Markets rally on US fiscal deal

2 January 2013 Last updated at 09:51 ET

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Global stock markets have rallied after a short-term deal to stave off the US “fiscal cliff” was reached.

The Dow Jones gained 1.8% at the open on Wall Street, while European shares were up by more than 2% for the day.

Failure to agree a deal would have triggered spending cuts and tax rises worth $ 600bn (£370bn), expected to throw the US back into recession.

However, the deal has only postponed by two months negotiations over spending cuts and the government debt ceiling.

Just before the New Year, the US Treasury Secretary Tim Geithner indicated that the federal government would run up against the debt ceiling – a legal cap on its total borrowing set by Congress – by the end of February.

The fiscal cliff deal does not include an increase in the debt ceiling. It also postpones by two months steep automatic spending cuts to federal government spending on things like defence and education.

The fiscal cliff measures – immediate tax rises worth $ 536bn, as well as spending cuts of $ 109bn from benefit payments and domestic and military programmes – were due to come into effect automatically at midnight on Monday.

Tax rises

The deal has averted most of these measures, including:

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“Start Quote

This week’s deal lifts the risk of an accidental recession – at least for a while”

End Quote

• making permanent tax cuts dating back to George W Bush’s presidency, for individuals earning less than $ 400,000


• postponing the $ 65bn of automatic spending cuts for two months


• keeping benefits available for the long-term unemployed, worth $ 26bn, for another year


• postponing for another year an $ 11bn cut in Medicare payments

However, the deal did also allow some tax rises to go ahead, namely:

• the expiry of a payroll tax holiday, expected to raise $ 95bn in additional annual revenue


• allowing the Bush-era income tax cuts for individuals earning over $ 400,000 to come to an end, with the top rate increasing from 35% to 40%


• higher taxes on dividend income, capital gains and inheritance for these same top earners


• phasing out certain income tax deductions for individuals earning more than $ 200,000

The increase in payroll taxes is likely to be the most significant of these measures, in terms of how much it raises in revenue for the government, the number of taxpayers affected, and its impact on the economy.

Payroll tax is paid by all employees. The tax holiday – which cut the rate from 6.2% to 4.2% – was introduced by President Barack Obama three years ago to help stimulate the lethargic economy by putting more money in the pockets of ordinary American workers, who were most likely to go out and spend it.

Continue reading the main story

“Start Quote

The battle [over spending cuts] has just been shoved two months down the road”

End Quote

Economists suggest that its expiry is likely to have the biggest impact on spending – particularly consumer spending – in the US.

Jan Hatzius, chief economist at Goldman Sachs, has said it would reduce US economy growth by 0.6%.

‘Disappointment’

The deal has postponed the hardest decisions that Republican and Democratic politicians must still reach agreement on – over spending cuts and the debt ceiling.

Both issues will need to be addressed at the end of February, with Republicans likely to demand deep cuts, particularly to entitlement programmes such as social security, in return for an increase in the legal cap on government borrowing.

President Obama’s Democrats would prefer to reduce the government’s deficit via further tax rises.

“In the most immediate sense, they took their feet of the cliff, but once again they have taken the hard work and pushed it down the street,” said Daniel Costello, a US economics commentator.

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Fiscal cliff explained

• On 1 January 2013, tax increases and huge spending cuts were due to come into force – the so-called fiscal cliff


• The deadline was put in place in 2011 to force the president and Congress to agree ways to save money over the next 10 years


• The fear was that raising taxes while massively cutting spending would have huge impact on households and businesses


• Experts believed it could have pushed the US into recession, and had a global impact on growth


• A deal has been reached delaying some of the tax rises and all of the spending cuts by at least two months

“It’s a huge disappointment. The Republicans deeply wanted spending cuts. Their long-term goal is to finally start chipping away at some of the entitlement spending [on welfare payments] that is just getting out of control.”

Entitlement payments are expected to rise sharply in the coming decades as the post-World War II baby-boom generation retires and enters old age, entailing more government-funded medical care.

“Two-thirds of all federal spending comes from entitlement spending – that means when you wake up in the morning, two-thirds of the money is already spent. By 2020, that goes up to 90%.”

When President Obama last faced off against the largely Republican-controlled Congress over the debt ceiling in 2011, negotiations went to the wire before agreement was reached to increase the ceiling from $ 14.3tn to $ 14.7tn.

Markets fell sharply at the time on fears that, legally barred from borrowing any more, the government might be forced to default on some of its payment obligations, with unknown but potentially significant legal consequences.

The political wrangling also prompted ratings agency Standard and Poor’s to deprive the US of its top AAA credit rating.

Temporary lift

Despite the deal’s shortcomings, markets took cheer from the fact that agreement had been reached on how to postpone and moderate the process of bringing the government’s overspending back under control.

Richard Hunter, Hargreaves Lansdown: “This points the market in the right direction”

The FTSE 100 index rose 145 points to 6,043 points, the first time it has been above the 6,000 level in 17 months, with mining shares leading the way.

The UK market was also boosted by a survey of production and new orders in the manufacturing sector, which showed activity at a 15-month high in December.

Shares worldwide had been hurt in November and December by fears that the US would not be able to reach any kind of agreement and would go off the cliff.

Analysts said the relief would not last.

Mike McCudden, head of derivatives at stockbroker Interactive Investor said: “There will no doubt be a few more twists and turns in the days ahead… but for now, investors have the concrete news they were hoping for.”

Joe Rundle, head of trading at ETX Capital, said: “Today’s bullish tone may continue as we head toward the weekend. but the euphoria will most certainly evaporate, as the deal voted through does not include raising the debt ceiling and longer-term budget cuts.

“It’s only a matter of time before market participants lose their buzz as US lawmakers will have to reconvene to address the remainder of unresolved issues.”

BBC News – Business

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UK assumes presidency of G8 group

31 December 2012 Last updated at 22:18 ET

The UK is assuming its year-long presidency of the G8 group of nations.

The presidency – which rotates through the G8 members – means it will host the annual leaders’ summit and choose the global priorities that are discussed.

June’s summit is to be held at Lough Erne, in County Fermanagh, while topics discussed will include tax havens.

The G8 is made up countries who have, historically, been the richest in the world – France, the US, Russia, Japan, Germany, Italy, Canada and the UK.

As prime minister of the presidency holding nation, David Cameron has said he wants to focus on combating trade protectionism, cracking down on tax havens and promoting greater government transparency.

These topics will be discussed in ministerial meetings ahead of the summit along with urgent issues like the crisis in Syria.

Although G8 summits are renowned for fine communiques, the group increasingly suffers from a credibility problem – some of the world’s largest economies like China, India and Brazil are not members, says BBC world affairs correspondent Emily Buchanan.

Our correspondent also adds that organisers will at least be hoping the June summit will be trouble-free.

The last time the UK was the host in 2005, in Gleneagles, more than 200,000 people marched against world poverty.

The proceedings were then overshadowed by the 7/7 bus and underground bombings in London.

Mr Cameron announced in November that the G8 summit would be held at the Lough Erne golf resort near Enniskillen.

It is the first time an event of this size has been held in Northern Ireland.

Speaking at the time, the prime minister said: “I want the world to see just what a fantastic place Northern Ireland is – a great place for business, a great place for investment, a place with an incredibly educated and trained workforce ready to work for international business.

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Commissions banned on new sales

31 December 2012 Last updated at 07:37 ET

Financial advisers and sales staff can no longer be paid commissions by the firms whose policies they are selling.

New rules, aimed at eradicating the long-standing practice, are being imposed by the Financial Services Authority (FSA) from now.

