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Market Comment 1st Feb 2012

RBS remains in the headlines as “Mr” Fred Goodwin is stripped of his knighthood. 

It comes as little surprise and really probably could have come sooner with the benefit of hindsight. His name will forever be associated with the banking crisis and as the person who should shoulder the most blame for what has happened subsequently after building the bank into an institution that held assets twice the size of the UK economy.  A lot has changed since and banks have changed as regulations have become tighter and capital requirements stricter.  The world of banking has most definitely changed but unfortunately lending to the wider economy continues to be stifled.  Whilst they continue to repair their balance sheets much of the money remains either locked in their vaults or deposited with the ECB at a time when businesses are crying out for cash.

The results from the UK banks are due towards the end of this month so it will be interesting to see firstly whether RBS does make a profit and secondly how the overall sector is doing.  The 2011 numbers are on the whole expected to be down on 2010, but this doesn’t seem to be stopping big bonuses being dished out.  Although there are many headline grabbing numbers overall bonuses for bankers is down and nowadays they are paid in shares so it should theoretically be in their interests to work for the long term improvement and profitability of the bank.  A more profitable bank should theoretically mean more lending to the economy, but as said this is the theory.  At the moment the reality is very different, but the optimism in equity markets could brush off on sentiment and confidence allowing banks to open their vaults and get lending going again.  This will be critical to helping the economy to avoid flat to negative growth this year.

We’ve seen so far this week a little bounce in confidence across the eurozone and the UK, but this may be just a reflection of the festive period and general New Year optimism. Whether this can be maintained is very much up to whether inflation does carry on downwards and growth doesn’t flat line.

As February gets underway the market seems to be carrying on where it left off January getting a little bit of a boost from some Chinese manufacturing numbers overnight so at the time of writing the FTSE is back above the 5700 level.  The trading ranges so far this year have been rather narrow, but overall equity markets have had one of their best starts to a New Year and this bodes well for the remainder of the year.  Clients don’t seem to agree as they continue to oppose any strength in particular the US indices which have been marching higher.

There’s a bit of economic data out today that we should all pay attention to.  UK manufacturing PMI numbers are expected to climb back above the 50 level which is meant to indicate expansion for the sector, so this could be good news for the bulls and in particular sterling.  Then at lunch time the prelude to Friday’s non-farm payroll comes in the form of the private ADP payrolls from the US which are to climb almost 200k.  Later this afternoon there are further US numbers in the form of manufacturing and construction data.

The recent strength in the euro has come to a standstill for now, in line with the equity markets that seem to have had their palpable strength put on pause.  The rally so far this year hasn’t been helped by the continuing discussions on Greece’s debt as day after day we are told “we’re near an agreement”.  For now the euro is holding onto the 1.3000 level against the dollar as EUR/USD trades at 1.3060 at the time of writing.  Support is seen at 1.3045 and 1.3010 with resistance at 1.3210/30.

Gold continues to hover around its recent highs and this morning is at 1738.  Underlying strength in the precious metal seems to be coming from both angles with the price getting support from both increased risk appetite as well as risk aversion when the euro gives back a little bit.  The bulls will be targeting 1748 and 1760 meanwhile support is seen at 1703 and 1680.

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Market Comment 1st Feb 2012

RBS remains in the headlines as “Mr” Fred Goodwin is stripped of his knighthood. 

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