Banking Sector Shares Retreat Sharply on US Regulatory ThreatsBank shares on both sides of the Atlantic fell sharply over the week after President Obama moved to introduced legislation that would reduce the ability of banks to take risks. The proposed legislation would also put limits on the size of banks in an effort to remove the “too big to fail” concerns that caused much of the chaos in the sector in late 2008.Obama stressed, “We should no longer allow banks to stray too far from their central mission of serving their customers. My resolve to reform the system is only strengthened when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low and cannot refund taxpayers for the bailout. If these folks want a fight, it’s a fight I’m ready to have. Never again will the American taxpayer be held hostage by a bank that is too big to fail.”The populist move welcomed by the public but resented by most banks follows reports of record bonuses at some financial institutions with traders profiting from the unprecedented rally in the price of risky assets. Many commentators suggest the sharp appreciation in equity and commodity prices (leading to higher performance related bonuses) are a result of government intervention and stimulus measures rather than a fundamental improvement in performance of the banking and finance sector.Obama also aimed criticism specifically at bank’s proprietary trading systems suggesting the banks should be more focused on traditional community banking – lending to small businesses and home owners – rather than risking capital in market speculation which offers in many cases zero real economic benefits.Obama’s efforts if successful will restore the much of theme, if not the detail, of the Glass-Steagall reform originally introduced in the 1930’s which was undone by the Clinton administration following years of banking sector lobbying. The Glass-Steagall act forced banks to separate their investment banking and retail lending activities to remove much of the balance sheet risk from banks which held customer deposits.In the UK the Bank of England Governor, Mervyn King, has previously stated a similar desire suggesting “casino” banks should not be involved in commercial deposits and lending functions.Market insiders responded to Obama’s plans suggesting halting proprietary trading would reduce market liquidity.The proposals not only persuaded investors to sell off risky assets, with finance sector shares amongst the biggest decliners, but also prompted a sharp spike in volatility as the following charts highlight.Chart: US Financial Sector Daily to 22nd January. Source:http://www.StockCharts.com
Chart: Volatility Index Daily to 22nd January.
Gold Falls in Line with Risk AppetiteGold, like other risky assets, fell sharply towards the end of the trading week with commodity traders concerned that the Obama regulatory threats would hinder institutional trading activity and liquidity.However, most commentators suggest the recent dip in the price of gold is likely to be temporary with many traders looking for new entry positions as value returns to the market. The long term fundamentals remain positive with China’s commitment to diversifying its reserves and the strong economic recovery in India and elsewhere in Asia likely to support retail buying in the region.A key price support level is $1,070, close to the recent low seen in December.Chart: Gold Daily to 22nd January Source:http://www.StockCharts.com
IMF and World Bank See Recovery as FragileIn a week which saw the biggest falls in the prices of risky assets so far in 2010, investor confidence in the European and US economic recovery was further undermined by two reports, from the IMF and World Bank, both of which offered concern over the strength of the recovery out of recession.The International Monetary Fund cited weak employment growth and fragile consumer demand as obstacles to a sustainable recovery. The IMF also suggested governments should take caution regarding the timing of stimulus exit policies and observed many bad assets had not yet been fully written-off on bank and business balance sheets.Also highlighted were the high levels of public debt in developed economies, such as the US and UK. The IMF stated the record levels of debt would remain a significant concern until action to reduce the deficits was executed preferably as soon as economic growth was in place and sustainable.The IMF predicts global growth may reach 3.1% in 2010 with much of the momentum coming from Asia.The World Bank offered a less optimistic forecast and expects global growth of 2.7% in the current year with developing countries fairing better with a possible collective GDP expansion of 5.2%. Developed economies would enjoy much weaker growth of around 1.8%. The Bank suggested higher borrowing costs and the reduced availability of credit would hamper the global recovery.The World Bank, like the IMF, cited weak private demand in western economies as the Achilles heel in the sustainability of the recovery and that the UN’s efforts to reduce poverty in some of the world’s poorest countries had been set back years due to the 2008/09 global recession.Chinese Economy SoarsWhilst the previous