The aim is to stop policies – such as private pensions and investments – being mis-sold by sales staff, motivated by commission payments.

Instead, customers must be quoted up-front fees, and be told about charges.

Sales staff or financial advisers will also have to state if they are really independent, or restricted to just selling the policies of particular financial groups.

The reforms form part of a series of changes in the financial services industry called the Retail Distribution Review, and which were first proposed by the FSA back in early 2010.

Linda Woodall at the FSA said: “The changes will improve customer confidence – we want people to feel that they are getting a service from their financial adviser that is relevant to their circumstances and in their best interests.

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“Start Quote

The danger here is that quality financial advice becomes something only for the wealthy”

End Quote Keith Tadhunter Independent Financial Adviser

“These changes are about making the cost of advice clearer, where else would you buy something without knowing in advance how much it costs?

“Customers will now know how much advice is costing them, the service that they are receiving and be reassured that their adviser is qualified.”

Mis-selling scandals

The changes should ensure that independent financial advisers no longer receive payment for their advice by taking a regular cut of their clients funds via commission payments, something the clients may not be aware of at all.

The new policy will apply to the sale of investments such as pensions, annuities and unit trusts, but not to some mortgages and insurance policies.

Alan Higham, an expert on annuities – a pension income for life – believes that there is also a loophole with sales of annuities.

He said that “limited pension advice” – which provides guidance, quotes and explains terms and accounts for about a third of annuity sales – is not covered by the new rules.

This is because the client has made the decision without recommended pension advice from an adviser. If anything is wrong with the choice, then it is the client’s responsibility, rather than the adviser’s.

Commission-driven sales are thought to have been at the heart of the huge mis-selling scandals of the past few decades, affecting the sale of endowment policies, personal pensions and most recently payment protection insurance (PPI).

Even apart from those scandals, the FSA estimated in 2010 that mis-selling in general was costing UK financial consumers about half a billion pounds a year.

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Suggested questions to IFAs

• How much will your advice cost me and how is this calculated?


• Can you explain the different ways I can pay for advice?


• Can you explain what products you can advise me on and any areas you cannot help me with?


• How often will you review my investments?


• Can you show me proof that you are qualified to give advice?

Source: Financial Services Authority

A recent survey for the FSA found that 17% of adults currently take advice from a professional financial adviser and another 32% would consider doing so.

But a third of the respondents thought, wrongly, that the advice was free and that they did not have to pay a charge.

‘Danger’

Financial advisers have said that some operators in their industry have given it a bad name. However, some argue that the change in the rules could create issues for those who may not actively seek financial products, such as a pension.

“The danger here is that quality financial advice becomes something only for the wealthy, when in reality, most people need it to some degree – as poor rates of saving across the population only go to show,” said Keith Tadhunter, an independent financial adviser at Future Financial in Bath.

But Martin Wheatley, the chief executive designate of the Financial Conduct Authority, said that – although there was a savings gap in the UK – people had not trusted financial services.

“This is part of getting trust back into finance,” he said.

He expected the industry to change, with many more options explained through websites for people looking to save or invest in the long-term.

The new policies will also stop, from the end of 2013, the practice of businesses such as fund supermarkets or online discount stockbrokers accepting payments from some of the investment funds whose policies they are selling.

This is also thought to lead to biased sales, which may not be in the best interests of private investors.

Part of these payments has sometimes found its way back to the personal investor in the form of a cash rebate, but they are also used to cross-subsidise the provision of other services, such as stock and shares Isas.

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We’re Paying Off Our Debts, At Least At Home

Had it with the so-called fiscal cliff? Wondering what comes next now that Republicans pulled the plug on House Speaker John Boehner’s Plan B? Take a break from the frenzy in Washington and ignore for the moment the federal government’s red ink. Focus instead on another balance sheet that isn’t getting enough attention: The household balance sheet. Over the past five turbulent years, despite high unemployment rates and falling median income, American households have reduced their debts and shored up their balance sheets. “The aggregate numbers show that households are back to being in pretty good shape,” says James W. Paulsen, chief investment strategist at Wells Capital Management. Adds Susan Lund, partner at the McKinsey Global Institute: “Households continue to make very good progress at deleveraging.”

Case in point: the drop in the financial obligations ratio. It measures the ratio of household debt payments to disposable personal income. The obligation side of the ledger includes mortgage and consumer debt payments, automobile leases, rental payments on tenant-occupied property, homeowners insurance, and property taxes. In other words, the gauge captures much of the typical household’s monthly outlay for debts. The ratio hit a record high of 18.88 in the fourth quarter of 2007, according to the Federal Reserve. In the third quarter of this year it had dropped to 15.74, about the level of the early 1980s. (The series starts in 1980.) The reduced strain on household financial resources reflects the impact of low interest rates and less debt.

To be sure, about two-thirds of the gain in household balance sheets has come through mortgage foreclosures and credit-card defaults. Nevertheless, household debt as a share of gross domestic product is currently at 83 percent, far below its peak of 97 percent of GDP in 2008. At the current pace of deleveraging, households could return to their long-term borrowing trend (1950 to 2000) by the second half of 2013, calculates McKinsey’s Lund.

Households should feel wealthier next year. Their net worth plunged a record-setting 25 percent during the Great Recession. The latest readings have household net worth a mere 2 percentage points shy of reversing the loss. That figure should improve with housing market sales and prices showing definite signs of life, especially with the drag from foreclosures lessening. Yes, the current foreclosure pipeline remains full, but the future looks less dire. The rate of mortgages delinquent by 90 days or more—mortgages clearly heading toward foreclosure—fell to 3.5 percent in September 2012, according to the latest data from Foreclosure-Response.org, a joint venture between Local Initiatives Support Corp., the Urban Institute, and the Center for Housing Policy. The number is sharply lower than the December 2009 high of 5.5 percent,

The deleveraging story goes far beyond the household. Corporate America is flush with cash, and the sector has slightly reduced its debt levels. The beleaguered financial services industry has taken far more draconian actions to create a healthier margin of safety.

Such aggressive balance-sheet cleansing by the household and business sectors isn’t all good. By saving more, they are spending less, reducing demand for goods and services. That could have doomed the economy to a severe downturn if not for the big offsetting budget deficits run by the federal government.

Now even the federal government is poised to make progress. Say what? You wouldn’t know it for all the talk of fiscal crisis in Washington, yet the federal deficit as a share of GDP is shrinking as the economy recovers. Specifically, the government deficit-to-GDP ratio reached 10.4 percent of nominal GD during the Great Recession. Despite the economy expanding at a tepid 2 percent average rate, the deficit-to-GDP ratio has shrunk to 6.9 percent. Even if the economy continues to expand at a slow 2 percent pace, says Paulson, it’s likely the government debt-to-GDP ratio will peak over the next 12 to 24 months. The odds favor the lower band of that range estimate if the pace of growth picks up. “We may be at the stage where if we follow historic trends, you see government debt on a path to decline,” says Lund. Paulsen is even more optimistic: “Over the next three years the fiscal issue will fade.”

Got that, Washington? The underlying dynamics of the economy are screaming on-the-mend, including a job market that’s slowly improving, a housing market with a pulse, and healthier private sector balance sheets. Economic optimism would be the watchword of the New Year if it weren’t for the damaging drama of the fiscal cliff. Main Street has done its part.

