely" or "very" important to their vote, making fuel costs the third most important issue for American voters.

Economists say that the economic pain will not ease for voters come the November election.

"The next two quarters are likely to see a bit of an improvement, mainly because of the tax rebates, but there really isn’t anything out there on the horizon that’s going to change the economic landscape in a meaningful way," said Vitner. "Consumers are likely to be very concerned about the economy come election day."

That may be good news for Barack Obama.

"When the economy is bad, it tends to favor the party that’s out of power," said Vitner. "It’s going to be very difficult for the Republicans to take the White House." 

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With the broader economy sputtering, venture capital firms are finding it increasingly difficult to generate returns through the sale or public listing of portfolio companies, according to a report released Tuesday.

Dow Jones VentureSource reported that in the second quarter of 2008 there were no initial public offerings of U.S. venture-backed companies. Moreover, liquidity generated via mergers and acquisitions fell to $4.7 billion with just 56 transactions completed.

"The U.S. venture capital industry is in the midst of the second-longest IPO drought we’ve seen since we started tracking the industry in 1988," said Jessica Canning, global research director for Dow Jones VentureSource. "The last completed public offering for a VC-backed company was in March and we’ve seen 10 companies withdraw IPO registrations since then."

In terms of overall liquidity, which includes both IPOs and M&As, the second quarter’s $4.7 billion marks a 47 percent drop from the same period last year.

The report says the second quarter’s 56 M&As mark the fewest number of transactions completed in a quarter in at least a decade and well below the second quarter of 2007, which saw $8.8 billion generated via 97 M&As.

While acquirers were paying a median of more than $22 million for venture-backed companies in the second quarter last year, the median amount paid for a venture-backed company in the most recent quarter dipped 7 percent to $21.3 million.

Information technology companies accounted for the bulk of capital raised via M&A in the second quarter with 41 transactions generating some $3.3 billion in liquidity, a 29 percent drop for the segment from the nearly $4.6 billion raised in 61 M&A transactions during the same quarter last year.

By sector, software companies accounted for the majority of IT deal flow with 28 M&A transactions garnering nearly $1.2 billion. The largest deal of the quarter was Time Warner’s $850 million acquisition of the San Francisco-based online social networking company, Bebo.com.

According to the data, only six venture-backed health care companies completed M&As in the second quarter, raising just $267.8 million, some 86 percent less than the $1.9 billion raised in 16 M&As for the segment in the second quarter of 2007.

With its nine completed M&A transactions amounting to roughly half of last year’s second quarter total of 17, the business, consumer and retail industry accounted for $1.2 billion in liquidity, well below the $2.2 billion generated via M&As in 2Q07 no fax payday loans.

A report by the National Venture Capital Association and Thomson Reuters said the situation can be characterized as a capital markets crisis for the start-up community.

"Venture-backed companies that successfully enter the public markets represent a critical job creation engine for the United States economy, and that engine has completely shut down," said Mark Heesen, president of the NVCA.

In a survey, Thomson Reuters and the NVCA said they found:

• 81 percent of venture capitalists do not see the IPO window opening in 2008.
• Two-thirds of venture capitalists believe that venture-backed companies are less likely to want to go public today than they were 3 years ago.
• Only 8 percent of venture capitalists characterize the current IPO drought as "not critical" to the future health of the venture capital and entrepreneurial communities.

Dixon Doll, co-founder of Menlo Park based DCM and current NVCA chairman, said, "While we clearly recognize that the IPO drought is being driven largely by a weak economy, there are other systemic factors that are making the IPO exit less attractive for high quality venture-backed companies. Our government and the private sector should be doing all that it can to encourage these innovative, high quality companies to enter the public markets and grow from there. The acquisition will always be an attractive and viable exit path for venture-backed companies, but the public offerings create visible, long term economic growth."

Companies that were once venture-backed but are now public account for 10.3 million jobs and 18 percent of US GDP, according to a 2007 Global Insight Report.

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U.K. mortgage approvals fell to the lowest in at least nine years in May, a sign that the housing slump is deepening.

Banks granted 42,000 loans for house purchase, compared with 58,000 in April, the Bank of England said in London today. The result was the lowest since the bank's series began in 1999. Economists predicted a reading of 51,000, according to the median of 26 estimates in a Bloomberg News survey. House prices fell the most in seven years in June, Hometrack Inc. said today.

The U.K.'s worst property downturn since the early 1990s is threatening to tip the economy into a recession. While Bank of England Governor Mervyn King says there will be “extremely weak activity'' in the housing market, the fastest inflation in a decade is standing in the way of lower interest rates.

“For approvals to fall by so much in one month having already collapsed over the last year underlines the ferocity of the housing market slowdown,'' said Alan Clarke, an economist at BNP Paribas SA in London. The report “suggests the pace of house price declines will continue or even accelerate and the risks to economic growth have also risen.''

The pound slipped after the report, and was at 79.32 pence per euro at 10:13 a.m. in London.

The dearth of credit and slowing economic growth pushed property values down 1 percent in June from the previous month, the most since records by market researcher Hometrack began.

Abandoning Market

Trevor Williams, an economist at Lloyds TSB Bank Plc, said today's “huge drop'' in mortgage approvals shows first-time buyers have “been abandoning the market almost completely.'' Home loans in May were about one third of last year's peak.

U.K. banks are reining in lending following the collapse of the U.S. subprime mortgage market, which so far has cost financial institutions worldwide $400 billion in losses and writedowns.

Shares of property-related companies such as Taylor Wimpey Plc and Bradford & Bingley Plc have lost more than two thirds of their value this year. Taylor Wimpey, the U.K.'s largest homebuilder, said today it's in talks with investors to raise money as it writes down the value of land amid a “sustained weak'' housing market.

HBOS Plc, the country's largest mortgage lender, and Bradford & Bingley are also turning to investors to replenish their balance sheets no teletrak payday loans.

`No End'

“There's no end in sight,'' said David Tinsley, an economist at National Australia Bank in London, who formerly worked for the U.K. central bank. “With inflation remaining elevated, we're unlikely to see rate cuts. But even if we did, it probably wouldn't help much.''

King said on May 14 that the country may experience the “odd quarter or two'' of contraction. The bank predicted that the annual rate of economic expansion will drop to around 1 percent early next year, the lowest since 1992.

Consumer confidence fell 5 points to minus 34 in June, the least since 1990, GfK NOP Ltd. said in a separate report. U.K. services output growth held at the weakest pace since 2002 in the three months through April as business services and finance contracted, the statistics office said today.

At the same time, households are still adding to a record 1.4 trillion pounds in debt. Net consumer credit rose 1.4 billion pounds in May, the most in three months, and credit card lending increased 0.6 billion pounds, the Bank of England said today.

Rate Cuts

In April, the Bank of England lowered the benchmark interest rate for a third time since December to 5 percent.

Commercial banks aren't passing that on to homeowners. The cost of a home loan fixed for two years with a 25 percent deposit rose to 6.27 percent last month, the highest since 2000, central bank data shows.

Faster inflation may make the central bank reluctant to lower rates further. Consumer prices jumped 3.3 percent in May from a year earlier, the most in more than a decade, and King said last week that the rate may exceed 4 percent later this year. The bank aims to keep the inflation rate at 2 percent.

“The bank's clearly concerned about inflation in the near term,'' said George Buckley, an economist at Deutsche Bank AG in London. “But those concerns should give way to growth worries and next year people will talk about when the bank starts cutting rates.''

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