Large fines for FX market rigging at Citigroup and JP Morgan Chase are pressuring the respective shares and setting up US markets for a lower open as investors look for reasons to take profits at overbought levels. The five banks involved in the US, UK and Switzerland had recently made provisions for the fines in or just after recent quarterly earnings reports so the impact is largely priced in. The fines are the biggest ever handed out by the FCA but are relatively small compared with those levied in the US for mortgage fraud. The small size of the fines and the fact that it is the banks and not individuals who face the consequences calls into question the effectiveness of the regulation. The fines are being paid with shareholder money so the moral hazard within the banks has not been removed; the likely result will be more fines down the road as more manipulation is revealed. The biggest market impact will likely be a faster move by banks towards automation of market-making activities to remove the human element in trading FX and other markets. Removing the humans lowers the risk of manipulation but could also lead to more of the kind of volatility seen in October; robots just don’t seemingly absorb risk in the same way as a human trader might have when sentiment sharply changes direction. Staying on the topic of FX, Philly Fed president Charles Plosser has said in a speech that “dollar shifts don’t effect US inflation much” referring to the relatively internal nature of the US economy; it’s really international companies who are more exposed by foreign earnings. If the Fed doesn’t mention the dollar as a major concern in next week’s FOMC minutes this could see another leg higher in the US dollar rally and fall in commodities. Macy’s, Pinnacle Foods, JC Penney and Cisco report earnings today. Futures suggest the: S&P 500 will open 5 points lower at 2,034 with the Dow Jones expected to open 45 points lower at 17,569 and the Nasdaq 13 points lower at 4,174. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
FX manipulation fines leading to lower US market open
19:00, 11 November 2014