The revelation of a £12.8bn shortfall in Barclays’ balance sheet today, and the sell-off which ensued, tends to negate this blind optimism and does not necessarily bode well for Lloyds and RBS, who report earnings later this week. Litigation reserves are clearly taking their toll on bank profitability and show that Europe’s banks lag behind their US counterparts considerably.
Investors seem loathe to get their feet wet ahead of the key economic data points this week both from Europe and the US. As always, much seems to hinge on the Bernanke rhetoric, despite the fact that the man has never and will never give the market the forewarning clarity it seeks in terms of QE tapering.
The FTSE gave up the ghost at the 6600 level and has traded in a tight 20-point range for much of the day.
Macro-wise, the news was ever so slightly upbeat with recession-beating optimism flourishing, despite the jobless rate in Europe being at record highs. German consumer confidence hit a six-year high and the eurozone retail index surged to levels not seen in 21 months. Spanish GDP was also seen as a positive, declining by 0.1% in the quarter as expected. How much of this can be attributed to seasonal influences remains to be seen. The tempering of expectations may have gotten out of hand given that markets clearly seem to celebrate a decline in growth of 1.7% year-on-year these days.
The five-year high print in US consumer confidence last month could not be sustained so Americans appear a little more pessimistic at this juncture, with the actual not matching expectations. House prices continue to be the backbone of the US recovery with prices in Dallas and Denver exceeding pre-crash levels. Rising bond yields as the markets attempt to price in a Fed rate hike may well be the undoing of the positive story potentially inhibiting the retail mortgage market.
Whatever the news about M&A activity and the turnaround in economies, the bellwether stocks continue to disappoint. US steel posted its second quarterly loss in a row; net sales are down to $4.4bnn, down from $5.0 last year. The net loss was also higher-than-expected. Needless to say, sluggish global growth and a slowdown in industry are to blame.
The Dow is currently trading up 10 points at 15,531.
The strong dollar has been to the detriment of gold prices. The consolidation below the pivotal $1350/oz metric has failed to break higher as a result. The reaction in price during Bernanke’s last speech which resulted in a $30 surge top the upside was always susceptible to profit-taking. Any protracted sell off should see support around the $1290/1300 zone. With the Indian wedding season fast approaching, a break through the $1350 will probably be quite explosive and give gravitas to a test of the $1500 zone.
The US dollar has chosen today to make a comeback at the expense of the other G10 currencies. The euro and the pound both failed to push through some key levels and have been subject to a degree of shorting. The Aussie dollar was one of the worst performers on the day as it becomes clear that the ripple effects from the China slowdown threaten to unravel the Australian growth picture. Speculation of a 50 basis point from the RBA sent the Aussie down 1.5% against the buck.