Financial market research and analysis

FTSE 100 content above 7k

While market participants have been obsessing over the Dow approaching 20k, the FTSE 100 has been content to hold above 7000. A finish for the year above 7000 might just be the psychological boost required to presage a fresh record high in 2017. On Wednesday UK stocks lost some ground with light profit taking headed into year-end.

Risers on the FTSE were a mixed bag but the ongoing terrorist manhunt in Germany meant travel and leisure stocks including TUI AG and Carnival were the obvious losers. Amid a flurry of European banking news, UK bank stocks held their ground. The hope is that the fines announced by Swiss competition authorities bring the likes of Barclays and RBS closer to having paid their dues for LIBOR rigging.

Monte Dei Paschi on the ropes

Banks were the headline grabbers on Wednesday- but for all the wrong reasons. Not for the first time this year, shares Banca Monte dei Paschi went limit down to a record low. The bank announced it has four months of liquidity, rather than the previously stated 11 months. The ongoing withdrawal of deposits makes Monte Paschi a ticking time bomb.

Italy’s pending banking explosion has clearly been recognised by Italian lawmakers who approved a proposal to allow an extra €20bn in public borrowing to support the sector. The €20bn is a welcome backup for Monte Paschi where its separate private €5bn funding deal has hit the skids. The Italian government approval is not the end of the road. Use of public funds risks running straight into the brick wall that is the “European Bank Resolution & Recovery Directive’ that says investors have to share some of the burden with taxpayers.  

EU says Hasta la vista banks

Most Spanish banking shares including Banco Santander and Banco Popular Espanol saw heavy losses on Wednesday after losing a case on mortgage interest payments at the EU Court of Justice. The EU court upheld that mortgage customers who paid too much interest would be entitled to compensation while ruling against a proposed time limit on the refunds.

Instead of being returned to shareholders, bank profits will have to be directed toward provisions for customer refunds. This is Spain’s version of the PPI scandal. Another round of capital-raising seems likely for those lenders with lower capital ratios. It seems that just as banks in Europe see light at the end of the tunnel, regulators kick them back into the dark.

 “Brexit transition phase” consolation to Sterling

The British pound eased off earlier lows versus the dollar but fell against the euro on Wednesday. Dour forecasts from the Office for Budget Responsibility were offset by the tabling of a “Brexit transition phase” by Prime Minister May. The OBR said higher inflation and investment would increase public spending over the next four months and it does not expect strength in corporate tax revenue and stamp duty to continue.

A period of transition whereby the UK can keep existing arrangements with the EU would take the sting out of triggering Article 50 in March. To some extent it’s a can-kicking exercise but it would offer businesses more time for planning once the deal between the UK and EU takes shape. We believe the uncertainty of triggering article 50 runs the risk of testing the lows in GBPUSD early next year but expect a relief rally back above 1.30 in the second quarter.

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.