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Investors Hope for Continued U.S. Market Rally; British Government Takes Majority Stake in RBS

1 December 2008 - Features - Editor

With Black Friday shopping turning out more lucrative than the majority of analysts, investors and retailers had anticipated in the current economic downturn, Wall Street players are facing the new trading week with hope that last week’s rally on U.S. stock markets will continue. The success of Black Friday is largely spurred on by the big discounts and special prices offered by retailers to start off the shopping season, and the better than expected turnout of customers has been a source of encouragement to retailers and investors alike.

However, while shoppers may have turned out in great numbers, the actual dollar spend at retailers will be made known through reports from the biggest U.S. retail stores by Thursday this week. These results, together with other data, such as November’s payroll report, will serve as an indicator how much consumer spending has been curtailed by the economic crisis and how this is affecting retailers. Bearing in mind that consumer spending accounts for over two-thirds of the U.S. economy, Black Friday and Thanksgiving weekend sales data is crucial to Wall Street, and any spending that outstrips the grim forecasts is likely to boost markets.

The announcement of the economic team for the Obama administration did much to calm jittery investors, as did the rescue of Citigroup. These and other measures being put into place by the federal government are an encouraging indication of its commitment to take whatever steps necessary to set the economy back on track. Investors will also be focusing on the beige book released by the Federal Reserve, assessing business conditions across the country and for all market sectors.

Meanwhile, across the Atlantic, the Royal Bank of Scotland Group (RBS) announced Friday that the British government is set to buy an almost 60 percent stake in the bank, thereby taking majority control. This action has become necessary after the government-initiated strategy of recapitalizing the bank through the sale of shares to investors failed, with only 0.2 percent of shares on offer being sold. In terms of the £20 billion plan, the British government agreed to buy the balance of shares not purchased by investors, leaving them liable for nearly all of the shares, which will be split between ordinary shares and preference shares. While giving the British Treasure 57.9 percent ownership of RBS, it represents a paper loss on its investment of approximately £5 billion. However, in light of the fact that while preference shares are outstanding, RBS will not be permitted to pay any dividends to ordinary shareholders, it will be one of the bank’s top priorities to buy back preference shares as soon as possible. This latest deal forms part of the British government’s strategy to recapitalize banks in Britain which includes negotiations with Lloyds TSB Group and HBOS.

 


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