sections in this report have highlighted the vulnerability in the global recovery there is, of course, one country that did not suffer a recession and continues to report ground-breaking growth – China.4th Quarter Gross Domestic Product growth raced to 10.9% annualised, from 9.1% annualised in the prior July to September period. The Q4 rate was the fastest in two years and has forced analysts to revise expectations for 2010. In response the Chinese authorities have clamped down on lending forcing banks to rein in the flow of money into the economy. Full year growth for 2009 totalled 8.7%.China has also surpassed Japan and is now the world’s 2nd largest economy after the US. It is predicted China may overtake the US to become the foremost economic power before 2030 and possibly as early as 2025.The Chinese monetary body is expected to increase interest rates in the 1st quarter in a further effort to cool the economy.Key data for the 4th quarter included a 17.5% jump in retail sales in the year to December whilst industrial production raced by 18.5% over the same period.UK Unemployment Falls Thanks to Part-time Work AvailabilityIn the three months to November the number in part-time employment jumped 99,000 helping to reduce the unemployment rate for the first time in 18 months. Despite the headline unemployment rate dropping, the number of “economically inactive” UK residents rose to a record 8.04 million indicating the volume of people not in work and not registered for benefits and including working age students continues to increase. The 8.04 million figure equates to 21.2% of the potential work force. Unemployment officially fell 7,000 to 2.458 million.The ILO jobless rate which includes jobseekers not claiming benefits fell from 7.9% in October to 7.8% during November.The unemployment rate for 16-24 year olds fell by 16,000 though the numbers are distorted due to the propensity for school and college leavers to stay in education rather than look for work in a recession.Despite the mixed signals most commentators suggest the job market is stabilising after a torrid two years for job-seekers. Economists also noted that despite the 2008/09 recession being the most severe for decades in terms of GDP contraction unemployment hasn’t risen to the 3 million plus suffered in the early 80’s recession. The trend towards part-time work when full-time unemployment is unavailable and the wider availability of adult education are the primary reasons for the lower headline rate.BoE Unanimous in Rate and QE DecisionBank of England minutes released this week in relation to the recent monetary policy committee meeting have highlighted a unanimous 9-0 vote in favour of keeping rates on hold at 0.50% and maintaining the quantitative easing program at £200bn.The minutes signalled the economy continues to slowly recovery but that an accommodative monetary policy needs to stay in place to secure growth into 2010. The minutes also noted a need for the government to take strong fiscal action to reduce the public debt deficit. The comments were a rare move verging on political policy highlighting the desperate state of UK public finances after years of over-spending.The BoE also noted the recovery (GDP is predicted to have risen in Q4), would have been harder to realise were it not for the weaker pound. The BoE predicts inflation will moderate from the recent spike and return below the 2% target rate during 2010 enabling the bank to maintain low rates.UK Inflation JumpsWhilst the Bank of England continues to predict low inflation through 2010 the latest official data suggests otherwise. Inflation, measured by the Consumer Price Index, jumped by the biggest rate on record between November and December from 1.9% to 2.9%. The consensus predicted a 2.6% rise. The sharp increase in CPI was largely attributable to higher fuel prices. The Retail Price Index which includes mortgage payments also rose more than expected by 2.4% in the year to December.Chart: FTSE Daily to 22nd January. Source:http://www.StockCharts.com
HSBC Boss Gets PoliticalFTSE 100 bosses tend to avoid attacking politicians and governments. It invites unpleasant anti-business legislation and makes for uneasy meetings when corporate bosses bump into politicians.Mike Geoghegan, the HSBC CEO, bucked the diplomatic trend this week and attacked the government’s handling of the recession mocking Labour’s excessive spending and suggesting its politicians needed to adopt a “mindset change”. Geoghegan also reflected that a change of government may be necessary to help the country secure fiscal prudence.Interestingly, the verbal onslaught comes just weeks before Geoghegan relocates from HSBC’s London office in Canary Wharf to Hong Kong as the bank increases its focus on Asia which continues to outstrip Europe and the UK by just about every economic measure.Labour’s recent move to double-tax bank bonuses no doubt fed Geoghegan’s desire to criticise.Chart: US Listed HSBC Weekly to 22nd January. Source:http://www.Stockcharts.com
JPM is trading higher on the session. Watch the 44.80 level as the first line of resistance intraday. Should that level fail to hold the 45.00 double top would be the next resistance area.
