FTSE 100: 6840.27 ▲ 36.40 (0.53%)
Who, after a week in which fears over Spain’s banking system morphed into broader worries about the global economy– capped by weak data from China, the eurozone and US on Friday – is going to take the action that will stop markets falling?
This week equity markets have sold off, the oil price has fallen below $100 and government bond yields on ‘safe haven’ countries the US, UK and Germany have repeatedly fallen to new record lows as investors again seek safety.
On Friday there was sufficiently dire news from all of the world’s major economies for calls to be raised for more economic rescue measures from each of them:
In the US, the worst nonfarm payrolls data (a closely watched measure of the US labour market) in a year led to chants for ‘QE3’ from the US Federal Reserve. Fed chairman Ben Bernanke could provide more clues as to the central bank’s plans when he gives evidence to the Joint Economic Committee of Congress on Thursday.
In Europe, there have been a string of comments from European Central Bank (ECB) chairman Mario Draghi and commissioner Ollie Rehn urging member states to take action, while warning about the fragility of the eurozone and the threat of disintegration. Added to these comments have been growing fears about the health of Spain’s banks after Bankia’s bail-out, as well as a string of downbeat data form the eurozone where unemployment has hit a record high and consumer confidence a two-year low.
In what will perhaps be the closest watched event for markets next week, the ECB meets on Wednesday to vote on interest rates and monetary policy. Investors will be listening closely to comments from Draghi (pictured) – hoping for reassurance – but a rate cut to help markets is not expected for now. The Bank will however present its latest economic and inflation forecasts.
In the UK, the Bank of England could act to increase its quantitative easing programme from the current £325 billion after a particularly weak report on manufacturing activity. Lloyds economists say another £50 billion is likely, though like the ECB, the Bank’s monetary policy committee could choose to wait it out amid the uncertainty. Any increase though would not provide a significant boost to the FTSE 100, which is more closely tied to global events.
Then, in China, after May’s manufacturing PMI – a closely watched indicator of the state of the economy – dropped to 50.4 (below 50 would mark a contraction), hopes have increased again for action from the authorities. These hopes gave markets a lift at times over the past week, though official reports have refuted suggestions that the Chinese are preparing to act.
In unpredictable and volatile markets, authorities around the world – watching Spain and Greece ahead of the latter country's election on 17 June – look likely to sit on their hands for another week.
In a curtailed week in the UK because of the Diamond Jubilee holidays on Monday and Tuesday, there are few scheduled corporate announcements, leaving the FTSE even more at the whim of economic and political news.
Johnson Matthey (JMAT.L) publishes a full-year 2011/2012 earnings release on Thursday, while security firm G4S (GFS.L) is holding its annual general meeting on the same day.
Comments (14)
Next Italy and then France's head on the guillotine. And as France's paymaster/bwanker, Germany will not be unscathed, in fact in deep doodoo for a while. I warned of this last year.
23:48 on 01 June 2012
How about all those earning a £1Million + per year who were given a 5% income tax reduction (i.e.£50K + per year) by David Cameron. His justification for this considerable reduction of tax (to those who are already doing very well, whilst abolishing the higher tax allowance for those aged 65 +) was that this would in some way "incentivise" these wealthy people (including showbiz and sporting celebrities) to strive harder for the 'National Good'.
11:29 on 03 June 2012
There is every indication that the key players in the Eurozone crisis - the politicians who have supported the euro so far - are yielding to the inevitabilty of a Greek exit.
This will eventually lead to a slimming down of the Eurozone, leaving only the stronger economies, including Germany and France.
It is how to manage this transition in an acceptable timescale that is the central problem facing Europe's politicians. We must all hope that they get this right!
11:42 on 03 June 2012
If there is a further round of QE, instead of lending to banks which hoard the cash and don't lend to business, is it not possible for the Bank of England to bypass them and lend direct to small and medium businesses, the sector which can create the most employment.
Also, modeled on the person to person lending schemes, business to business lending might be possible since £tens of billions is being hoarded by companies at the moment.
New thinking is needed, a fresh approach. Listen to advice from those who have been successful in business and not just read stuff in a book.
11:50 on 03 June 2012
@ outofthebox
I think your suggestion BOE by-pass existing banks to lend to business is a good idea.
If need be, they could set up a 'National Bank' to deal with the administration - a great opportunity to do this was missed when the government bailed out Northern Rock and others
12:24 on 03 June 2012
Sadly to say history shows nationalised industries always become a drag on the taxpayer whether in banking or any other industry.
Ironically (or embarrassingly) the goverment does now own major stakes in Lloyds Banking Group as well as Northern rock and RBS. In reality the banks are essential to our capitalist system but some are now broke just like our country. Presumably the assets regularly pumped in by the goverment on a regular basis allow the banks to keep going on their painfully slow road to recovery. Look at other banks around Europe and perhaps ours are positioned better than most. Not that being the best of a bad bunch is anything to be rejoice about.
