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Banco Flopular

The unusually smooth bailout of a big Spanish bank and upwardly-revised OECD global growth forecasts helped create an aura of stability in markets. The stability was perhaps inevitable on the eve of what stands to be a very eventful day on Thursday.

 

Banco Flopular

The banking sector led European stock market gains as investors took the rescue of Banco Popular in its stride. The Euro Stoxx Banks 600 index rose as much as 1.5% on Wednesday before paring gains. The general take is that the Single Resolution Board –an EU regulatory entity setup in the wake of the 08 crisis- did its job.

 

The sanguine market reaction is because most debtholders came out unscathed. Junior bondholders lost it all, a lesson that might work its way through the high yield space. Banco Popular market reaction is like ship wrecked passengers celebrating being rescued and ignoring the fact the boat just sank. We’re  perhaps a little more troubled than most at the underlying cause of the need for a rescue, not that the rescue went smoothly.

 

This bailout won’t cost taxpayers anything officially since Santander will raise 7bn euros to fund the liabilities. That is unless contagion spreads across the European banking system. The need to rescue one of Spain’s biggest banks comes at a time when the Spanish economy is firing on all cylinders with the fastest quarterly growth in the Eurozone. The Banco Popular rescue reminds us why we wouldn’t touch the European banking sector with a barge pole. Just because the cost was one euro, doesn’t mean it’s a good deal for Santander – just ask Lloyd’s shareholders what they think of the HBOS acquisition.

OECD raises forecasts, bashes nationalists

The OECD, the Paris-based think tank hiked its global growth forecast for this year to 3.5% which would be the best performance in six years. The OECD devoted a lot of time to anti-globalist sentiment that led to the election of Donald trump and Brexit. It’s interesting that the OECD raised its growth targets for all but the two nations that had nationalist election results (the US and the UK).

FTSE 100 election stalling

A rise in all the heavily-weighted sectors from banking to basic resources to homebuilders wasn’t quite enough to override a sense of caution in the UK stock market. The successful rescue of Spain’s Banco Popular was well-reflected in a rise in the shares of RBS, itself a government-backed bank. WPP shares were top fallers after a poorly-received trading update was laid on top of shareholder discontent at the size of chief executive Martin Sorrel’s pay packet.

US stocks open slightly higher

US stocks edged higher at the open as President Donald Trump nominated Christopher Wray as new FBI director. Timing-wise, it is not a bad move from Trump; it perhaps takes some heat off Comey’s testimony. Trump seems to be aware of the potential fallout from Comey’s testimony and has been talking up the Republican tax and spending bills. We don’t see much fallout from the Comey testimony since he has already previously testified that nobody was influencing his investigation into Russia influencing the US election.

FX slow except ECB rumours

With the US dollar hovering near its lowest since the election of Donald Trump and the pound grinding to a halt before the election, FX movement was minimal. The euro was the stand-out exception. Reports suggesting the ECB is ready to cut its inflation forecasts for 2019 sent the euro to a four-day low until the denial of said reports sent it right back up again. The ECB lowering its inflation targets to us is akin to doubling down on an original bluff in poker. We think the ECB is delaying a necessary tapering announcement. The ECB is hoping the market doesn’t call its bluff before December when the QE program is officially scheduled to end.

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