BA (BAIRY.PK), the flagship British Carrier, and Iberia (IBRLF.PK), the Spanish airline, have agreed to a merger of equals. The new group will become the third largest airline globally after KLM / Air France and Lufthansa (DLAKY.PK) and will operate 419 aircraft to 205 destinations.

In a statement released on Friday, BA predicts the combined group would enjoy cost synergies of around Euro 400 million a year, with five years of the venture compared to an one-off merger cost of Euro 350m.

WTO Warns Against the Rise of Protectionist Policies

The World Trade Organization predicts unemployment across industrialized nations will increase for at least one more year, possibly two. The WTO forecast, endorsed by most economists, warns of the social and political implications of a two-speed recovery in which industrial corporations and investment banks recover swiftly and prosper thanks to government subsidies and loose monetary policies whilst the working class within industrialized nations continues to suffer either unemployment or lower incomes.

Unemployment has now passed 10%. You can add another 7.5% on to that figure if you include Americans who have given up looking for work. But risky assets are still rallying, though the volatility has picked up in recent sessions.

So have equity markets gone too far too quickly? Of course we will only know retrospectively, in around 18 months after the 08/09 recessionary dust has settled.

US Rates on Hold into 2010

The dollar weakened across the board following the announcement from the Federal Reserve that it is to keep rates at close-to-zero into 2010.

Background to the Asset Protection Scheme

The Asset Protection Scheme (APS) was announced in January to remove uncertainty about the value of UK banks' past investments and bad debt exposure. The APS was also designed to allow banks to rebuild and restructure their operations to increase lending in the economy to both businesses and consumers.

BG Group (BRGXF.PK) continued the Q3 energy sector theme articulated by both BP and Royal Dutch Shell (RDS.A).

Total operating profit including share of pre-tax operating results from joint ventures and associates fell 38% from £1.38bn (Q3/08) to £0.856bn (Q3/09). Earnings per share, excluding disposals, certain re-measurements and impairments, fell 39% from 23.2p to 14.1p over the same time scale.

Royal Dutch Shell (RDS.A)

Chart Source: StockCharts

US Exits Recession

The US economy bounced back into growth during the 3rd quarter. The Commerce Department’s preliminary report indicated annualized growth of 3.5% surpassing the consensus forecast of a 3.3% annualized expansion. Data for the prior quarter indicated a 0.7% contraction.

Democracy is the system of one person one vote. Business is one dollar one vote. It would take a vivid imagination to think that the perfect scenario for a business, securing abnormal profits or a monopoly, is appropriate in a fair and democratic society. Likewise, the managers and shareholders of corporations need to be offered a reward for their time, skills and investment, otherwise there would be no motivation to take risks or to employ workers. A fair equilibrium is the logical aim.

But the two, democracy and business, co-exist uncomfortably as there is a finite amount of wealth in the economy and that wealth needs to be shared equitably between two of the three participants in any economy: individuals, (workers, consumers and taxpayers) and businesses. The third participant is the government which should not pursue wealth or power for its own benefit but should act as the moderator and facilitator, creating a scenario which allows the two other parties to prosper fairly, in correct proportion and in line with the law. To achieve this fair scenario, key governmental decision makers should not have personal interests more aligned with one group, business, than the other, society.

If more evidence was needed that the Bank of England’s quantitative easing program was wholly ineffective in its efforts to generate real economic growth, it arrived by the truck load this week on confirmation that Q3 GDP contracted and the UK economy is still officially in recession.

In fact it would take a vivid imagination or a deep misunderstanding of financial markets to think that the BoE’s purchase of £175bn worth of government bonds, bought with printed money, would do anything economically productive at all.

Previous session overview

The dollar slipped a tad against the yen in Asia Wednesday due to profit-taking, but it may rise briefly later in the day as Japanese fund players are expected to launch their buying for new trust funds.

Today's financial and economic tribulations were a long time in the making. Many people ask, "Why didn't someone see it coming?"

But a New York Times bestselling book did see it coming. More than 100,000 people read it in time to protect their wealth.

Sainsbury (JSAIY.PK), one of the big four UK supermarkets, continues to fight ably for the top end of the retail marketplace. In the 16 weeks to 3rd October total sales rose 3.2% (6.8% excluding fuel). Like for like sales rose 1.3% (4.6% excluding fuel).

The difference between total and like for like sales is partly attributable to the company’s policy of building a convenience store network which saw an additional 12 stores open in the quarter more or less in line with the full year target of 50 new convenience stores. Of more significance is the full-size store expansion plan which resulted in 19 more supermarkets including 14 Somerfield and Co-operative stores acquired early in 2009.

The Institute for Supply Management's (ISM) services index rose in September to 50.9, beating the consensus forecast of 50. A figure above 50 implies the sector is growing. A figure under 50 implies contraction. The index bottomed late in 2008, below 40, and has made a steady recovery since. The September data came in at a 16-month high progressing from August’s 48.4.

The better than expected service sector news contradicts recent payrolls data which has continued to disappoint. US unemployment now stands at 9.8%.

Australia has become the first industrialized nation to commence the journey back to a normal monetary policy stance. The Reserve Bank of Australia surprised some analysts with its decision to increase rates by 0.25% to 3.25%. The modest rate hike is the first increase in 18 months and follows the emergency monetary easing executed late in 2008/early 2009 in response to the financial crisis. Currency analysts immediately revised their end of year targets, predicting the end of 2009 rate would be 3.5% and end of 2010 rate between 4.5% and 5.0%. A rate around 5% would still represent a relatively loose monetary policy compared to the 7.25% businesses and consumers suffered at the peak of the last economic cycle.

Extracts from the official RBA announcement, below, highlight the factors behind the rate decision; a stronger than predicted economic recovery and easing deflationary pressures.

Gold is a unique creature in the investment world. It appreciated into the recession, like the US dollar, as investors sought a safe haven from market turmoil. Now as the global economy exits recession, gold is appreciating again. This latest rally is inversely related to the dollar which is depreciating on US budget deficit concerns, firm risk appetite, the renewed chase for yield and predictions that the current Federal Reserve stimulus package will prompt inflationary pressures during 2010 and beyond.

This scenario of gold popularity and dollar apathy has helped push the precious metal’s price to a new record, above $1,050 per ounce.

In a recent interview, David Miles, possibly the most cerebral and worldly member of the Monetary Policy Committee sat on the forex fence and predicted that it would not be easy to predict the direction of sterling during forthcoming months.

The follow-up question, also regarding sterling, cemented the absolute certainty that the economic future was unknown in the eyes of the BoE.

The International Monetary Fund doesn’t concern itself with the timing of political conferences in the UK, and why should it? If the IMF was to be time-sensitive to the Labour government’s every recycled sound-bite the Fund would never be able to release its excellent reports which handily detail British banking sector greed, a vacuum of sensible fiscal policies and regulatory incompetence.

So whilst Gordon Brown and his cabinet articulated their vision for another 5 years of Labour government, the IMF unleashed its bi-annual Global Financial Stability report which singled out the UK economy as being at particular risk of continued fiscal imbalance into 2010.

Thanks in no small part to increased government spending US Q2 GDP data has been revised for the better. The economy is now reported to have shrunk by only 0.7% in the 3 months to end of June 2009. Last month the US Commerce Department estimated a 1.0% contraction.

Some three months after Q2 closed, commentators are now awaiting preliminary Q3 data and the consensus suggests a return to growth for the US economy is highly probable. What is less certain is the rate and sustainability of the recovery as ongoing economic data remains mixed and can still fall short of expectations as this week’s news again proved.