Wednesday, June 23, 2010

British Airways merger 'back on track'

BRITISH Airways has said it has agreed a recovery plan for its underfunded pension schemes in a move which paves the way for its merger with Spanish rival Iberia.

The embattled airline said its agreement with pension trustees would avoid closure of the two final salary company pension schemes – which together have nearly 100,000 members.

It aims to pay £330m a year, rising in line with inflation, until 2023 and 2026 for the two schemes to plug a gaping £3.7bn deficit.

But members will have to either pay more to maintain the same benefits, or see their pension pots reduce.

BA, which has around 700 staff in the North East, will submit the plans to the Pensions Regulator by the end of June and Iberia now has three months to consider the pensions deal.

The pension recovery programme had been a major sticking point in the Iberia merger and Iberia still has the option to call off the tie-up if it does not agree with the arrangement.

BA struck an agreement in March with trade unions on the pension changes, which will see members accept a reduction in benefits.

However, those in the larger of the two schemes – the 68,800-strong New Airways Pension Scheme (Naps) – can pay 4.5% more in contributions to maintain existing benefits.

BA chief financial officer Keith Williams said: “The trustees understand that the airline is unable to increase its contributions in the current financial climate but we have agreed a recovery plan that avoids closing the pension schemes, gives Naps members choice over their future pension accruals, and increases the prudence of the assumptions employed in managing the scheme.”

The Naps scheme has a deficit of around £2.7bn, while the Airways Pension Scheme (Aps) – with around 31,000 members – is some £1bn in the red. They both closed to new members years ago – Naps shut in 2003 and Aps in 1984. But they have been under threat amid mounting funding pressure from falling stock markets and increasing liabilities as members live longer.

An Iberia spokesman said BA’s pension agreement was “a positive step forward in the merger process. The next step will be Iberia’s decision on the pension recovery plan.”

Thursday, June 3, 2010

US dollar gains as the Euro wanes

The past two days the markets have been looking to today’s US employment report for clues as to the next direction these markets will likely take. With that we have seen the return of a certain amount of risk appetite with respect to equity markets, with both the Dow and S&P500 just failing to break above their respective 200 day moving averages yesterday.

Positive US retail sales data, (up 2.5%) and the solid ADP report helped boost this positive mood amongst investors yesterday.

This appetite for risk however has been less resilient with respect to currencies, with the US dollar continuing to remain fairly buoyant.

US non farm payrolls are expected to come in at around 525k for May, which would be the biggest increase since 1983, so any disappointment here, could well provoke a sharp reaction, considering the ambient bullishness of some investors about these numbers.
The reason the forecast is expected to be so high is due to census hiring boosting the numbers.

The US dollar continues to attract safe-haven buying on the back of continued concern in the euro zone about sovereign debt and credit market liquidity with European banks remaining extremely nervous with respect to their lending between each other. European Central Bank data suggests that these European banks have parked just over €320bn in the overnight deposit facility in preference to lending to other banks at higher rates.
This continued reliance on the ECB coupled with the news that Hungary was at risk of a Greek like crisis, has continued to dampen sentiment and increase the likelihood that the European Central Bank will need to hasten further liquidity measures ahead of, or at its rate meeting, next week.
Economic data hasn’t been of any help either as Euro zone retail sales released yesterday showed a slump by 1.2% in April, against an expectation of a small rise of 0.1%.
With the market focus on the US employment report it should also be noted that Euro zone Q1 GDP is due out today as well with an expectation of a 0.2% rise.

The dollar has also been helped by various comments by Kansas City Fed hawk Thomas Hoenig who suggested that the Fed Funds rate may have to rise to 1% by the end of the summer and by Dallas Fed President Richard Fisher, who suggested that the time for tightening monetary policy was getting closer.

The election of monetary dove Naoto Kan as Japanese Prime Minister has also served to further weaken the yen as he is reputed to be an advocate of further monetary easing measures in order to stimulate the Japanese economy.

EURUSD – the single currency continues to find each rally off its recent lows shallower with each passing attempt. Yesterday we stalled at 1.2330, the day before 1.2350 and last Friday the rally stalled at 1.2455.
As said before the 1.2135 level remains the proverbial line in the sand, and we need a daily close below here to set off a move towards the 1.1700 level, and 2005 lows.
There is minor resistance around the 1.2350 area but to break higher significantly we would need to see a break above the 1.2450/60 level for a move towards 1.2700 to unfold.

GBPUSD – the pound has so far been unable to re-test the 1.4780 level of earlier this week. While we stay above trend line support which is now at 1.4570, the odds continue to favour another test of the 1.4780 level, and possibly even 1.4850. A break below 1.4535/45 would re-target the lows around the 1.4430/40 area.
Key support level remains around the 1.4230/50 level and remains the key barrier to any further sterling declines in the short term. The 1.4000 level remains a key support on a monthly close.

EURGBP - the Euro continues to find rallies difficult to sustain failing just short of the breakout level that was the previous 18 month lows. The next target remains the 0.8250 level on the way towards the 0.8170 level.
The 0.8170 level is a 50% retracement of the up move from the 2007 lows at 0.6537 to the 2008 highs at 0.9801.

USDJPY – the election of Naoto Kan as Japanese Prime Minister this morning continues to weigh on the yen, falling back yesterday from the 92.80 level, which remains the next obstacle for a move above 93.00 towards the 93.30 area. With short term indicators looking a little overbought we could see a slip back towards the 91.45 area on a break below the support at the 92.20/30 area.
Recent range support remains around the 90.70/80 area.