Everyone is deeply frustrated, but considering the political blunders of recent weeks, maybe the best thing Washington can do is calm down. Stop playing political Armageddon. Realize that grand bargains can do more economic harm than fiscal good. If you must, embrace some form of face-saving, kick-the-can-down the-road compromise. Thanks to the underappreciated health in household balance sheets, the political equivalent of doing nothing will let the economy grow and deleveraging to continue. Indeed, the surprise of 2013 could be how rapid the short-term improvement in the fiscal balance sheet turns out to be.

Businessweek.com — Top News

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Pending home sales hit two-and-half year high in November

WASHINGTON (Reuters) – Contracts to buy previously owned U.S. homes rose in November to their highest level in 2-1/2 years, an industry group said on Friday, further evidence of a strengthening housing market recovery.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed last month, increased 1.7 percent to 106.4 – the highest level since April 2010 when the home-buyer tax credit expired.

Economists polled by Reuters had expected signed contracts, which become sales after a month or two, to rise 1.0 percent after a revised 5.0 percent increase in October. It was the third straight month of gains.

“Home sales are recovering now based solely on fundamental demand and favorable affordability conditions,” said NAR chief economist Lawrence Yun.

Pending home sales were up 9.8 percent in the 12 months through November.

The housing market has turned the corner after a dramatic collapse, which dragged the economy through its worst recession since the Great Depression of the 1930s.

Home sales and prices are rising, encouraging builders to undertake new construction projects.

Home resale contracts were up in three of the country’s four regions. They were unchanged in the South.

(Reporting By Lucia Mutikani; Editing by Neil Stempleman)

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‘Boxing Day record’ for web retail

27 December 2012 Last updated at 07:44 ET

By Kevin Peachey Personal finance reporter, BBC News

Record numbers visited UK retail websites on Boxing Day, with analysts suggesting shoppers are also using the internet to identify bargains.

Information service Experian said UK consumers made 113 million visits to retailers’ websites during 26 December.

High Streets are expected to be busy again for the post-Christmas sales, with large department stores such as John Lewis throwing open their doors.

Some big name retailers started their online sales on Christmas Day.

UK internet users made 84 million visits to retail websites on Christmas Eve and 107 million visits on Christmas Day, up 86% and 71% respectively compared to the same days in December 2011, according to Experian.

“The UK sales creep continues to advance so that now the post-Christmas sales are starting before Christmas,” said James Murray, digital insight manager at Experian.

“Five years ago we called it the January sales, before it became the Boxing Day sales, now retailers have to call it the winter sales as discounting starts earlier to encourage higher spending.”

Retail consultants have said that many people heading out to the shops will have already browsed online to choose the items they want.

Activity

Continue reading the main story

“Start Quote

[The internet] has an influence on the High Street with shoppers doing more research beforehand”

End Quote Matt Piner Founder, Conlumino

The squeeze on family finances is likely to keep the lid on retail sales, especially on big ticket items.

A lack of activity in the housing market is also reducing demand for some household items that might have been replaced as people move home.

However, some positive news in employment levels means that some stores could still record a decent level of sales in the significant post-Christmas sales period.

The first indications of the level of activity in the post-Christmas sales, the footfall figures from Experian, will be published later.

Online research

The growth of the internet means that the peak in sales might already have taken place.

Mr Murray, of Experian, said that 26 December was traditionally the single biggest shopping day of the year online.

And now, shoppers are using digital devices such as tablets and smartphones to search for bargains – then only travel to those specific shops to buy those items.

“The internet has been a huge factor in retail all year, and has an influence on the High Street with shoppers doing more research beforehand,” said Matt Piner, founder of retail research agency Conlumino.

He said items such as laptops and furniture in particular were identified by shoppers during online browsing, rather than in a store.

‘Cautious’

John Lewis, which starts its sale in department stores on Thursday, said it had seen notable activity during its online clearance sale. That started at 1700GMT on 24 December.

Continue reading the main story

“Start Quote

UK retailing is set for another year of tough trading”

End Quote Maureen Hinton Verdict

On Christmas Day, the department store said online sales peaked late in the evening. Items that proved popular included electrical items, sheets and pillowcases, luxury towels and candles.

Analysts said the departure of some high-profile names from the High Street had helped some of the remaining department stores. However, many had targeted “cautious” shoppers with discounts in the run-up to Christmas, according to Rahul Sharma, of Neev Capital, a retail consultancy.

He said that shoppers were offered discounts of 20% to 30% in the build up to Christmas, to tempt them into buying items for themselves, as well as presents.

This meant that clearance sales might be muted this year, with many of the items that stores wanted to shift already having been sold.

Predictions

Analysts have suggested that DIY and gardening will see the strongest performance in the retail sector in 2013, compared with 2012.

Poor weather in the past 12 months meant that sales have been low. This, together with homeowners improving homes ready to go on the market, should lead to a rebound in the coming year, according to Verdict and SAS UK.

The groups predicted that spending on food was likely to raise roughly in line with inflation.

However, they say that music and video spending will be hit the hardest, with a predicted 6.3% fall compared with 2012, owing to online streaming and cheaper internet prices.

The amount people spent online was expected to account for 12% of total retail spending, they added.

“UK retailing is set for another year of tough trading,” said Maureen Hinton, of Verdict.

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Tube drivers in Boxing Day strike

26 December 2012 Last updated at 07:01 ET

BBC News spoke to commuters at Edgware Road station in London, some branding the strike “really inconvenient”

A number of London Underground drivers have gone on strike in a long-running row over bank holiday pay.

Transport for London (TfL) says there is likely to be “significant disruption” to Tube services, and more buses will be laid on.

Members of the Aslef union have walked out for 24 hours after voting 9-1 in favour of strike action.

TfL said limited services were running on the Tube, although there are some services running on all lines.

It urged passengers to check before travelling. There are no services on London Overground.

TfL said the Bakerloo, Central and Victoria lines were running services through central London.

The District, Hammersmith & City, Circle, Metropolitan, Northern and Jubilee lines are running limited services.

The Piccadilly line is operating a shuttle service between Heathrow terminals and Hammersmith, and between Arnos Grove and Cockfosters.

The Docklands Light Railway is also operating, except between Canning Town and Beckton and between Shadwell and Bank.

‘Scandalous actions’

Tfl said services could vary throughout the day depending on the resources available.

It said there would be extra buses for shoppers heading for the West End and for the Westfield shopping centres in east and west London.

Otherwise, the capital’s 700 bus routes will operate a Sunday service.

The congestion charge for vehicles entering central London does not apply during the festive period and there are no on-street parking charges in Westminster.

It is the third successive walkout by Tube drivers on what is the first day of the post-Christmas sales.

Howard Collins, London Underground’s chief operating officer, criticised the union for demanding to be paid “twice for the same work”.

“The scandalous actions of the Aslef leadership are an attempt to hold Londoners to ransom, and demonstrate a wholesale disregard for our customers,” he said.

“We will be running as many services as possible, supported by London’s 700 bus routes, but there will be disruption.”

The disruption, which led to the Premier League derby between Arsenal and West Ham United being postponed, is due to continue with two further walkouts on the last two Fridays in January.

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Monti ‘available to lead Italy’

23 December 2012 Last updated at 08:29 ET

Italian Prime Minister Mario Monti says he is not siding for now with any party in upcoming elections, but remains available to head a future government.

Mr Monti said he was ready to lead any coalition committed to his reforms.

The caretaker prime minister said he was unable to accept an offer from former Prime Minister Silvio Berlusconi to lead a centrist coalition.

Elections are to be held in February. Mr Monti resigned after Mr Berlusconi’s party withdrew its support.

Mr Monti was nominated as technocratic prime minister in November 2011, after Mr Berlusconi’s centre-right coalition government fell amidst a financial and economic crisis.

