Financial Gossip

The banker’ bonus row continues and this time are very own “business” secretary says that he doesn’t seem to care if rules on bankers remuneration are so strict that they cause an exodus of “business” from the UK. That’s not what British businesses need to hear right now at a time when the country’s being crippled by dire weather on top of the fragile economic conditions it already faces. Forcing talent away from these shores is not the answer and the banking sector is hardly bullying anyone but merely pointing out the facts. Restrictions to the way bonuses are paid won’t necessarily change a person’s actions and is more likely to have them packing their bags and moving to another financial centre. The costs to the exchequer and our economy far outweigh any possible benefits of the proposed rules.

Today the banks meet with the chancellor and our “business” secretary and will likely agree to restrict bonuses in a bid to rebuild their reputation with the country and politicians. We will find out later today what’s agreed and hopefully a happy medium is hit as after all we all part own two massive UK banks and it’s in our interests that we retain good people to help achieve a return on our investment. This investment is currently looking healthy and a decent return looks very possible when the stakes are scrutinised next September.

The markets have started this week where they left off last week and we continue to see this drift sideways. Without wanting to sound like a broken record when writing about the markets, but I’m going to have to since we’re still in this extremely narrow trading range, support in the FTSE is at 5850 and resistance around and just above 5900.

The FTSE is completely flat this morning having drifted in and out of gains. With very little in the way of economic data or corporate numbers out this week we can expect to see the market continue its move sideways. Trading will be as monotonous as it has been for the past two weeks, but is an opportunity for investors to focus on what lies ahead in 2011 and how to position themselves.

FX markets are almost as quiet as the indices with the balance of trading just tipping against the US dollar at the moment. EUR/USD is just about holding onto ground but is back below 1.3200 after a sell off towards the end of Friday’s session and since then it’s been clawing back some of those losses to 1.3120 at the time of writing. Pressure continues to be firmly against the euro as last week’s EU summit did little to placate investors and credit rating agencies continue to downgrade countries like Ireland whilst threatening to do the same for Portugal and Greece.

One of the assets to have done well over the week end and started a little perkier this week is surprise, surprise, none other than gold. After a break below 1375 it looked like further weakness was due to set in but bulls continue to buy on the dips and so we’ve back above 1380. 1390 and then 1398 are targets for the bulls and to the downside the recent low of 1363 is support.

Crude has suffered a bit of FTSE-itis in the past couple of weeks as it too has traded within a narrow range between $84 and $90. The trend is still in favour of the bulls, but without a break above resistance it shouldn’t come as a surprise if we see some profit taking.

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Concerns for the eurozone debt crisis continue to rattle investors and the euro took a bit of a dive yesterday after threats that France might have their credit rating downgraded by Moody’s. This particular rating agency seems to have been on the war path recently slashing Ireland’s level and threatening not only to lower Spain’s, Portugal’s, Greece’s but now France and Belgium. So now no one is safe from their scrutiny and it comes as a shock to the bond markets having not foreseen France as being a potential target for a downgrade. The problem they face is the considerable exposure their banks have to the PIGS.

Costs to insure European government debts are still rising and nervousness for the region continues to build. As bond yields make financing for these countries ever more expensive, the costs to refinance in future is even more worrisome. Now that we’ve seen the yield of Spain’s 10 year bonds go over 5%, the so called point of no return, the contagion looks to be infecting other parts of the region so before too long we may see another bailout. Portugal as we know is almost certain to go cap in hand to the EU and IMF next year and after that there’s every chance of more trouble with the most likely candidate being Spain.

Equity markets continue to brush these European concerns aside and the FTSE was being called to open above the resistance at 5900. We’ve opened above there too and if the market can sustain strength above here then there’s every chance that this could be the breakout bulls have been waiting for. The 6000 level has become more of a reality.

Clients are opposing the trend higher so further pressure to the upside could be added if there’s a bit of a bear squeeze too. The market is in year end mode as moves to the downside have been limited. During the month of December there’s little that can stop equities from pushing higher, especially is the consensus is that gains are set to continue onto the following year.

