So the regulators are about to release their pearls of wisdom to a breathless audience and already the sound of incredulity is being heard across the city. Huge limitations, restrictions, rules, reporting criteria etc etc always sound great to regulators as this justifies their existence but some of the proposals leaking out are either exaggerations so that the final document seems almost a relief or one of the longest economic suicide notes in history.
Asking banks to store up capital in times of feast sounds great but who decides what is feast and what is famine? How bad will the next downturn be? Reducing risk, means reducing lending, means lower growth, means higher structural unemployment ..Permanently.
Limiting lending on mortgages to 3 times salary also sound prudent on paper but have they really thought this through. Average salaries are around £26K, average properties are above £150K … following this rule of thumb condemns property prices to a sudden sharp correction to the downside. The chances of any ‘key employees’ buying a property will recede even further as nobody is going to build houses for such small sums. This rule would (in general) move the UK towards the European renting model.
Ah well! With the state now owning two of the biggest lenders it will be rather nice to see them regulating themselves. While at the same time HSBC and Barclays will probably be eying the exits. In these days of electronic banking a head office can be almost anywhere and there are plenty of stable nations who would kill for an opportunity to take the Financial baton away from London.
Tax income from the Financial Sector is expected to be £23bln less this year than in 2007, for all the vast sums poured into the banks the economy would suffer far more from a permanent loss of this magnitude than from the cost of the bailout.
The continued strength in the markets since the start of last week is finally starting to pressure the technical down trends (we only had to rally 1000 points in the Dow to get here!). Medium term resistance in the Dow is at around 7425 which we are just below but in the S&P is at around 772, which we are just above.
The FTSE is looking at the 3900 level on the open an expected rally of around 40 and I must say that I was not expecting to say that quite so soon! One of my cleverer dealers stated (a long time ago) that he would not be buying the FTSE until it fell below 3600 for various reasons. We did hit a low of 3450 two weeks ago but his target is currently looking quite good. With the return to a more positive outlook in the equity markets we might now start to analyse returns rather more closely. Yield on stocks (even if you price in substantial divvy cuts in some quarters) makes a mockery of cash and Gilt returns and unless you believe in the end of all things there must at some point be a substantial corrective move in one of the variables. In the long term either Gilts or Dividends will have to fall sharply or Equities will have to rally.
On the currency side there was little to go for yesterday and not much today either. Sterling continues to flirt with the downside 1.4000 level versus the dollar and the Euro in the
opposing camp pushing at 1.3000 to the upside.
The pound has quietly slipped back below 1.10 against the euro currency but there is not much comment on the wires over the renewed weakness and the yen is likewise following the pound down the slide.
The pressure forcing the euro higher seems to be coming from weak shorts built up in February as the world pondered the likelihood of a break up of the Euro Bloc but this seems very unlikely (for all its problems) as there is no credible mechanism for any nation to detach itself. Germany, France and the Netherlands will probably end up bailing out the weaker units but we can expect some serious quid pro quo. It would not be a surprise to find, in the future, that these three end up with much greater control over the whole edifice. In the end, money talks.
Gold continues to slip as other assets start to appeal but it would be a brave trader who read too much into the current rally in the indices. The rising medium term trend line which we bounced off last week at 890 has now risen to around 905. A breach and close below here might open us up to more significant weakness but, given that the line has held in the past, we are likely to see some attempt to hold the line and another bounce is probably still be the stronger odds. Gold is 3 bucks weaker this morning at $910.
With renewed hopes that the US housing market is finally bottoming out oil also looks to be on the up once again. Any return to a prospect for global trend growth might quickly translate into a squeeze on supply and it must be remembered that the Oil producing nations have cut back supply considerably since the slump in prices began.
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