Speaking at a news conference in Rome, Mr Monti urged Italian parties not to destroy what he said was his government’s achievement in saving Italy from that crisis.

“That financial emergency has been overcome,” he said. “Italians can once again hold their heads high as citizens of Europe.”

Keeping options open

Asked repeatedly if he was going to run in the 24-25 February election, Mr Monti said he cared more about policies than about the personalities involved in the election.

“I’m not siding with anyone – I’d like parties and social forces to side with ideas,” he said.

But he added: “To the forces that show convinced and credible adherence to the Monti agenda, I would be ready to give my advice, my encouragement and if necessary leadership,” he said.

“I would also be ready to assume one day, if required by circumstances, the responsibilities that would be entrusted to me by the parliament.”

The BBC’s David Willey says Mr Monti, whose possible role in February’s election has been the subject of intense speculation in Italy, is playing his cards close to his chest – whilst keeping his options open.

Mr Monti, 69, is an economist and former EU commissioner who first served as a minister under Mr Berlusconi in 1994.

His government has been praised for its initial reforms and for calming financial markets, though much of its reform agenda has been watered down or blocked.

On Sunday, he appealed to parties to push through further reforms of Italy’s labour market and its institutions.

He also criticised Mr Berlusconi for recently attacking the technocratic government, despite having previously praised it.

“I struggle to follow his line of thought,” Mr Monti said.

Mr Berlusconi, 76, has been mired in a series of sexual and financial scandals.

He made conflicting statements about whether he would remain in politics before launching into his sixth general election campaign.

Current polls suggest the centre-left Democratic Party led by Pier Luigi Bersani would win the most votes in a general election.

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LSE agrees LCH Clearnet purchase

24 December 2012 Last updated at 07:56 ET

The London Stock Exchange is to buy a 60% stake in LCH Clearnet, the European clearing house, but for a lower price.

The LSE will pay 366m euros ($ 482m; £300m), about 100m euros below the original offer price.

The lower price reflected new European rules requiring clearing houses to hold more capital, the companies said.

Clearing houses enable the trading of shares between two parties, charging a fee to guarantee the sales should one side default.

By requiring clearing houses to hold more money in reserve, the authorities hope to protect such firms against a major customer hitting a financial crisis.

“Today’s announcement is a success for LSE shareholders,” said Peter Lenardos, analyst at RBC Capital Markets.

“We believe that shareholder approvals will be sought in January and we still expect the transaction to complete in the first quarter of 2013.”

The deal was originally due to be completed by the end of this year. The UK’s Office of Fair Trading approved the acquisition earlier this month.

By taking over LCH, the LSE should be better able to compete with rivals such as NYSE Euronext and Deutsche Börse, which own clearing houses.

Demand for clearing transactions are expected to increase over the next few years as regulators force banks and other parties to channel trades through regulated clearing houses to ensure their risk positions can be better monitored.

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China and India: The $10 Trillion Engine of Future U.S. Growth

My friend and colleague Michael J. Silverstein, writing in this space in late October, mentioned that the most dangerous thing about China is America’s misguided attitude toward the country. In short, we appear to be afraid of China’s success.

The U.S. has never before run from a challenge. This is the wrong time to start.

As Silverstein and his co-authors—Carol Liao, David Michael, and Abheek Singhi—point out in their new book, The $ 10 Trillion Prize, one of the reasons many Americans feel threatened by China is they don’t know a lot about the country. What they do “know,” by and large, is what they’ve been told by politicians and others who accuse China of stealing U.S. jobs.

Yes, many low-skill, low-wage U.S. jobs have moved elsewhere, in many cases to China. Yes, many low-cost, mass-produced products that used to be made here are now being made there, and in other low-cost countries, such as India, Indonesia, Malaysia, Mexico, Thailand, and Vietnam. And, yes, many of those jobs will never come back.

But as China and the other developing countries grow, they also become potential customers for U.S. goods and services, from corn and soybeans to automobiles, commercial jetliners, heavy machinery, construction and farm equipment, and banking, investment, and insurance services, to name just a few.

It wasn’t that long ago that the prevailing American vision of the Middle Kingdom was that of millions of mindless peasants marching in automaton-like lockstep to the orders of the party bosses. They led lives of drudgery, on collective farms, toiling for mere survival. Everybody dressed like Chairman Mao. Dissent was met with tanks. And it wasn’t that long ago that that may have been accurate in some respects.

But China today, as Silverstein and his co-authors make clear, is a booming multiclass society with hundreds of millions of people who want nothing more than their own version of the American Dream: a nice home, a quality car, a good education for their children, appliances and conveniences, better health care, stylish clothes, more time for travel and leisure. In short: a better life for the next generation than the current generation enjoyed. The same is true in India.

The authors visited with and tell the stories of dozens of Chinese and Indian families and entrepreneurs who are striving for the same things Americans want—and for the first time in their lives, they have the money to get them.

My colleagues have calculated that between 2010 and 2020, Chinese and Indian consumers will spend some $ 64 trillion on goods and services. Chinese consumers will spend approximately $ 41.5 trillion, with annual expenditures reaching more than $ 6 trillion in 2020. Indians will spend $ 22.5 trillion, with annual spending hitting an estimated $ 3.6 trillion by 2020. Combined, they will be spending some $ 10 trillion per year by 2020—more than three times what they spent in 2010.

That’s what U.S. politicians and business leaders should be talking about: the promise of China and India as engines of future U.S. growth. That’s the prize the book is about.

China and India today show the kind of unbridled optimism that used to be the hallmark of America. Many Chinese and Indian entrepreneurs expect their companies to grow by factors of 10 over the next decade.

Rather than fear such growth, Americans should embrace it, wish them well, and make sure our businesses, farms, and factories are prepared to meet their needs.

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Can Nepal’s Republic Be Saved?

If you were a politician in Nepal during the past two years, there’s some chance you may have been slapped. In January 2011—as well as in May and November of this year—three citizens who were fed up with chronic government inaction physically attacked three senior politicians.

Nepal’s citizens survived 10 years of a bloody Maoist insurrection that killed an estimated 16,000 people but also brought about the end of a centuries-old monarchy in 2008. Since then, however, the country has been hampered by chronic political and economic crises that have created a severe legitimacy crisis for the ruling elites. Can this nascent republic be saved?

It seems to be an impossible challenge in the near term. The current political crisis is so dire that there has been no parliament since May. In November, hints surfaced of a presidential coup to oust the Maoist-led caretaker government of Prime Minister Baburam Bhattarai. President Ram Baran Yadav heard advice from the military chief and the Indian ambassador about the best way out of the crisis, but he ultimately took no action. Weeks later, the political crisis persists.

On Nov. 29, Prime Minister Bhatterai and various political factions failed to meet the president’s deadline to form a national unity government that would lead to parliamentary elections for April or May. On Dec. 6, the factions failed again to meet the extended deadline. A day later, on Dec. 7, President Yadav offered yet another six-day extension. But the ruling alliance of the Unified Communist Party of Nepal (Maoist) and United Democratic Joint Madhesi Front, as well as the opposition Nepali Congress and Communist Party of Nepal, failed to select a prime ministerial candidate, missing the latest deadline. Amid such political deadlock, there has been no progress on a new constitution—a critical component of the peace deal that ended the Maoist civil war in the first place.

