It was another relatively quiet week for stock markets last week as the Dow, S&P 500 and FTSE all finished relatively unchanged over the trading week. UK banks were under pressure yet again as the tide of bad news kept rising. Reports that half a million people will be in arrears on their home loans, came on top of MPC BoE deputy governor Bean’s comments, that economic conditions were so bad that another bank bailout could be on the cards. Considering the fact that there are only two major independent UK banks left, traders don’t have to search too hard to locate where the next big bust might be. Barclays has already secured (expensive) funding from the Middle East, leaving HSBC at the centre of intense speculation today.
HSBC was perceived as being at arms length to its peers until recently because of its greater exposure to the Asian Market. However, a combination of China’s bubble bursting and large exposure to the Madoff scam has quickly reversed sentiment in the global banking giant. There are fears that it too will need to raise funds, slash its dividend or both.
Oil prices hardly helped the FTSE or energy stocks such as BP and Shell. After some false rallies, the oil bear market remains well and truly in place, with crude oil prices closing the week at $42.36. According to Bespoke Investments, at -76.1% in 5 months, oil’s fall, like the drop in The Baltic Dry Shipping Index, is one of the most extreme bubble bursts in history. According to WTRG Economics, since 1970 the average price of oil historically has been around $30 a barrel. As amazing as it sounds, $30 oil could therefore be seen as a return to normal after the madness of the last few years.
Global financial tectonic plates shifted further last week on the currency markets. After todays UK employment figures and the release of the minutes from the last MPC meeting, the Euro smashed the pound to move within 5% of parity at one stage. If the momentum built up over the last couple of months is anything to go by, the pound could be less than 30 days away from being on level terms with the Euro. If you are invested in Europe this is great news – but for expats paid in GBP it is starting the hurt!
The pound was actually relatively unchanged against the dollar over the week; it is the euro that was tearing away today. The BundesBank block and ECB president Trichet are sticking rigidly to their tight monetary policy, and this is having a direct impact on demand for the European single currency. Recently Trichet was quoted as saying that the current economic crisis shouldn’t lead to the breaking of fiscal rules. With Eurozone members such as Germany and Greece at opposite ends of a very fierce argument, tensions are running high within the European single currency region. Credit default swaps for Germany are still one of the lowest of all Western nations. By contrast, countries clamouring for monetary easing such as Greece and Italy, have seen the cost of insuring against a default of sovereign wealth bonds soar through the roof. Sovereign CDS levels are not a perfect measure of the risk of a country going bankrupt, but they do at least serve as a useful barometer. Although the euro is running hot, the underlying tensions between member nations cannot be ignored.
This weeks calendar is of course shortened with the festive holidays, but there is still room for some upper tier economic announcements next week. On Tuesday we have the UK current account figures, followed by US new and existing home sales in the afternoon. Wednesday brings US core durable goods orders, and unemployment claims, as well as a raft of middle tier announcements.
Finally as this is the last weekly post before the holidays, may I take this opportunity to wish all of you a very Happy Christmas and peaceful New Year. Next year promises to be a very challenging one, both for traders and investors alike, so I hope in some small way this blog and my other sites will help to provide a balanced view of the markets moving into next year – all best wishes Anna