EUR/USD dived late in yesterday’s trading session on the back of the Moody’s ratings cuts, but found support at 1.3100. This morning it’s made back a great deal of those losses and is at 1.3150, having hit a high just below 1.3200 earlier. Support over the near term is seen at 1.3085 and 1.3060, but the major level to the downside is 1.3000. To the upside bulls will be targeting 1.3215 and then 1.3265.

Moody’s have literally just put their Portugal rating on review for a downgrade which has brought the euro back from its morning highs and once again we see euro gains limited.

Cable is fluctuating between support and resistance at the moment and it looks like FX markets are winding down for Christmas too. At 1.5550 this morning the theme today is a little bit of dollar weakness.

There’s little to report on the front of gold but the mild dollar weakness is just giving bulls the edge with the precious metal a couple of bucks better this morning at 1389. Buyers will be looking for a return back above 1400 soon for a confirmation that the momentum is still in their favour.

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FTSE
The market hasn’t made any significant ground over the last couple of weeks as concerns over UK bank exposure to European debt concerns to unsettle investors. Despite all the efforts by the EU to contain the debt crisis there will always be the risk of considerable losses to our banking sector should there be the worst case scenario of a default.

Banking stocks continue to struggle to make ground following the Bank of England’s unconstructive comments about the sector and this is preventing the FTSE from making new highs despite all the efforts of the EU to restore investor confidence. For as long as there is no clear resolution to the European debt crisis, equity markets will find it difficult to carry on with their upward momentum.

On top of this we are well and truly winding down for Christmas. Next week sees not significant economic data releases and since the FTSE has made decent gains so far this year many investors will bank their profit and take next off.

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The EU summit so far has delivered little apart from verbal guarantees that in 2013 they’ll have something in place should it be needed after the current bond purchases and bailouts expire. The doubling of the ECB’s purchases of government bonds is from a very low base and is something that was due to happen anyway, but for now the hot air coming out of Brussels is appeasing the euro and European indices.

We were calling the FTSE to open around the 5900 level just before the open, however we’re back where the quote spent most of the night, just above yesterday’s close. The failure now on four separate occasions for the market to get over and remain above the 5900 level is not very encouraging for the bulls but there’s a feeling that since we’ve been grinding higher and flirting with that level that at some point before the year end there might just be enough of a bear squeeze to pop us above and on towards 6000.

To the downside 5850 remains the support for the index and for the past two weeks now we’ve managed a range of just 150 points. The quiet start to today’s trading could possibly be put down to traders jaws being on the floor watching the Australians decimate our batting line up!

Economic data is thin on the ground today and next week there is very little to focus on in that respect as market well and truly start to wrap up for Christmas. As much as many investors will want to see 6000 before we enter 2011, it would come as now surprise if we just drifted sideways in a similar fashion to the last two weeks.

French manufacturing confidence numbers have just come out better than expected and then later this morning Germany’s Ifo survey is expected to rise to new highs, just as it did last month. Unlike other European countries Germany is thriving, enjoying robust economic growth and recently their retail sales in the run up to Christmas has been very strong. And all this in the face of a crisis, it’s no wonder they don’t want to jeopardise this by propping up other EU nations!

The biggest focus for economic data will probably be the US leading indicators at 15.00 London time. With initial jobless claims continuing to fall and gradual improvements in consumer sentiments the index is due to rise over the 1.0% mark. This could be enough to push US indices to yet another 2010 high.

The euro is finding some strength on the back of the summit, but not particularly convincing hovering around the 1.3300 level. Clients remain bearish of the single currency so they’ll be hoping for this little spurt of strength to be short lived and see EUR/USD head back towards 1.3225 and then test the week’s lows around 1.3180.

Cable has found support at the 1.5500 area for the second time in the last couple of weeks and technical analysts will see this as a bit of a double bottom. Bulls will be hoping for a return to the 1.5715 area which should provide some resistance having been a previous support area prior to yesterday’s break below it.

Gold is trying to recover from yesterday’s weakness as it hit a low just above the 1360 area and has bounced back to 1375 this morning. The break below 1380 was quite negative for the precious metal which has been suffering a similar fate as other metal markets which have all been subject to some sort of profit taking this week. 1387 to the upside will be the target for bulls to push through and for the few bears that are out there they’ll want to see a move down below yesterday’s low to 1353.