This political crisis has amplified the economic weaknesses of the aid-dependent country, a quarter of whose population lives below the poverty line. Youth unemployment is over 40 percent and job creation is a struggle, especially with growth expected to drop to 3.8 percent in 2012-13, from 4.5 percent the previous year, according to the International Monetary Fund. The approval of the government’s budget on Nov. 21 averted a major financial crisis that would have left half a million civil servants, soldiers, and police without pay. This was a rare spot of good news for the dysfunctional country.

Though India and China already have significant stakes in their neighbor, the political crisis puts further foreign investment in jeopardy. One report suggests that Nepal’s diplomats have secured additional investment abroad, but this is contingent on the establishment of a constitution and the return of political stability. Other potential investors, including many businessmen from Saudi Arabia, have admitted losing interest in Nepal because of the political impasse. The country’s dismal ranking of 141 (out of 176 countries) on Transparency International’s Corruption Perceptions Index, the recurring power crisis, and additional structural limitations are not helping matters.

If the political and economic situation continues to stagnate, and no constitution is finalized to unite the people, it is likely that ethnic and religious differences—as well as the frustrations of historically marginalized groups from lower castes—will serve as significant sources of conflict.

It’s clear that the ruling elites are rapidly losing domestic legitimacy. Unfortunately, this has not motivated them to resolve the political crisis with dispatch. Perhaps it’s time for foreign donors to apply overt pressure on Nepal by making future aid conditional on a resolution to the political deadlock.

Even if a political consensus emerges as to how to move forward, it will take time before Nepal’s rulers regain the legitimacy needed to allow the government to ease the economic crisis. If no consensus is reached in 2013, mass street protests—which in the past brought down the monarchy—are likely to resurface. The way things are going, another Nepali politician could get slapped.

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US budget negotiations setback drives stocks down

PARIS (AP) — A failed attempt find a compromise in U.S. budget negotiations sent global stock markets plummeting Friday, as investors feared the world’s largest economy could teeter into recession if no deal is found.

Without an agreement, the U.S. economy will fall off the so-called “fiscal cliff” on Jan. 1 when Bush-era tax cuts expire and spending cuts kick in automatically. The measures were designed to have a negative effect on the U.S. economy, in the hopes that the feared outcome would push lawmakers and President Barack Obama to find a deal.

“We’ve seen Europe’s politicians repeatedly flirt lemming-like with cliff-diving in 2012, and now it’s the turn of U.S. ‘leaders,’” said Kit Juckes, an analyst with Societe Generale. “The nagging fear is always there that someone, on one side of the Atlantic or the other, will forget to let rational thought take over at the last second.”

Amid the uncertainty, European shares fell. France’s CAC dropped 0.15 percent to 3,661, while the DAX in Germany dropped 0.6 percent at 7,626. The FTSE index of leading British shares retreated 0.6 percent to 5,929.

The euro also fell sharply, dropping 0.3 percent to $ 1.3182.

In Asia, Japan’s Nikkei 225 index closed 1 percent lower at 9,940.06. Hong Kong’s Hang Seng lost 0.7 percent to 22,506.29. South Korea’s Kospi shed 1 percent at 1,980.42. Australia’s S&P/ASX 200 fell 0.2 percent to 4,623.60. Mainland Chinese stocks were mixed.

U.S. stock futures tumbled after rank-and-file Republican lawmakers failed to support an alternative tax plan by House Speaker John Boehner late Thursday in Washington. That plan would have allowed tax rates to rise on households earning $ 1 million and up. Obama wants the level to be $ 400,000.

In early trading in New York, the Dow Jones industrial average dropped 1 percent to 13,183, while the broader Standard & Poor’s index fell 1.1 percent at 1,427.

“The fiscal cliff is a real threat not just for U.S. growth next year but for the outlook for global growth,” said Jane Foley, currency analyst with Rabobank.

When growth slows, energy demand does, too, and oil prices fell in anticipation.

Benchmark crude for February delivery fell $ 1.92 to $ 88.19 per barrel in electronic trading on the New York Mercantile Exchange.

___

Pamela Sampson in Bangkok and Fu Ting in Shanghai contributed to this report.

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Wall Street ticks lower on “fiscal cliff” stalemate

NEW YORK (Reuters) – Stocks edged slightly lower on Thursday as investors fretted that a deal on the U.S. budget wouldn’t come as soon as they had hoped after President Barack Obama threatened to veto a controversial Republican plan.

The market barely reacted to a round of strong data, including on gross domestic product growth and housing, suggesting talks to avert the “fiscal cliff,” steep tax hikes and spending cuts due to take effect in 2013, remain the primary focus for markets.

Republican Speaker of the House John Boehner said Wednesday his chamber would pass a proposal that spares many wealthy Americans from tax hikes needed to balance the budget. Obama has threatened to veto the plan if it passes, while some Republicans oppose any deal featuring tax increases.

“The closer we get to the end of the year without a deal, the more optimism is going to evaporate,” said Todd Schoenberger, managing partner at LandColt Capital in New York. “Volatility is going to be extreme until there’s a deal, and the probability of being caught on the downside is much greater than being on the upside.”

While investors have hoped for an agreement soon between policy makers over the fiscal cliff, this seems unlikely as wrangling continues over the details.

The Dow Jones industrial average <.dji> was down 18.74 points, or 0.14 percent, at 13,233.23. The Standard & Poor’s 500 Index <.spx> was down 0.84 points, or 0.06 percent, at 1,434.97. The Nasdaq Composite Index <.ixic> was down 4.18 points, or 0.14 percent, at 3,040.18.</.ixic></.spx></.dji>

NYSE Euronext was the S&P 500′s top percentage gainer, surging 35 percent to $ 32.56 after IntercontinentalExchange Inc said it would buy the operator of the New York Stock Exchange for $ 8.2 billion. ICE shares rose 1.3 percent to $ 130.06.

Stocks rallied earlier in the week on signs of progress in the negotiations, led by banking and energy shares, which tend to outperform in times of economic expansion. On signs of complications, however, many have turned to hedging their bets through options and exchange-traded funds.

The U.S. economy grew 3.1 percent in the third quarter, faster than previously estimated, while the number of Americans filing new claims for jobless benefits rose more than expected in the latest week.

“It is great to see this kind of growth, but investors know it could all disappear if there’s no deal on the cliff,” Schoenberger said. “Macro data may be on the back burner for a while.”

Existing home sales jumped 5.9 percent in November, more than expected, and by the fastest monthly place in three years. And the Federal Reserve Bank of Philadelphia’s December index of business conditions in the U.S. Mid-Atlantic region rose to 8.1 from -10.7 in November. Analysts were looking for a read of -3.

Google Inc agreed to sell set-top TV box maker Motorola Home to Arris Group Inc for $ 2.35 billion in cash and stock. Arris rose 6.6 percent to $ 15.51 while Google was little changed.

(Editing by Bernadette Baum)

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UBS in $1.5bn Libor rigging fine

19 December 2012 Last updated at 06:43 ET

Swiss banking giant UBS has agreed to pay $ 1.5bn (£940m) to US, UK and Swiss regulators for attempting to manipulate the Libor inter-bank lending rate.

It becomes the second major bank to be fined over Libor after Barclays was ordered to pay $ 450m to UK and US authorities in the summer.

Regulators worldwide are investigating a number of banks for rigging Libor.

Libor tracks the average rate at which the major international banks based in London lend money to each other.

The bank also admitted to manipulating Euribor and Tibor – the equivalent interest rates set by lenders in the eurozone and in Tokyo.

UBS said it had agreed to pay fines to regulators in three different countries:

It is the second-largest set of fines imposed on a bank to date, after the $ 1.9bn that HSBC agreed to pay US authorities earlier this month to settle allegations of money-laundering.

