tock markets underwent a double whammy yesterday, as another slide in oil prices along with continued concerns about the European banking sector set off a fresh bout of risk aversion, as the miserable start to 2016 saw banking stocks sink to fresh new multi-year, or record lows in some cases, as banks from across the continent got clobbered with the worst losses amongst Greek, Italian and Spanish banks.
The slide has continued in Asia overnight as the Nikkei has slumped sharply again as oil price volatility and the stability of the banking sector weigh on investors.
Deutsche Bank’s shares also continued their decline, hitting a record low, with markets seemingly unconvinced by management claims that the bank was “rock solid”, while German finance minister Wolfgang Schaeuble’s comments that he had no concerns about Deutsche were also similarly put to one side, as fears grow that the bank could well end up being nationalised.
While it is easy to suggest that the current sell-off is an over-reaction where banks are concerned confidence is everything, and as we know from 2008 once it is gone it is very difficult to get back.
With economic growth showing signs of slowing, and interest rates already at record lows and in some case negative the capacity for banks to build up resilience and improve their profitability is becoming that much more difficult, as central bankers around the world fumble around in the dark.
The latest German economic data didn’t provide any comfort either as industrial production for December slid sharply by 1.2%, while exports also dropped back sharply as well, reinforcing investor fears that economic activity is starting to slip back.
The extent of the threat to the banking sectors future profitability can be summed up in one number, $6trn, and increasing. This is the value of the number of bonds currently with a negative yield, and a number which has doubled in the last two months alone.
Seeing the current turmoil being wreaked in financial markets surely it is inconceivable that central bankers will continue with a policy that in essence yields no discernible benefit, and simply prompts counter reactions of pass the parcel by central bankers across the world, essentially rendering the whole policy ineffective, but doing enormous damage to long term savers and pension funds.
Today market attention will be on Washington DC as Fed chief Janet Yellen gives her semi-annual testimony to US policymakers on Capitol Hill, with markets increasingly writing off the prospect that the Fed will be able to raise rates at all this year.
While we get the latest Fed minutes next week, Yellen’s comments today could give a huge steer on how the FOMC views the current market turmoil and whether she acknowledges that financial conditions have tightened. She doesn’t want to be too dovish so as to give the impression that the Fed has been spooked by recent market events, but she also won’t want to be seen to be totally insensitive to the febrile atmosphere currently prevailing in financial markets.
She may also get asked about the prospect of negative yields in the US given that the Fed has asked US banks, in a paper released at the end of January, to model scenarios for negative treasury yields in the latest round of stress tests for this year.
Given the recent surprise actions by the Bank of Japan in cutting rates into negative territory this addition to the stress tests can’t be a coincidence, particularly since Kuroda surprised the markets on his return from Davos, and previous to his visit there he had all but ruled them out.
– continues to edge higher towards the 1.1400 area after pushing above last week’s high at 1.1235. Upward momentum should remain intact while above the 200 day MA at 1.1050 and while we remain above this level the prospect for further gains towards 1.1400 remains. A move back below 1.1040 could well see a revisit of the 1.0970 level.
– the pound has struggled to rebound and hasn’t been able to retest the highs last week at 1.4665, but is still finding support around the 1.4350 level. While above the 1.4220/30 area the bias remains towards the upside and a return to the recent highs, and on towards 1.4800.
– the move through the recent highs at 0.7755 has prompted further gains towards the 200 week MA at 0.7945, though we have run out of steam at the 0.7850 level. Any pullbacks should find support back near the 0.7750 area.
– this week’s move below 116.00 has seen the US dollar drop sharply towards the 114.00 area, and if we close the week below this key area which acted as the base for all of 2015 then we could well see further US dollar weakness in the coming weeks towards 110.00. We need to see a recovery back through 118.20 to stabilise.
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