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UK Unemployment
Today’s numbers confirm what a tightrope the UK jobs market is walking at the moment. With government spending cuts around the corner and some 300k public sector job losses expected, the private sector will find it difficult to take up the slack.

While yesterday’s inflation numbers would justify calls for interest rate rises early next year, the employment situation certainly does not. With tax rises also due in 2011 the last thing the economy needs is for interest rates to start rising before a recovery in the labour market is well and truly established.

FTSE & EU Summit
Having spent the majority of the day languishing around its lows in negative territory of some 35 points the FTSE staged a late rally. The recovery this afternoon was driven primarily by strong US markets that are continuing their Christmas rally unabated with the Dow Jones marking a new high for 2010.

Despite the apprehension amongst European investors ahead of tomorrow’s key meeting between EU leaders who’ll be looking to resolve the eurozone debt crisis, investors remain content to buy good quality equities that won’t necessarily be hurt by any further bailouts.

Banking stocks remain under pressure following the announcement by Moody’s that they’re reviewing Spain’s credit rating, but gains in other sectors kept the losses to a minimum.

Looking ahead to the all important EU summit the market is expectant of a plan of action to avoid contagion within the eurozone. With Portugal almost certain to need a bailout next year and Spain teetering on the brink, the market really needs a firm message from EU politicians that they will not let the crisis get out of hand. The hope is that the euro will receive an early Christmas present from France and Germany, but considering that up to now they’ve been a Scrooge in refusing to commit to any of the proposed resolutions, it’ll be a miracle if any common ground is achieved.

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Once again nerves over the eurozone are just reminding investors that all is not well across much of the economic block. Moody’s threat to downgrade Spain’s credit rating reminds us that all is not a bed of roses so December’s rally is halting for now.

Markets have well and truly been in rally mode with December’s gains totalling almost 7% so far. Clients have continued to oppose the move higher so far this month by selling into the strength. It would seem that they simply don’t believe the momentum can continue given all the uncertainties that remain. This morning they are being justly rewarded for their persistence as the FTSE is some 30 points lower in early trade.

The past resistance of 5850 that was taken out yesterday should provide the bulls some support over the short term and if we head below there then 5800 should provide some support. To the upside there’ll be no surprises to hear that 5900 is the resistance for now.

On the economic data front we get UK unemployment released at 9.30. Even though we’ve seen a number of surprises (considering the circumstances) that would suggest the labour market in the UK isn’t all that bad, a lot of the good numbers have not been supported by new full-time jobs. The manufacturing sector is seeing a change in fortunes and is hiring people, but other sectors are not seeing the same sort of demand which is being reflected in wages too. The number of claimants is expected to fall, but with jobs being hard to come at the moment don’t be surprised to see this figure rise.

Later at lunchtime we have US inflation numbers. US CPI is a mere third of that in the UK and it’s surprising to see considering the amount of QE that they’ve pumped into their system. PPI is double that of CPI and it indicates that the rise in prices is not being passed onto the US consumer as the economy so heavily relies on their strength in order to sustain is recovery.

The euro’s breakout above 1.3280 was not exactly followed through yesterday and as far as candlestick formations goes the shooting star it formed will come as some concern for the bulls. This would indicate that the uptrend is over but considering that we are not in an uptrend it can probably be discounted and traders will focus more on the recent outbreak to the upside which could see further strength. This morning however the threat of a downgrade to Spain is taking its toil on the single currency and EUR/USD is at 1.3310 having taken out support at 1.3350. Below here the past resistance of 1.3280 is quite a major support level now.

Cable has been rising slowly but surely in a sort of two steps forward one step back scenario. 1.5900 was tested yesterday and we failed there so that’s the near term resistance for now. At 1.5750 this morning, to the downside support is seen at 1.5720, 1.5675 and then 1.5650 will be in focus.

Once again the 84.00 level has proved too much for USD/JPY as the dollar’s strength just seems to have been called into question for the time being. The recent low at 82.80 is support and a break below here bears will target the 82.40 area. To the upside 84.30-40 is where the cross has failed on five occasions so far, so you’ve got to fancy that if it can break out above here it’s going to head further north.

