There were many amongst us in 2008-2009 who believed that insoluble medium term sovereign debt crises would be the ultimate result of rescuing the insolvent banking system by way of quantitative easing and continual bailouts (both secretive and published). As the dangerous portents of the crises return that prediction looks correct…
According to a Bloomberg index European banking and ‘financial’ stocks in Europe fell 5.6 percent yesterday to sink to their lowest level since March 2009, the measure of banks’ reluctance to lend to each other also spiked to the highest since April of that same year. The Bloomberg Europe Banks and Financial Services Index of 46 stocks has dropped almost 10 percent in the past two sessions, to the lowest level since March 31, 2009.
In the UK the bank RBS, much maligned at the time of the crisis in 2008-2009, has seen it’s share price once again flirt with the record lows experienced during the crisis. At 51p the UK govt. breaks even on it’s rescue, Lloyds has to recover to 74p. At 21p and 31p respectively, the market for banking sector shares would have to make a massive recovery, similar to the secular bear market rally since 2010, for the govt. and tax payers to break even.
European stocks slumped yesterday, the Stoxx Europe 600 Index posting its biggest two-day drop since March 2009, investors are speculating that the necessary support for bailing out Europe’s indebted nations may fade. The markets will look towards the finance ministers and central bankers from the Group of Seven nations to take further preventative and curative steps when they meet in Marseille, France, on Sept. 9 and 10.
The rout of leading European indices was not contained to the Stoxx index alone, the DAX, CAC and FTSE were hit hard. Germany, the supposed stalwart example of probity and governance throughout the continual crises since 2008, appears to be in the line of fire. It’s export driven recovery has now run out of steam and the notion that as a nation Germans will have to singularly carry the burden of Euroland recovery is causing domestic political unrest.
One central bank which has grasped the nettle without fear of stinging is the Swiss Central Bank. The central bank is setting a minimum franc exchange rate of 1.20 against the euro and will “defend the target with the utmost determination” if needed. The Zurich-based bank said in an e-mailed statement today that it is; “aiming for a substantial and sustained weakening of the franc. With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
This policy statement has had a parabolic effect on all chf currency pairs and will undoubtedly (perhaps temporarily) dent the permanent safe haven status of the currency. The dollar, the euro, the yen, sterling and all other pairs have shown massive gains versus the franc since the announcement this morning. The retracement has been equally as violent however temporary it may prove to be. Actions speak louder than words and if the SNB carry out their threat, to buy up massive reserves of other currencies, then the reversal could be (in market terms) permanent.
Asian markets suffered mixed results overnight/early morning, the Nikkei was down 2.21%, the Hang Seng up 0.48% and the Shanghai down by 0.3%. European indices have recovered some of their losses of yesterday; the ftse up 1.5%, the CAC up 1.21% and the DAX 1.33%. The Stoxx is up 1.06%. Looking towards the USA the SPX future is suggesting an opening of 1% up, a significant reversal of sentiment from yesterday’s prediction of 2.5% down as the USA markets were closed for ‘Labor’ Day. Perhaps rumours of President Obama’s Roosevelt ‘New Deal’ style initiative, to get the masses back to work by re-building infrastructure, has increased confidence. Brent crude is up $125 a barrel and gold is down below the new dollar heights of + $1900 experienced yesterday.
The Swiss central bank’s policy announcement has trumped the impact likely to be felt by all other data releases today, however, the US Institute for Supply Management (monthly) figure may affect sentiment. As an indicator it ‘straddles’ both the manufacturing and service sectors, as with many ‘numbers’ a figure above 50 is regarded as positive. The predictions are for 51 versus 52.7 last month.