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Market Comment 28th June 2012

As Barclays reels from the news that ‘shock horror’ there might have been some collusion between the money market desk and the swaps desks over the fixing of the Libor rates the press and politicians will welcome the opportunity of having yet another go at the financial sector. 

The fact that Barclays was one of sixteen banks (of whom the BBO took the average of the middle eight Libor quotes) and that the net effect of their machinations was to ‘lower the cost of borrowing’ (fractionally) will be lost in the relief of the politicos that there is some else to shove the spotlight on to. It must be remembered that for every swap there is a counterparty (generally another financial institution) and banks do not run enormous exposure on swap books so when journalists talk about 300 trillion swap/lending volumes most of this has an equal and opposite component. i.e 150 trillion long and 150 trillion short as, for banks, every loan must be covered.

The ‘fines’ from the regulators can be assumed to effectively be much more than the actual amount that Barclays might have benefitted from over the issue (so in the great scheme of things not much over a four/five year period) but to this must be added that by reinforcing the appearance of stability in 2007/08 Barclays and others probably did rather more to save the financial system from total disaster than the various Central Banks have managed since then.

Of course this probably won’t stop some court in the States award mind boggling sums to the rather precious class actions going on at the moment but the markets seem to be confident that this is a storm that can be weathered as Banking stock is not reacting particularly poorly to the headlines.

Today also sees the start of the latest European Summit (Yawn) and we will all await with bated breath the pontifications from Paris as every nation tries to come up with some way of selling “ess aitch one tee” to their various electorates. Merkel’s apparent comment to her MPs that, any move to force Gemany into guaranteeing other countries debt by whatever route (short of full federalization) will be “over her dead body”, rather puts a dampener on the chances of success. The West Germans are still paying huge sums for the assimilation of the East (with no real sign of this changing in the medium term) more than twenty years since the reunification and this is with fiscal control. It is understandable that they baulk at having to do the same for the South without any kind of checks and balances on the fiscally imprudent Governments.


The FTSE has tried its best to get a foothold above 5500 with the implied price almost hitting 5550 overnight but, this morning, ‘discretion being the better part of valour’ seems to have set in once more. To be honest the ever increasing number of profit warnings from mid tier companies has been commented on here several times over the past month and one could hardly describe the near to mid term prospects of a sudden economic boom reversing this as being probable. In this light a major rally is probably not a likely event but against this must be mentioned that currently yields are exceptional on equities versus virtually any other asset class and so long term players who can afford to sit on the dips will be slowly putting in small percentages rather than sitting on cash.

We have seen a return to the bond markets for some of the better rated companies as, due to the incredibly low Gilt/Bund/Treasury yields, corporate debt issuance is now far cheaper than equity and the lack of IPO’s in general over the last few years (coupled with more and more quoted companies going private or being merged/acquired) has rather restricted the attraction of shares. As the need for ever more short term ‘results’ from quoted companies has restricted performance, more and more investment money is drifting away from the markets into private equity funds and volumes on most exchanges are looking dire.

The FTSE is at 5490 as I write with light support at 5475/85 and below here at 5435/40. For the Bulls the weak bounce is looking a bit unnerving but the near term hope is for a return above 5520 for a renewed attack on 5545/50.

The Dax which two months ago was 1200 points above the FTSE is now just 700 having fallen over 1000 points in the meantime. For all of the power of the German industrial machine the fiscal future does not look bright. Either the country is going to be saddled with others national debt or they will have to kick out the failing countries and watch their weak Euro currency benefit evaporate (along with possible massive social disorder on their doorstep). The bears will be looking for a retest of the 6100/10 major support but will first have to overcome volume areas all the way down to this level. On the upside the message is much the same as the FTSE with the initial target being 6220 and then 6240/50.

For currency markets the Euro is probing into the recent low range below 1.2450 and to be fair the chart looks pretty ropey. There is huge support around the 1.2300 area but the prospect of massive issuance from the ECB (printing money to you and me) does not exactly bode well. In reality it must be remembered that the Euro did come into existence well below 100 versus the dollar back in 1999/2000 so this is not exactly virgin territory. The 2010 low of 1.1875 is naturally a target for the uber-bears and unfortunately there is not actually much in the way of major levels below 1.2300 to support a concerted move. On the upside we are looking for 1.2450/60 and then 1.2505/15 with 1.2595/05 being the biggest barrier to a bounce.

Oil is weakening again and with geo-political tension in the middle east seeming to be fading somewhat the natural antagonism between OPEC nations when prices start to slide may well rear their head again. OPEC nations depend massively on the flow of oil dollars as most have virtually no other revenue source of note. If the price falls the temptation to sneakily pump more becomes almost too much to ignore. The effects of ever increasing social systems across the globe has created massive problems to treasuries. Countries which five years ago would have been happy with Oil above $50 are now seemingly in real fiscal problems when it goes below $100. As mentioned before the price seems to find it much easier to fall at the moment than to rise and with Brent now in the low 90’s buyers are once again looking nervously over their shoulders. Support is at 9240/50 and 91.75/85 with resistance at 93.10/20 and at the recent highs of 93.90/94.00

Gold is reacting in much the same way as all the other asset classes following the markets down in recent months. In general there is really strong support all the way down from current levels (1570) to 1525/1530 but if we go below here then all the buyers of te last few years may start to look for the exit. The general medium/long term trend was broken back in May but if we were being very bearish there is a chance that the general move lower for the Yellow metal may actually degenerate into a full blown bear market and bring us back into the long/long term value area which is currently between 680 and 1000 dollars! For today though we have support at 1565/67 and 1558/60 with major support still down at 1525/30. Resistance is at 1575/77, 1581/83 and 1588/90 with major resistance at around1635/40 which has capped the recent rallies.

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Market Comment 28th June 2012

As Barclays reels from the news that ‘shock horror’ there might have been some collusion between the money market desk and the swaps desks over the fixing of the Libor rates the press and politicians will welcome the opportunity of having yet another go at the financial sector. 

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