Gold seemed to be content above 1400 having spent the whole day above there yesterday, but has dipped back below is Asia’s session and early this morning. 1411 is still the resistance bulls will want to see taken out before we can expect another test of the all time highs, but for now the precious metal is back at 1390 at the time of writing.

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CPI
A year ago conditions were very different to what they are now and it was forgivable to think that inflation would fall as a result of sluggish growth but prices continue to rise. Today’s inflation figures remain a concern for the Bank of England who once again has had to write to the Chancellor excusing why they are overshooting so much.

The upward pressures on inflation are now too great so that any possible future downturn in growth will not be enough to bring prices back down. There is very little that is going to bring down inflation at the moment with commodities continuing to augment and tax rises due in the New Year. UK inflation will remain above target for a long time to come, leaving the Bank with little other option than to raise interest rates in 2011. It certainly throws the prospect of any further quantitative easing out the window.

FTSE
The index is testing its 2010 highs and is one step away from hitting the 6000 level. Investors were delighted to see BP selling off more assets as it moves to repair its balance sheet and reputation. The expectations are for a renewal of a dividend policy early next year which has really spurred the market.

The gains were made without the usual help from mining stocks which retreated. Markets were also assisted by strong US retail sales which showed that the US consumer is still well and truly alive.

There is still plenty to focus on ahead of the Christmas holidays but there’s a feeling that the markets are going into wind-down mode. The gradual grind higher is typical of this time of year and for now there looks like there’s no stopping the rally.
Market Wrap – CPI and FTSE

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A little sell off in US markets towards the close of their session has left Europe starting the day just slightly on the back foot. The indices have had a decent run higher and in the cast of the FTSE it is just struggling slightly at the resistance around 5850, even though yesterday’s close above this level was a positive sign that the bulls are still in control.

The focus is building on the EU whose leaders are due to meet on Thursday to discuss how to protect the euro against any future crisis and ultimately prevent the eurozone from breaking up altogether. The discussions will not be easy, but you get the feeling that since no radical decisions have been taken thus far, the required outcome is most unlikely to be achieved. Germany and France’s failure to commit to more than what the ECB is doing with its government bond purchases doesn’t fill you with confidence. At the very least, if the political will is there to save the eurozone from destruction, the bailout fund should be increased.

But going forward this is not the answer to the problems. Germany and France’s opposition to various proposals is understandable as bailing out bank after bank and then country after country does not encourage financial prudence. The peripheral EU countries have got a long hard slog ahead of them and years of near negative, if not recessional, growth before their economies recover properly.

Lots of UK house price data today and earlier this morning we saw a slightly better than expected RICS house price balance, but the figure still makes for grim reading. According to the Royal Institute of Chartered Surveyors their survey said expectations were for price declines to outweigh price rises by 44%. Not a pretty figure, but at least it’s off the 18 month low it reported in November. Unfortunately, the trend for this survey is still very much downwards.

This morning we get the DCLG house price data which is expected to show a 6.1% rise year on year, down sharply from 8.1%.

At the same time UK CPI numbers are released where the headline inflation number is due to stay at 3.2%. This continues to be way above the BOE’s target of 2% and is being propped up by high petrol prices. Utility bills and commodity prices are only going one way at the moment and with taxes due to go up in January, we will not see CPI back around target for a long time. At some point next year the MOC will have to act and raise rates. It could come sooner than many expect.

Later on we see US retail sales and PPI data, followed by business inventories and then to wrap the trading day up we end with the FOMC rate decision. With November’s FOMC marking the instigation of QE2 this month shouldn’t provide any surprises and just reiterate their commitment to the existing program.

EUR/USD performed a classic breakout to the upside yesterday and has barely looked back since. The bullish engulfing candlestick move above the downward trend line has taken the rate back above 1.3400 and it sits at 1.3440 at the time of writing. The move above 1.3280 was swiftly followed by a flurry of buying and now resistance is seen at this morning’s high of 1.3475 and then 1.3500. This move has almost reversed the fortunes of the euro as traders expect big things ahead of Thursday’s meeting, although as mentioned above, some people are doubtful!

