19 December 2009 - Global Markets Review

Good Morning Ladies & Gentlemen,

From someone that is passionate about cars and not-so-passionate about the US, I have to mention this week the sad demise of a certain car brand.

It was, said Maud Olofsson, Swedish enterprise minister, "bad news at the worst possible time".

Many in Sweden were stunned by General Motors' decision to break off negotiations over the sale of Saab Automobile, sounding the death knell for one of the country's most cherished brands.

"GM could've done much more to help Saab," Ms Olofsson told reporters.

The US car group had been trying to find a buyer for its ailing Swedish unit since the start of the year as part of broader efforts to offload loss-making units and narrow its focus on core brands.

A provisional sale was agreed with Koenigsegg Automotive, the Swedish maker of high-performance sports cars, backed by China's Beijing Automotive Industry Holding (BAIC), but the deal fell apart last month.

Spyker Cars, another niche sports car maker based in the Netherlands and part owned by Russia's Convers banking group, stepped into the breach and GM officials expressed confidence earlier this week that a deal would be done before the group's self-imposed year-end deadline.

But several people involved in negotiations said there were doubts over a €400m ($572m) loan from the European Investment Bank that Saab needed to stay afloat and GM said on Friday that time had run out to save the company.

"We discovered this week that there were issues that could not be resolved and no amount of extra time could overcome that," said John Smith, GM's chief negotiator.

GM will try to sell off any parts of Saab it can find buyers for and has already struck a deal with BAIC involving production equipment and intellectual property related to two older models. But Mr Smith said the Chinese company had not expressed interest in buying further assets.

The "orderly wind-down" promised by GM will bring an end to six decades of car manufacturing by Saab, during which the company developed a reputation for idiosyncratic design and innovative technology inspired by the aeronautic heritage of its former parent group.

But Saab failed to translate the passion of its small but loyal customer base into long-term commercial success. GM bought 50% of the company in 1990 and full control in 2000, hoping to make Saab its flagship premium brand. But the Swedish unit broke even only once under US ownership.

Less than 100,000 Saab vehicles were sold last year, about 1% of total global car sales and down from 133,000 two years earlier. Volumes have plummeted further this year amid uncertainty over the company's future.

Saab loyalists blame GM for neglecting the company, pointing to an ageing product line-up that has not had a new model for eight years. An updated version of its 9-5 model was due for launch in 2010 but now looks unlikely to reach the showrooms.

Closure of Saab will be felt hardest in Trollhattan, the town of 45,000 in south-west Sweden where the company employs 3,400 people at its main production plant. But the pain will spread across the country to the many suppliers and dealers that depend on Saab.

The Swedish government offered credit guarantees to help any new owner keep Saab afloat and people involved in negotiations said Stockholm was supportive of the Spyker bid. But the centre-right administration of Fredrik Reinfeldt, prime minister, has taken a tougher approach to the car industry than some countries, and opposition parties - gearing up for next year's general election - on Friday accused the government of not doing enough.

Ms Olofsson ruled out government intervention to save Saab, saying:

"We don't have the expertise and we don't have the money".

The US had both of those in abundance - was Saab GM's sacrificial lamb?

Elsewhere, this week has seen focus settle on Japan.

The Bank of Japan vowed on Friday that it would "not tolerate" deflation, a statement interpreted as a signal from the bank to persuade markets that it would keep interest rates low for an extended period.

The central bank's statement follows political pressure from the recently elected government, concerned over a lack of growth in the economy and declining tax revenues, for BoJ action on falling prices.

"It is sometimes said that the Bank of Japan accepts a negative range or accepts deflation ... and if that mistake exists it is better to remove it, but our standpoint has not changed," said Masaaki Shirakawa, governor of the BoJ.

The bank left interest rates unchanged at 0.1% on Friday.

Economists said any decision by the bank to keep rates low for an extended period would be aimed at weakening the Yen and lowering borrowing costs, both measures that would assist Japanese exporters.

This means to me that the implicit message is that the BOJ is going to keep 0.1% interest rates for as long as three years.

Despite the central bank's strong words, the BoJ's own policy board expects deflation to persist both next year and the year after, leading some analysts to conclude that its statement was more a response to political and public pressure than a genuine policy change.

Japan's consumer prices index turned negative on a year-on-year basis in February and in October was down by 2.5% on the previous year .

The BoJ is saying that they will not tolerate deflation but they are explicitly predicting that it will persist in the fiscal years for 2010 and 2011, which looks like tolerance to me.

The BoJ's previous "understanding" of medium to long-term price stability - in essence its self-imposed objective on inflation - was that the year-on-year change in the consumer price index should be "in the range approximately between 0 and 2%". It has now changed that to "a positive range of 2% or lower".

It is the first time the BoJ has said that it will only accept rising prices.

On December 3, the BoJ held an unscheduled policy board meeting at which it agreed to offer Y10,000bn ($111.1bn, €77.2bn, £68.6bn) in loans to drive down three-month interest rates to 0.1%.

That had seemed to quieten the political complaints, although economists said that the measure would have little effect because there is limited demand for loans from Japanese companies and consumers.

The BoJ has so far avoided more substantial "quantitative easing", such as increasing its outright purchases of long-term government bonds.

Officials point to the danger of being seen to fund the government's fiscal deficit and also question the success of the policy when it was used between 2001 and 2006.

So let's take a look at the numbers on the boards this week:

US Markets

How the US did this week .....

US Summary US stocks rose, trimming a weekly loss for the Standard & Poor's 500 Index, after better-than- estimated profit at Oracle and Research In Motion Ltd. boosted technology companies.