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In this week’s update we discuss the Libor scandal, trade after Brexit, the American air strikes on Syria and the ten-year old brewery worth £1 billion.
1. The Bank of England and the Libor scandal
Last week, fresh evidence surfaced implicating the Bank of England in the 2008 Libor rigging scandal. BBC Panorama uncovered a secret recording between a senior Barclays manager and their Libor submitter, which suggests the Bank of England pressurised commercial banks to lower their benchmark rates during the 2008 crash. Since the financial crisis, many leading banks have been implicated in manipulating Libor rates for their own benefit - rate-setting was unregulated at the time. Billions have been paid by some of the world’s largest banks in fines to financial regulators over the past five years.
What is Libor?
Libor – the London interbank offered rate - is a benchmark interest rate that global banks charge for lending money to each other. Quoted in five currencies, there are 35 different Libor rates calculated each day – the most common is the three-month US dollar rate (often known as the ‘current Libor rate’). Each bank submits the interest rate they are willing to charge other banks to lend money, and an average is taken. This calculation is vitally important for trillions of dollars-worth of financial contracts and reflects the confidence banks have in each other.
The allegations suggest that traders at banks worked together in order to artificially deflate or inflate the average. On the whole, the Bank of England are likely to desire lower rates because it shows market stability and economic confidence, whereas bank traders could potentially want higher rates to inflate their profits from trades. However, they are not allowed to artificially manipulate rates for their own gain.
Since the scandal came to the public’s attention in 2012, the Bank of England has always claimed it knew about the Libor rigging later than 2008. This new evidence puts some doubts on this claim.
Questions to ask yourself… What implications does this have for the Bank of England if they are found to be encouraging Libor rate fixing? Why is the Libor rate so important for the global economy?
2. Barclays boss Jes Staley under Investigation
Two city regulators have opened an investigation into Barclays Chief Executive Officer Jes Staley over his behaviour in a whistleblowing case. The Financial Conduct Authority and Prudential Regulation Authority are investigating the American for breaking rules surrounding the treatment of an internal whistleblower. It’s claimed that Staley attempted to wrongly identify them, though these attempts were ultimately unsuccessful. The CEO will take a significant pay cut after an external investigation commissioned by Barclays found he acted “mistakenly”, but there could be further punishment when the new investigations are concluded.
Question to ask yourself… Why is it important for regulators to investigate cases of possible wrongdoing surrounding whistleblowers?
3. Changing trade after Brexit
New analysis has found Britain would be able to increase exports to India by £2 billion per year after Brexit. The EU has been unable to agree a free trade deal with India, therefore the UK currently faces high tariffs on exports. India have refused to comply with EU regulations on intellectual property and free trade, ultimately stopping any possibility of a deal being reached. British trade negotiators are happy to cut the red tape and make a deal with their Indian counterparts when Brexit is finalised. The report suggests British exports to India could increase from £4.2 billion to £6.3 billion if a deal can be reached, while imports from India are forecast to rise by £1 billion.
Will Brexit mean job losses in Britain?
Since Theresa May triggered Article 50 there has been much speculation about jobs moving out of London to the EU, especially in the financial services and investment banking sectors - but how bad is it actually going to be? Goldman Sachs have stated that it will relocate hundreds of staff out of London before any deal with the EU is stuck. Many other firms are waiting to see what sort of deal Britain get, but the so-called ‘Brexit limbo’ has led firms to create contingency plans and foreign employees are asking to be moved back home. HSBC, Lloyd’s of London, AIG and Barclays are among other top firms who are considering relocating some of their staff out of the UK. It’s not all bad news though, as JP Morgan’s Chairman has performed a U-turn and will now not move many jobs out of the UK in the next two years.
Questions to ask yourself… What can the Government do to discourage firms from leaving the UK? Are there any dangers of cutting back on red tape after the UK leaves the EU?
4. Oil prices up after Syria air strikes
The price of crude oil was boosted by 2% on the news of American strikes in Syria, and on Friday closed at its highest price in four weeks ($52.24 per barrel). Tensions in the Middle East and the ongoing conflict in Syria have made speculators nervous about supply, therefore increasing the price. Syria isn’t a large producer of oil, but it’s feared the air strikes could lead to retaliatory policies from countries supporting President Assad’s regime – most notably Iran and Russia. This price increase is almost entirely due to geopolitical concerns, so if the air strikes in Syria are only temporary then the impact on oil prices will be too.
There is no longer a huge surplus in supply after OPEC (the Organization of the Petroleum Exporting Countries) agreed to cut output for the first six months of 2017. On Sunday Libya’s biggest oilfield was shut down again, cutting off a potential source of additional supply. Wall Street bank RBC has forecast a 20% rise in oil prices in the coming months, meaning it would be trading at over $60 per barrel during the summer.
Questions to ask yourself… Who benefits from an increase in oil prices? Is Trump’s foreign policy dangerous?
5. BrewDog worth £1 billion
On what was a beautiful weekend, many of you might have enjoyed a BrewDog beer in the sun. After being founded in a garage in Aberdeenshire just a decade ago, BrewDog's products are now stocked in major supermarkets and pubs across the UK, and the company own a dozen bars themselves. Last week America private equity firm TSG Consumer Partners agreed to acquire 22% of the “punk” beer company for £213 million – making their market value £1 billion. BrewDog posted a £7 million pre-tax profit last year and is currently building a brewery in Ohio to launch a base for American expansion.
The brewery has completed four previous rounds of crowdfunding and now boast nearly 50,000 “Equity Punks”. These current investors will be able to sell up to 15% of their shares this week and, if they bought shares in the first round, they are likely to see a return of 2,800% on their initial investment. Both founders are set to take home £100 million between them, but their stake in the business will be reduced to make way for the new investment.
Question to ask yourself… What new challenges arise when trying to gain presence in the American market?