The reversal in the dollar gave gold another boost as it touched 1400 but is back above here this morning. The short, medium and long term trends for the precious metal are still upward and bulls will want to see 1411 taken out before a move onwards to test the all time highs again!

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It’s bash the bankers time again as the EU has approved its bonus rules which limit the amount of banker bonuses that are made in cash and defer a large amount of these bonuses over a number of years. So if I am a star trader for a European bank in London, Paris or Frankfurt and my bonus is 100k, I’ll get 20k in cash and the rest in some sort of share scheme, most of which I won’t be able to actually get my hands on for at least 3 years. Plus on top of this if a rogue trader like Nick Leeson or Jerome Kerviel lose the bank billions then my bonus earned 3 years ago can be taken away. If I am a star trader for an Asian bank in Singapore, Hong Kong or Shanghai and my bonus is 100k, on pay day I’ll see 100k (minus the tax) go into my bank account.

Firstly, where does this encourage me to work? Europe doesn’t seem so attractive. Secondly, if I am working for a bank whose performance is dependant on the deals I make (risky deals or not) and my remuneration is based on that, I would still want to make as many deals as possible (risky ones or non-risky) despite not seeing my entire bonus up front.

The rules are not the answer to trying to prevent reckless lending or a recurrence of the banking crisis. It’s not the dealmakers that should see their pay reformed but the deals themselves. We await the FSA’s interpretation of the new rules with abated breath.

This doesn’t seem to have dampened the spirits of investors this morning and nor should it do, as they remain content to continue topping up their portfolios in the run up to year end. The FTSE is seeing a mild bit of strength on the back of no action taken by the Chinese to increase interest rates. This has lifted the miners and banks are a bit perkier as they were expecting a rise so the news is welcome. The index is testing the 5850 area which was the high marked in last week so we’re right on resistance at the moment. A break above here should lead to a move to test the 5890-5900 level and the 2010 highs. A gradual rising trend line has formed in the last 10 days so near term support is around 5810-20. The bulls really are trying their best to creep towards 6000, so with 13 trading days left in the year, that’s a mere 12 points a day!

The news from China has firmed the dollar with USD/JPY heading back over 84.00 to 84.25 at the time of writing. This mini break out above last week’s high is quite bullish and it’s marked a two and a half month high this morning. Next levels to watch to the upside are 84.60, then 85.00. At least the Bank of Japan will be happy as the rate’s much improved on the intervention levels!

The Euro is still finding the downward trend line a struggle, but having been below 1.3200 earlier this morning it’s just back above it now with resistance slowly drifting downwards in line with EUR/USD itself. 1.3280 and 1.3320 are quite important levels for the bulls whereas the bears will have their eyes on 1.3180 and if we go below here a possible test of 1.3110.

Cable’s been one of the worse hit by the dollar’s strength this morning with dealers selling it quite aggressively since 8am. At 1.5750 right now this is a support area so the losses might be limited.

Gold has also benefited from the lack of interest rate rise in China. Last week we had two bounces off the 1380 area and considering the upward trend for gold remains incredibly strong, there’s a little life in the precious metal today. At 1391 now bulls will be looking for a test of the 1400 area again soon.

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The price activity throughout this week for the FTSE has been yawnsome. A mere 100 points trading range it looks like the market has shut up early for Christmas. Now that the EU leaders have agreed to meet again next week to discuss what steps to take in order to contain the European debt crisis, it’s quite conceivable that we’ll see similar price action until that point.

The market simply couldn’t get any traction to continue in the fashion that it has started December and once again it was a rise in Spanish bond yields that has caused a lack of investor appetite for stocks. Not even good confidence numbers released in the US was enough to push the markets higher.

As volumes start to dwindle then the momentum for the FTSE could do too. Investors could well be content with the gains made throughout this year as the market’s gained some 7% so far in 2010 and if you add in dividends it makes for a decent return, especially considering the turmoil we’ve been through.

This article was written on behalf of London Capital Group. Please click here for more information on cfd spread betting or spread betting forex.