Jeremy Warner's Outlook: World currency system at breaking point
Tesco is a victim of its own success; Ashley thwarts Nike's Umbro bid
Currencies were bouncing around all over the place yesterday as traders placed their bets on what the Fed might do to US interest rates after today's meeting of the Open Markets Committee. For sterling, there is an equally important meeting next week of the Bank of England's Monetary Policy Committee.
A speech by Kate Barker, one of the MPC's "floating" voters, seemed to suggest that, contrary to expectations, the Bank was quite happy to leave British rates on hold for now. Similar speculation surrounds the Fed decision, with policy-makers said to be unconvinced by the need for a further, immediate, cut in interest rates. This despite more grim housing market data yesterday.
Yet whatever the opportunity for interest rate arbitrage, the big picture in currency markets remains the same as it has been for some while now, with the dollar in apparent freefall and other developed market currencies strongly appreciating. These adjustments are to some extent justified as a natural reaction to the problems of the US economy, with its humongous twin budget and current-account deficits and fast-slowing growth rate.
Yet there is another dimension to all this, which is proving very uncomfortable for Europeans as their currencies continue to appreciate against the dollar. A number of currencies remain effectively pegged to the greenback, creating major distortions in the usually corrective pricing mechanisms of the free-market system.
The most important of these are the Chinese renminbi, and to a lesser extent the currencies of the oil-rich Gulf states. Until quite recently, these pegs hardly mattered. The Chinese economy was too small to be of significance, while the fact that oil is priced in dollars made it natural for the Gulf states to have currencies that mirrored the behaviour of the dollar.
The situation today is completely different. China is now one of the world's biggest economies, and in the next 20 years is destined to eclipse even the US. The high oil price has meanwhile hugely swollen capital flows coming out of the Middle East. America's biggest trading partners are these countries, yet there is no effective currency adjustment mechanism for addressing the imbalances that have built up between them.
The result is that those currencies that do obey the laws of the free market are disproportionately punished with exceptional appreciation. To put it another way, it is the Europeans who are being forced to pay the price of America's burgeoning trade deficit with China. To make matters worse, China doesn't even sit at the high tables of the international organisations that are meant to address these issues – the G7 and IMF. It suits China to opt out. This makes their deliberations and pronouncements increasingly irrelevant.
The global currency system has become as much of a mess as it was when the Bretton Woods Accord of fixed exchange rates began to break down from the late 1960s onwards, perhaps worse still. The late Herb Stein, President Nixon's economic adviser, once remarked that if something cannot go on forever, it will stop. But as ever, the question about the present bipartite system of exchange rates is when?
Even within China, the pressures to allow a faster rate of appreciation against the greenback are becoming intense. Interest rates are rising in China, but falling in the US, making defence of present exchange rates tougher still. As it is, the Chinese authorities face massive portfolio losses on the dollar assets they have bought in defence of the trade surplus with the US. China wants to move at its own pace, with a gentle deflation of present pressures. The danger for the world economy is of a much more explosive resolution.
Tesco is a victim of its own success
Today's other big story for investors is the long-awaited publication of the Competition Commission's report into supermarkets. There's no point in me trying to guess what's in it at this late stage. By the time many of you read this column, it will already have been published. The lorry load of apparently authoritative stories we've seen in recent weeks claiming to reveal its content seem to me to be based on little more than well-informed speculation. I'll hold my counsel until I see the real thing.
Yet a couple of points seem worth making in the meantime. What started out as an inquiry focused on the interests of the little guy in the convenience store sector has, in the course of the investigation, turned into a piece of undisguised Tesco-bashing. The commission will of course deny this. Any plan of action for curtailing the power of Tesco will be presented as even-handed regulation applying indiscriminately to all supermarket groups.
Yet because Tesco is by far the largest, and also has the greatest potential for expansion thanks to the size of its land bank, any restrictions are bound to affect Tesco more than the others. Indeed, rival supermarket groups have tried to use the commission to paint Tesco as the real villain of the piece and thereby gain competitive advantage.
This in itself makes me highly suspicious of the commission's musings. Complaining to regulators in the hope of restricting more successful rivals or gaining special regulatory privileges is what business losers do. This is not what competition policy is for. Tying Tesco up in knots so that it cannot compete might suit Asda and Sainsbury's well, but it hardly helps the consumer.
Tesco's 30 per cent share of the UK groceries market might seem high enough for any company, even when it has been hard won through fair means before the jury of consumer choice, yet the same is not true of non-foods, where the bulk of Tesco's UK expansion drive is now focused. Here the company's market share is much lower. The public benefit that derives from Tesco's expansion into these markets in terms of lower prices and more choice is hard to argue with. To punish Tesco for its own success seems harsh, and unlikely to be in the best interests of consumers.
Yet it is also the way of the world, and there may be a natural limit to public tolerance of a company's size and power, which Tesco is already close to. Consumers are ambivalent about Tesco. They on the whole like its prices and retail proposition, but they resent its growing presence.
If Tesco's further UK expansion is indeed to be restricted by Competition Commission diktat, then the company has neatly prepared for it through its international rollout. Not many people know this, but Tesco International would, if it were a standalone company, already be Britain's third-largest retailer by revenue after Tesco as is and Marks & Spencer. When you can progress no further at home, the only option is to go overseas. Sir Terry Leahy, the Tesco chief executive, seems to be pursuing these alternatives with the same success as he has achieved at home.
Ashley thwarts Nike's Umbro bid
Mike "stuff the City" Ashley has upped his stake in Umbro to a level that appears to block Nike's proposed takeover bid. It is only possible to speculate on what his motives might be, for, as ever with Mr Ashley, he's not saying.
It seems quite a clever move. The Umbro acquisition would make Nike the dominant football apparel provider in the world, with the opportunity severely to squeeze retailers such as Mr Ashley's Sports Direct.
At the very least, Mr Ashley has put himself in a position where he can force Nike to pay through the nose for the prize. Alternatively, he could bid himself. Or he could just leave fallow and thereby increase his bargaining power with key suppliers.
Sports Direct is fundamentally a decent company with good prospects, but it has been clobbered by Mr Ashley's cavalier attitude to corporate governance. A bruiser if ever there was one, Mr Ashley positively revels in his bad-guy image. He's been heard quite publicly to say he doesn't give a stuff about his outside shareholders. There are, in any case, no independent directors left to protect their interests. Yet as is frequently the case with such characters, he's also a canny deal-maker. What you see is what you get.