The only (tiny) glimmer of rationale for Lloyds buying HBOS was the creation of a huge domestic behemoth which would recoup in spades the losses of the last few years in the decades to come. In his desperation to have a Scottish Bank pulled from the fire Gordon Brown agreed the merger, which would have had no chance on competition rules prior to the crisis. Now the fire is from European rules and (promises forgotten and Lloyds shareholders absolutely scr**ed) Our Gordon and Captain Darling announce the one thing that makes a mockery of the whole fiasco. Lloyds will have to split up (at its weakest moment) and three shiny new. (and more importantly) competitor retail banks are to be created.
While the headline news this morning will be about agreement over the state banking insurance the long term outlook for our domestic banks has just got a little worse. Messers Daniels and Blank must seething.
This actually mirrors much of the recent data that we have been seeing from the Major Western economies. Everything seems to be slightly worse that we had hoped and while a recovery does seem to be slowly gaining ground the burden of all the bits and pieces that we must carry out of the wreckage of the recent past may well crush the green shoots before they can grow into a harvest.
The BOE may have to continue with QE (printing money) and while economists seem sold on the idea the fact is that QE is just another way of pushing the harsh decisions further down the line. We cannot QE forever and when it ends Gilt Yields (and every other Sterling Interest rate) will scream higher as the market will ponder the effect on prices of the Government having to not only issue debt for its own reasons but the BOE also having to offload the £175 (or will it be 250) billion of debt accumulated at the high of the market.
News over the weekend that Labour propose (if they win the next election) to raise business rates and put even more taxes onto high earners in the guise of massive increases in Council rates will have everyone looking once again at the cost of doing business in the UK. If the answer to every fiscal question is to tax the wealthy more then I am afraid that you are probably asking the wrong question otherwise every country on the planet would do it.
The FTSE looks to be opening at around 5035 its closing level on Friday and if it manages this it would actually be a result as we were calling the market to be down at 4990 on the close of the US session. Traders are very long and will be hoping for some respite after the US consumer confidence numbers made such a dent on investor confidence. The Treasury will be releasing the PMI (Purchasing Managers Index) on Tuesday and we must hope that this data maintains its recent strength. Much of the foundation of the recent rally has been built on the supposed prescience of this index and if it starts to slip economists might have to start rethinking their numbers.
And on Thursday the BOE will also be announcing their latest interest rate decision (no change almost certainly) and the thinking over their aforementioned QE position.
While these will be interesting tasters as will the FOMC on Wednesday and a whole raft of other minor numbers during the week all eyes will once again be focussed on the Non Farm Payroll (NFP) figure due out at 12.30 on Friday.
The Dax remains under heavy pressure this morning having fallen some 10pc from the highs in the last five or six sessions. It is now in danger of giving up all of the rally since July. There is good support between 5345 and 5380 but traders will be wary of getting too excited about any bounces while the current weakness continues. Corporate profitability in Europe has been coming under extreme pressure due to the ongoing strength in the Euro even though the currency is now slightly off its highs.
We can anticipate some solid buying in the indices in early action as investors take the recent weakness as the opportunity they have all been waiting for. Our clients will be hoping that the weakness has now run its course but many will remain on the sidelines keeping their powder dry, fearful that the falls of recent times might gain traction and develop into a bigger pull back in the run up to Christmas.
The Euro, as mentioned, has given up some of its rally in the last week or so but European politicians will still be wondering at what they can do to lessen its impact. With inflation still squatting in its lair and the Bundesbanks old bogeyman is looking a tad toothless just now. Japan has just recorded minus 2.1pc YOY inflation and Europe looks to be very slowly drifting in the same direction (not so aggressively but still slightly worryingly). Unfortunately for the inflation doves there is always a “But” in any conversation about prices. The “But” in this case is the cost of energy, Oil is drifting higher day by day and although there has been a recent pull back in line with equity markets from the highs we are still miles higher now than we were at the turn of the year. For all of the talk about variation from dependence on Oil the fact remains that a huge percentage of our usage still relies on the black stuff. While there are other alternatives to petrol and diesel we are stuck with the historical infrastructure build around these (as anyone who has searched for an LPG or bio-fuel garage will testify).
The Euro looks comfortable above 1.4700 vs the dollar but traders will be eying this level if new weakness appears. Support at 1.4675 has been tested a couple of times and on both occasions the snap back rally has been quite aggressive. Traders seem happy to be long Euro at current prices (1.4755) with 1.4855 as the near target. This commentator continues to feel that the Euro is heavily over valued but the pressure to avoid virtually every other major currency means that more and more cash is ending up in the Eurozone.
Oil seems to have found support at around the 76.50 to 77.00 level and with every other market bouncing from Friday’s lows Oil is taking its lead from this. 75 bucks remains the major support and 80 and then 82 buck the near term resistance. While 80 and 82 have built some minor resistance due to recent activity the bulls are still looking for 85 to 90 bucks as the target region.