Continue reading the main story

“Start Quote

The potential costs to [the banks] could be eye-watering if clients can prove they are out of pocket as a result of market rigging”

End Quote

The fine “demonstrates the co-ordinated approach regulators are now taking to serious conduct issues that affect jurisdictions internationally,” said Nick Matthews, a forensic accountant at consultancy Kinetic Partners.

The bank has also agreed to admit to committing wire fraud through its Tokyo office in the case of manipulating Libor rates for loans denominated in Japanese yen, among others.

It said it would seek a non-prosecution agreement with the DoJ covering the rest of the bank’s misbehaviour.

The fine is the latest blow for UBS, following the conviction of rogue trader Kweku Adoboli earlier this year for losing £1.4bn for the bank, a £500m settlement with US authorities for helping US citizens evade taxes.

UBS also suffered the worst losses of any bank from US sub-prime mortgages during the financial crisis, totalling 38bn, and necessitating a bailout from the Swiss authorities.

The bank still faces lawsuits in the US for mis-selling mortgage debt to other investors, including a $ 6.4bn claim by the US government-sponsored mortgage finance agencies Freddie Mac and Fannie Mae.

Trader collusion

UBS said the fines – along with other payouts for mis-selling mortgage debts in the US – were likely to result in the bank recording a loss of 2bn-2.5bn Swiss francs in its financial accounts for the last three months of the year, although it still expects to make a profit for the year as a whole.

Continue reading the main story

What is Libor?

• Libor is the “London Inter-Bank Offered Rate”


• It tracks the average interest rate at which the big international banks based in London are willing to lend to each other


• The Libor rate is used to calculate payments under hundreds of trillions of dollars-worth of financial contracts, including mortgages and loans


• Libor is set every day by the British Bankers’ Association, based on estimates submitted by a panel of a dozen or so banks of their borrowing costs


• Banks are accused of lying about their real borrowing costs, in order to manipulate Libor for profit, and to make themselves look stronger during the financial crisis

The Swiss lender acknowledged its staff had manipulated the borrowing rates it submitted, which were then used to calculate the Libor rate – a benchmark interest rate that is used to calculate the payments on hundreds of trillions of dollars-worth of financial contracts – in order to make money on their trades.

According to the FSA, UBS had even gone so far as to give its traders formal responsibility for handling the bank’s submissions to the Libor-setting committee at the British Bankers’ Association – creating a direct conflict of interest, as the traders could profit depending on what they submitted.

Significantly, UBS also said its traders had colluded with their counterparts at other banks and brokerages.

The FSA said that UBS’s Tokyo office had made corrupt payments to brokerages – which helped to bring borrowers and lenders together anonymously in the inter-bank lending market – in order to enlist their support in manipulating Libor.

Besides UBS and Barclays, about a dozen other major banks are involved in setting Libor rates each day across a range of currencies, and most of them are understood to be still under investigation.

UBS chairman Axel Weber said: “The authorities have recognized UBS for the thoroughness of our investigation and our exceptional co-operation.”

According to the FSA, it would have fined UBS £200m, but gave the bank a 20% discount because it co-operated. Nonetheless, the £160m fine was still the largest ever imposed by the UK authority.

Barclays – which was the first bank to come clean over the scandal – has previously indicated that its fine of $ 450m would be overshadowed by the fines to be imposed on other culpable banks.

‘Not pretty reading’

Like Barclays, UBS also accepted that management had also told staff to submit inappropriately low estimated borrowing costs for the bank during the financial crisis, in order to give a false impression of the bank’s ability to borrow cheaply and maintain market confidence in the bank.

“We deeply regret this inappropriate and unethical behaviour,” said UBS chief executive Sergio Ermotti.

“No amount of profit is more important than the reputation of this firm, and we are committed to doing business with integrity.”

Former Schroders group managing director Philip Augar told BBC News that disadvantaged customers could take action against banks

The FSA said that the misconduct at UBS was extensive and widespread and involved at least 45 individuals.

“At least 2,000 requests for inappropriate submissions were documented – an unquantifiable number of oral requests, which by their nature would not be documented, were also made,” the FSA said.

“Manipulation was also discussed in internal open chat forums and group emails, and was widely known.”

It was so common that the FSA said every single Libor submission by UBS during the period it examined, from 2005 to 2010, may have been tainted.

“The findings we have set out in our notice today do not make for pretty reading,” said the FSA’s head of enforcement, Tracy McDermott.

Despite this, five separate internal audits by the bank’s compliance department failed to pick up on the misbehaviour.

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Newtown Fallout: Cerberus Retreats From Guns

While President Barack Obama and other Democratic politicians clear their throats about proposing new gun control laws sometime next year, the marketplace is responding swiftly to the Newtown, Conn., elementary school massacre.

Dick’s Sporting Goods, one of the largest retailers in its industry, said Tuesday it is suspending the sale of certain military-style semiautomatic rifles similar to the one used by the Newtown killer. Fox News reported that Discovery Channel has decided to cancel its popular reality show “American Guns.”

Less visible to consumers, but no less important, Cerberus, a $ 20 billion private-equity firm based in New York, announced overnight that, under pressure from the California teachers’ pension fund, it will sell its controlling stake in the country’s largest guns-and-ammo manufacturer, a conglomerate called Freedom Group. The semiautomatic rifle used to slaughter 26 people at Sandy Hook Elementary School, 20 of them children, was made by Bushmaster Firearms, one of the companies that operates under the Freedom Group umbrella.

The California State Teachers’ Retirement System, which has $ 751 million invested with Cerberus, said it would review its relationship with the private-equity firm “given the tragic events last Friday in Newtown, Conn.” Cerberus then followed with its announcement, saying that unloading Freedom Group “allows us to meet our obligations to the investors whose interests we are entrusted to protect without being drawn into the national debate” on gun control.

Bloomberg TV’s Tom Keene asked me this morning on his “Surveillance” program whether this the beginning of something akin to the divestment campaign aimed at breaking South Africa’s apartheid system. That’s a provocative question. The answer is probably no, and the reasons shed light on the nature of the American gun market.

Gun ownership in the United States is not apartheid. Millions of Americans relish firearms and use them for lawful hunting, shooting sports, and self-defense. To many people, guns represent individualism and self-reliance. The Supreme Court has interpreted the Second Amendment as protecting an individual right to keep a handgun in the home. Forty-nine states allow their citizens to carry guns concealed in public. A federal appeals court recently said that the sole holdout, Illinois, violated the Second Amendment by prohibiting concealed carry.

The $ 2 billion American gun industry is not the South African economy. The gun market historically has been fragmented and made up of relatively small companies. It consolidated in recent years, driven largely by Cerberus buying companies such as Bushmaster (and Remington, Marlin, and Para USA) in hopes of squeezing redundancies from their operations and selling off the roll-up in an IPO. To Cerberus’ frustration, the initial private offering had stalled for reasons having nothing to do with Newtown. (Finding efficiencies and cross-marketing opportunities turned out to be more difficult than the private-equity gurus anticipated.) Now, Cerberus will use the cover of renewed controversy over gun control–and the suddenly shocked sensibilities of the California teachers pension-fund managers (from whom Freedom Group presumably had not been kept secret)–to dump a guns-and-ammo play that wasn’t working out smoothly.

There are personal elements to the move, as well. Stephen Feinberg, who founded Cerberus in 1992, and is an avid hunter and gun enthusiast. His father, Martin Feinberg, lives in Newtown and told Bloomberg News the shooting was “devastating.”

