Market Update On 13 July 2012

13 Jul
So lets summarise the last couple of weeks  – alot and yet nothing has happened. There has not been a new crisis, failure or collapse. There  are dire issues but with proactive action, fiscal pain and possibly the effects of inflation and a change in perspective of normality – I think the endeavours will eventually be successful admittedly with many hicups, breaking news of the latest banking fiasco, mistakes and corrections – and with the odd (maybe more than odd) panic.

Barcelona events april 2012

Some of the major recent events which have caught my eye :-
1.  Bank of England – High Street Bank Lending Scheme Details Due
Sir Mervyn King said there was “a great black cloud of uncertainty” hanging over global business. He has announced in his Mansion House speech, the launch of a scheme aimed at boosting High Street bank lending – to be unveiled later by the Bank of England.

The aim is to make billions of pounds of cheap funds available to banks but only if they use the money to boost loans to businesses and consumers. The move is part of a raft of measures taken to try to increase lending. This is the first initiative which makes loans to banks conditional on the money being passed on through mortgages or business loans.

The belief is the bank of England could initiate circa £80bn to be available if High Street banks increase lending by 5%.

Crucial to its success will be whether it really does persuade banks to make affordable credit widely available.

2.  Republic of Ireland growth in 2011 Double Original Estimate

Irish Prime Minister Enda Kenny has been cutting spending to meet bailout conditions. The Republic of Ireland’s growth rate last year was double previous estimates at 1.4% but this year started badly, official figures show.

It means Ireland escaped technical recession last year – two consecutive quarters of negative growth, although the economy shrank by 1.1% in the first three months of this year.

The figures were produced by the Central Statistics Office (CSO).

3.  Euro falls to it lowest against the US Dollar since 2010

The euro has fallen to its lowest level against the dollar for two years on worries over Eurozone prospects and as minutes from the US Fed dampened hopes of any new stimulus measures.

The euro fell to $1.2165, its lowest level since mid-2010.

US Fed minutes released on Wednesday from its June meeting suggested it was not planning any imminent additional moves to boost the US economy. In contrast, the European Central Bank cut interest rates last week from 1.00% to 0.75% (a record low for the Eurozone). It also cut its deposit rate, from 0.25% to zero.

The value of the euro has also been hit by worries over growth prospects for the Eurozone and whether it can tackle the current debt crisis.

4.  China’s GDP Glows at its Slowest in Three Years – 2nd Quarter 2012

China’s GDP grew at its slowest pace in three years in the second quarter, but other less-cited indicators are already signaling that the world’s second-largest economy may be starting to turn around.

The economy grew 7.6% in Quarter 2. This is slower than the 8.1% in Quarter 1 and 8.9% in Quarter 4 2011. There are fears of a hard landing but the Chinese economy is still relatively strong.

JPMorgan’s Chief Asian equity strategist Adrian Mowat has stated that he expects China’s GDP to come in at 7.7% for the year overall and 6.6% quarter over quarter. That would make Quarter 2 the weakest quarter since the final quarter of 2008.

5.  Moody’s Downgrades Italy by Two Notches

Moody’s Investors Service downgraded Italy’s government bond rating by two notches to Baa2 from A3, and warned it could cut it much further if the country were to lose access to debt markets.

The move left Italy’s rating just two notches above junk status and could raise its borrowing costs ahead of a bond sale due later on Friday.

6.  LIBOR And The Banks – Fines Estimated At $22 Billion

Twelve global banks that have been publicly linked to the Libor rate-rigging scandal face as much as $22 Billion in combined regulatory penalties and damages to investors and counterparties.

The analysis, which the authors admit is “crude”, assumes that 11 more banks will be penalised like Barclays, which paid $456 Million in June to US and UK authorities for attempting to manipulate the London Interbank Offered Rate, the benchmark for $360 Trillion in derivatives, loans and mortgages.

The calculation excludes the potential fallout from ongoing US and European Union cartel investigations, which could result in multibillion-dollar fines.

7.  Markets Await JPMorgan Report on Its Derivatives Trading Losses

Later today, J P Morgan will reveal details of its controversial derivatives trading loss along with second-quarter earnings.

Analysts expect JPMorgan to take anywhere from a $4 to $6.5 billion trading loss, resulting from a trade put on by the  major traders in its London office.

8.  US Cracks Down on Iran’s Use of Front Companies

The U.S. tightened the screws on Iran Thursday, imposing additional sanctions targeted at Iran’s use of front companies to subvert Western sanctions on oil exports.
The U.S. identified dozens of Iranian front companies, ships and banks that it said were helping Iran avoid sanctions aimed at stopping it from acquiring nuclear weapons. The Treasury identified Noor Energy, Petro Suisse, Petro Energy and Hong Kong Intertrade as companies used by the National Iranian Oil Company. U.S. official are also working with the maritime industry to identify Iranian ships, by number, even if they are reflagged or repainted.
9.  Market Savior? Stocks Might Be 50% Lower Without Fed
A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank.

Theoretically, the S&P 500 would be more than 50 percent lower, if the bullish price action preceding Fed announcements was excluded, the study showed.

This was posted on the New York Fed’s website on Wednesday. The study sought to explain why equities receive such a high premium over less risky assets such as bonds. What was found was the Federal Reserve has had an outsized impact on equities relative to other asset classes.

10.  Fear of Year-End Fiscal Stalemate

With the economy having slowed in recent weeks, business leaders and policy makers are growing concerned that the tax increases and government spending cuts set to take effect at year’s end have already begun to cause companies to hold back on hiring and investments.

Economists say the magnitude of the effect remains unclear and the fiscal uncertainty is probably not the economy’s main problem, but is instead one of several factors — along with Europe’s troubles, the spike in oil prices and a continuing hangover from the housing bubble — restraining growth.

11.  Markets Expected To Rebound in Second Half

When we exit the current soft patch in the second half of the year, markets are expected to benefit.

I think in the next couple of months, what we will see is the battle between earnings and how bad is this news? or we will start to see signs the soft patch is ending and we’re bouncing. If that happens I don’t think we’ll worry about earnings in the last quarter. We’ll care about where the market is going.

But if the economic data remains soft, the earnings seasons news will take on more significance.

Global policymakers should also succeed in bolstering the worldwide economy. This is the first time in this recovery that you have almost every policy official around the globe easing.

This recovery is like the last longer – it’s rolling out much slower, but each time in the last two recoveries it took three years before we decided that we are in recovery. Years 4 of the economic cycle things started to gear, confidence finally went up, the job market finally came to life. I think this is likely to follow a similar trend.

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