The coalition meanwhile is correct in my opinion in doing everything it can to attract new business here (and that includes making our tax rates competitive) as well as supporting our own entrepreneurs.
With this global emphasis to create more real jobs I just hope we don't run out of customers.
13:54 on 03 June 2012
Strangely Mario Draghi looks just like Peter Sellers (alias Bluebottle). I'd like him to say, on behalf of the Euro "You dirty rotten swines, you've deaded me again!"
15:37 on 03 June 2012
Seeing that continental European leaders have shown for two years and more total incomprehension of how best to deal with a financial market crisis by getting ahead of the curve relative to expectations, the chances of their now being willing and able to do so would seem to be vanishingly small
19:00 on 03 June 2012
@john_r
"..the banks are necessary to our capitalist system".
I would say the banking system is necessary to our capitalist system, not all the badly run banks that need taxpayers money.
Bad banks should be allowed to fail, and new well run banks take their place.
Bring on the new bank businesses who don't think the taxpayer is there to protect them from any downside of their own commercial decisions
20:06 on 03 June 2012
@Money Observer,
Totally agree that a good banking system is essential and that is exactly why our ineffective regulation and banking systems are being overhauled. But we surely can't allow major banks to fail without throwing millions more out of work. Remember that the financial industry is still unfortunately our country's major bread winner. Britain has more international banking assets than any other country in the world in terms of percentage of GDP. No wonder the EU were keen to tax our bank transactions. The consequence of a major banking default in Britain is unthinkable.
We may see this play out shortly as the future of the Euro hangs in the balance and we enter unchartered waters.
01:19 on 04 June 2012
@john-r
You are endorsing the view that some banks are "too big to allow to fail".
This "unlimited taxpayer safety net" causes complete distortion of banks commercial policies, causing them to push the limits of Risk.
They are able to indulge in very risky transactions without a commensurate increase in risk to their business.
Going forward this is not a sustainable position for our Society.
10:18 on 04 June 2012
@moneyobserver
Yes, you got it - some banks are too big too fail. Real banking is international. If one fails its like removing the 10th floor of a 30 storey building - a very real risk that the whole lot will collapse. Personally I've never seen banks as being protected by a taxpayer safety net. The top managers of the troubled banks have lost their jobs; the shareholders of the troubled banks have lost their money and the taxpayer now now owns a majority share of whats left. No winners - just all losers. The buildings remain; the bank workers mainly keep their jobs and importantly the banks attempt to lend to industry again but now on a more cautious footing as they restructure.
So to me it isn't the banks who are to blame but rather those stupid goverments who firstly relax banking rules, spend all of their taxpayers reserves then feeling good about themselves continue spending money that they don't have trying to bring about impossible political ambitions. Not just here but in America and in Europe. Then one day one of the banks is an obscure location wises up and effectively stops lending to other banks and before you can say Gordon Brown the whole lot comes tumbling down.
As a great lady once intimated the problem with socialists is that they keep spending until they run out of others people money. To that she could have added '' and then they blame the bankers.''
14:23 on 04 June 2012
@ john-r
The lady you refer to (MrsT) started the rot off with the 'Big Bang' deregulation in 1986, allowing big boring, but safe commercial banks to run large investment bank operations.The Americans didn't start this, Mrs T did, then the Americans ran with it.
Now MOST of the big banks transactions are with 'trading' complex instruments with one another which have nothing to do with the necessary straightforward financing of industry and commerce, taking loans and deposits, hedging forex transactions in support of industry and commerce running their operations, or managing pension funds.
I'm all for top managers and shareholders losing out when a bank is run into the ground.
When this happens the government could step in to 'facilitate' new 'commercial only' banking businesses taking over the boring but safe commercial banking side with all the related employees - the government does not have to maintain a permanent presence.
The investment bank side of such a failed bank (assuming it was this area that caused the whole bank to fail) can be allowed to die. The traders losing their jobs are well used to the risky side of their occupation and accept the potential high rewards, so will be realistic about their own failure.
I agree completely that it is was politicians that were the main cause of the banking crisis, but to absolve bankers is unrealistic.
But the people who have made most noise about the bankers have been the politicians in order to deflect attention from their own primary blame.
16:31 on 04 June 2012
Pursuing the issue of the sheer interelated nature of world banking, its been 4 years since the bank crisis happened and all banks have had 4 years to de-risk themselves of that level of "interelatedness".
UK banks have finally managed to start derisking themselves of exposure to Greek banks, but seem to have failed to derisk themselves of high exposure to French and German banks, even though everyone knows German and French banks have high exposure to Greece. If that proves to be a bad 'professional decision' by UK banks, well they've had 4 years to reduce their "interelatedness" - no one forces the banking industry to engage in the present levels of "interelatedness" you highlight.
For governments to commit to bailing out all failures of bad banking, is to commit to propping up the present situation in perpetuity. ,
16:52 on 04 June 2012
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