Cerberus’ move and the prospect that the companies within Freedom Group will get sold off individually or in small clumps will return the fractious gun industry to something closer to what it looked like a half-dozen years ago. Smith & Wesson (SWHC) and Sturm Ruger (RGR), the two publicly traded gun makers in the U.S., will stand a little larger in relative terms. Glock, Beretta, and Taurus will continue to import guns from, respectively, Austria, Italy, and Brazil (as well as assemble weapons in their U.S. plants). And overall, gun makers will likely enjoy increased sales over the next six to 12 months, as consumers buy additional pistols and rifles out of fear that their favorites might be more difficult to obtain if Democrats succeed in pushing through new restrictions.

There will be additional post-Newtown reaction from retailers and from Hollywood. Wal-Mart (WMT) is a major gun seller. It accounts for about 13 percent of Freedom Group’s sales, for example. The world’s biggest retail chain will doubtless come under pressure from anti-gun activists to curb its firearms sales, and the image-conscious company may follow its more specialized rival Dick’s.

In the entertainment world, the cable channel TLC has already delayed airing a show called “Best Funeral Ever.” Violent movie trailers might get postponed or edited. The massacre during a showing of The Dark Knight Rises in Aurora (Colo.) in July prompted Warner Bros. to pull the trailer for the forthcoming Gangster Squad, which showed a theater shooting. Later the studio cut the scene entirely.

Whether marketplace behavior will change over the long haul is a different question. Gangster Squad‘s opening was delayed but not cancelled. The film, pitting organized crime killers against police in Depression-era Los Angeles, is now slated to begin in theaters next month, and it will still include plenty of gunplay.

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Japan’s Nikkei outperforms as opposition wins big

LONDON (AP) — Japanese shares outperformed all others Monday amid hopes that the new government will enact fresh stimulus measures to boost the world’s third-largest economy.

Signs that U.S. politicians are inching toward a budget deal helped Wall Street open stronger than earlier predicted and shored up European markets after a bad morning.

The standout index was Japan‘s Nikkei 225, which closed up 0.9 percent at 9,828.88, its highest level since April, after the country’s Liberal Democratic Party swept back into power at weekend elections with a landslide victory.

Party chief Shinzo Abe, who is in line to become prime minister, favors increased spending on public works and setting a 3 percent economic growth target. He’s also expected to lobby for stronger action by the central bank to get Japan out of its deflationary trap.

“Japanese equities rallied today on the back of a resounding victory by Shinzo Abe‘s LDP, giving them a mandate to boost economic growth through more aggressive fiscal and monetary easing,” said Rebecca O’Keeffe, head of investment at Interactive Investor.

Expectations of further stimulus in Japan, despite the country’s sky-high debt levels and doubts over the effectiveness of looser economic policy, further weighed on the yen. The dollar was 0.4 percent higher at $ 83.73 yen.

The yen’s recent weakness is a potential boon to the country’s powerhouse exporters. Automaker Nissan Motor Co. rose 1.8 percent, Sony Corp. climbed 1.4 percent and Panasonic Corp jumped 2.3 percent.

Elsewhere, markets remained largely beholden to developments over the U.S. budget. The concern is whether the White House and Congress will agree a budget deal in time to avoid the “fiscal cliff” of automatic tax increases and spending cuts at the start of next year.

In Europe, the FTSE 100 index of leading British shares was down 0.4 percent at 5,896 while Germany’s DAX fell 0.1 percent to 7,590. The CAC-40 in France was 0.3 percent lower at 3,631.

In the U.S., the Dow Jones industrial average was up 0.5 percent at 13,194 while the broader S&P 500 index rose the same rate to 1,421.

Though the budget measures associated with the “fiscal cliff” would not all be introduced at once and the Republicans have indicated a willingness to increase taxes on households earning over $ 1 million, investors won’t breathe easily until a deal is signed, sealed and delivered.

“Investors have so far remained hopeful that an agreement can be reached in a sufficiently timely manner,” said Nick Bennenbroek, an analyst at Wells Fargo Bank. “However, with a year-end deadline for a deal now looming closer, those budget developments should become increasingly important through the end of December.”

In recent weeks, the dollar had suffered, at least against the euro, due to the U.S. budget fears. On Monday, the currencies were steady, with the euro up 0.1 percent at $ 1.3165.

Oil markets were subdued too, with the price of benchmark New York crude up 27 cents at $ 87 a barrel.

Elsewhere in Asia, China’s shares fared fairly well as its new leaders promised more spending if needed to underpin a wobbly economic recovery. Those hopes helped the Shanghai Composite to rise 0.4 percent to 2,160.34 and the smaller Shenzhen Composite index to end 0.4 percent higher to 819.58.

On Sunday, China’s new Communist Party leaders under party General Secretary Xi Jinping pledged a “proactive fiscal policy” and “prudent monetary policy” in a statement carried by the official Xinhua News Agency. They were references to the willingness to boost spending if needed and keep credit easy so long as inflation stays low.

Elsewhere in Asia, South Korea’s Kospi lost 0.6 percent to 1,983.07 and Hong Kong’s Hang Seng was down 0.4 percent at 22,513.61.

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Cinnabon in Tripoli: Libya Opens Up to Foreign Business

After 42 years, the country formerly known as the Great Socialist People’s Libyan Arab Jamahiriya is getting its first taste of consumer capitalism in an unlikely form: sweet, sticky cinnamon rolls. Cinnabon, the Atlanta-based bakery chain, is at the vanguard of a potential business boom in the North African country, which deposed dictator Muammar Qaddafi last year in a bloody civil war. In July the unit of Focus Brands became the first U.S. franchise to open since the revolution, with a two-level Tripoli outlet. It’s become a popular destination in a city with few diversions for residents.

The shop on Tripoli’s version of Fifth Avenue

Cinnabon’s bet on Libya—it plans to open at least 10 new locations over the next five years—shows the perils and potential of this wealthy new consumer market, which is being eyed by a growing number of foreign companies. Yes, Libya has a rickety electricity grid and few formal property rights. And due to ongoing sectarian violence, it remains a dangerous place. But the country sits atop Africa’s biggest oil reserves, which may generate as much as $ 55 billion for the state oil company this year. That means there are plenty of well-off locals and expats who can afford to pay for a Western-style sweet.

Photo illustration by 731; Photograph by Getty Images

The country is a less incongruous place for Cinnabon than one might expect. Syrupy treats like baklava are beloved in Libya, as in other Arab countries, so local palates are ready-made for the chain, explains Mike Shattuck, president of Focus Brands International. What’s more, in a Muslim country where bars are almost nonexistent, young people need places to hang out. Finally, an influx of investment from Persian Gulf property developers means “down the road there’s no question there will be a big mall culture,” providing the natural habitat for future Cinnabon outlets.

For now the Tripoli store is very much a foreign oddity. Positioned as more upscale than the chain’s food court roots in the U.S., the shop has become a fixture on Gargaresh Road, Libya’s Fifth Avenue, where it attracts an affluent clientele. The prices are First World as well: A cinnamon bun and a regular coffee cost 6.50 dinars, or about $ 5.15, close to the price in the U.S.

The franchise owners, brothers Arief and Ahmed Swaidek, first planned to open Cinnabon in 2008, but bureaucracy delayed completion of the store until January 2011. A splashy grand opening was abandoned when revolution broke out that February. Nonetheless, news of the shop spread quickly after its opening this July.

On a recent evening the store was busy with young customers, about two-thirds of them women, who tend to avoid the traditionally male-dominated coffeehouses. Unlike at most Western restaurants, all of the staff are male. In addition to the chain’s signature pastries, it serves Carvel ice cream (another Focus Brands product), sandwiches, salads, and cakes. An upstairs lounge caters to patrons who want to linger, and the shop stays open until about 11 p.m. to accommodate the local preference for late-night snacking. All that activity can push Libya’s patchy infrastructure to the limit: The utility in Tripoli can’t always cope with two floors of full-blast air conditioning. The franchise relied on a generator to keep things cool during the busy Ramadan season, says store manager Ehab Abdelo-Meged.

Serving Middle Eastern customers isn’t new for Cinnabon, whose portfolio of 900 worldwide locations includes outlets in Kuwait, Jordan, and Egypt. It also has experience operating in less-than-salubrious locales such as Pakistan and El Salvador. Still, Libya presents particular challenges. Security in Tripoli is shaky. In August, Salafi Muslim militants demolished a downtown mosque of the more moderate Sufi sect with bulldozers. Libya has yet to charge anyone with the murders of U.S. Ambassador Chris Stevens and three of his officials, killed when the Benghazi consulate was stormed in September. Kidnappings, including that of the head of Libya’s Olympic Committee in July, are a fact of life. And gunfire can be heard most nights in the capital.

Shattuck points to more mundane concerns, such as sourcing ingredients (the majority are imported from the U.S. on a quarterly basis) and finding a reliable way to pay suppliers in a country that still lacks a modern banking system. “There are a lot of institutional needs still, from our perspective. But we feel things are moving in the right direction,” he says.

Others are optimistic as well. Companies from France Télécom (FTE) to Qatar National Bank (QNRK) are looking to invest in Libya as Prime Minister Ali Zaidan’s new government plans to kick-start asset sales, privatize state companies, and break up monopolies. “I’m 10 times more bullish on Libya than I was at the end of 2010,” says Abdulla Boulsien, a former Merrill Lynch (BAC) investment banker who helps run Tuareg Capital, a Libya-focused private equity firm. So Cinnabon is unlikely to be the sole refuge for Libyans craving an American-style dining experience for long. “It’s a virgin land,” manager Abdelo-Meged says of the country. “Any franchise coming here will be a success.”

The bottom line: Libya, with 6 million citizens and $ 55 billion in state oil revenue this year, is attracting Western investments like Tripoli’s new Cinnabon cafe.

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UBS faces $1.6 billion fine over Libor rigging: paper

ZURICH (Reuters) – UBS faces a fine of 1.5 billion Swiss francs ($ 1.63 billion) to settle interest rate rigging charges, a Swiss newspaper reported on Saturday.

Citing unnamed sources, Tages-Anzeiger daily said the bank would admit 36 traders around the globe manipulated yen Libor between 2005 and 2010. A UBS spokesman declined to comment.

People familiar with the matter told Reuters on Friday UBS could reach a $ 1-billion-plus settlement and admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euroyen contracts.

Between 25 and 30 people have left UBS over the matter, the sources said. The Swiss bank had hoped for a softer touch from regulators by cooperating in industry-wide probes and was surprised by the size of the expected settlement, they added.

A 1.5 billion franc settlement would be the biggest ever paid by the bank, recovering from a $ 2.3-billion trading fraud by London-based trader Kweku Adoboli for which it was fined 30 million pounds ($ 48.36 million) last month.

A settlement would make UBS the second major bank to be sanctioned for its role in the Libor scandal. Britain’s Barclays paid a $ 450 million fine in June.

Libor is the rate used as a benchmark for pricing trillions of dollars worth of financial instruments and contracts around the globe. Tiny shifts in the rate, compiled from daily polls of bankers, could benefit dealers in complex products.

HEADING FOR LOSS

Tages-Anzeiger said the fine, together with restructuring charges of 500 million francs from plans to cut 10,000 staff as UBS winds down its fixed income business, would probably push the bank to a fourth-quarter loss.

UBS had already said costs related to the investment banking overhaul would lead to a fourth-quarter and full-year loss after it posted a third-quarter net loss of 2.172 billion francs. It is due to publish full-year results on February 5.

By admitting to a charge against its Japanese subsidiary, UBS would stop short of admitting wrongdoing at a group level, which could be fatal for a bank as it could lose its license.

Chairman Axel Weber, who joined UBS this year after stepping down as head of the German central bank, has been on a whirlwind diplomatic tour over the probe, the Tages-Anzeiger reported.

Swiss newspapers noted that Mark Branson, now responsible for overseeing big banks for Swiss financial markets regulator Finma, was chief executive of UBS Japan at the time of the alleged rate rigging.

A Finma spokesman said Branson had removed himself from Finma’s investigation into Libor to avoid any appearance of conflict of interest but declined to comment further.

In 2009, UBS paid $ 780 million to settle a messy U.S. investigation into tax evasion by admitting it had helped wealthy Americans evade and cheat on their taxes. ($ 1 = 0.9218 Swiss francs) ($ 1 = 0.6204 British pounds)

(Reporting by Emma Thomasson; editing by Jason Webb)

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Wall Street dips at open on “cliff” overhang

NEW YORK (Reuters) – Stocks were little changed on Friday, with the Nasdaq weighed by a 3-percent drop in shares of tech giant Apple, amid investor worries about a lack of progress by politicians in ongoing fiscal negotiations.

Apple was down 2.8 percent at $ 515.11 as UBS cut its price target to $ 700 from $ 780. The stock has tumbled in recent months for a variety of reasons, including investors locking in profits ahead of scheduled capital-gains increases for next year.

President Barack Obama and House of Representatives Speaker John Boehner held a “frank” meeting Thursday to try to break an impasse in negotiations over the “fiscal cliff,” tax hikes and spending cuts set to kick in early in 2013.

“The uncertainty that (the fiscal talks) is creating is basically holding the markets hostage in the short term,” said Andres Garcia-Amaya, global market strategist at J.P. Morgan Funds, in New York.

Frustration has mounted over the lack of progress in the discussions, with market participants’ worries reflected in a 0.6 percent drop in the S&P 500 on Thursday. Investors are concerned that going over the cliff could tip the economy back into recession. While a deal is expected to ultimately be reached, a drawn-out debate – like the one seen over 2011′s debt ceiling – can erode confidence.

Still, expectations of an eventual agreement have helped the S&P 500 bounce back over the last month, and on Wednesday, the index hit its highest intraday level since late October. For the year, the S&P has advanced more than 12 percent.

“For the end of this year, I wouldn’t expect a lot of big decisions by investors,” Garcia-Amaya said. “It’s been a fairly good year for equities and for that reason a lot of people don’t want to be a hero going into the end of the year.”

The Dow Jones industrial average <.dji> edged up 11.05 points, or 0.08 percent, at 13,181.77. The Standard & Poor’s 500 Index <.spx> slipped 2.49 points, or 0.18 percent, to 1,416.96. The Nasdaq Composite Index <.ixic> lost 12.62 points, or 0.42 percent, to 2,979.54.</.ixic></.spx></.dji>

Best Buy Co Inc slid more than 15 percent to $ 11.90 after it agreed to extend the deadline for the company’s founder to make bid.

Consumer prices fell in November for the first time in six months, indicating U.S. inflation pressures were muted. A separate report showed manufacturing grew at its swiftest pace in eight months in December.

Meanwhile, data out of China was encouraging for its key trading partners, including the U.S., and for the prospects for global growth. It showed manufacturing in the world’s second-largest economy grew at its fastest pace in 14 months in December.

(Editing by Bernadette Baum)

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