If investors were hoping for a quiet week away from concerns about China with Chinese markets closed for Chinese New Year, they got a very rude awakening yesterday as stock markets sold off hard, and there was no respite in Asia markets either despite a late rebound off the lows in the US and as such we could well see European markets open lower today.
The catalyst appeared to come from the European banking sector as screens flashed red across the board in scenes of total carnage, with equity markets selling off hard across the board over concerns about the future profitability of the whole sector, in an era where interest rates look set to go further into negative territory. Overnight the ten year Japanese bond became the latest to succumb to this new form of monetary madness.
European banks face a host of problems, including falling profits, a slowing global economy and negative rates reducing their ability to boost their profitability, at a time when a lot of them are being encouraged to boost lending to the wider economy as well as improve their capital buffers. Quite simply they can’t do all of them at the same time.
So far this year three of the worst performing stock markets are in Europe, with the Athens stock market the worst performer and the Italian FTSE MIB, both down over 20% and the German DAX not too far behind losing 14.5%, falling below its 2015 lows, and now over 12% below the levels it was when ECB President Mario Draghi announced the commencement of the ECB’s €1trn QE program.
Greek shares have been hit especially hard, now back at 1990 levels over rising political uncertainty as the new bailout talks continue to stall over reforms to the pension system amongst other things, like labour market reform.
The solvency of Italy’s banks has also been a continuous source of concern, despite talk of the creation of a new “bad bank” amidst concern about the true levels of non-performing loans.
This scepticism is well founded given the track record of Italian regulators in forcing Italian banks to clean up their balance sheets, which isn’t good. Over the past few years Italy’s oldest bank Monte di Paschi (L:0R7P) has had to raise capital on more than one occasion as well as being bailed out twice by the Italian government, which does give cause for concern as to the competence of the oversight, amidst a complete lack of transparency.
Then we have Germany’s Deutsche Bank (DE:DBKGn), whose shares have plunged to levels last seen in 2009 at the height of the financial crisis, and is down nearly 40% this year alone, over concerns about the resilience of its balance sheet. The cost of insuring the German banks debt against default surged yesterday, as investors took fright, and as we know from Lehman Brothers, no matter how healthy a bank looks on the surface, sentiment can deteriorate very quickly.
A late rebound in the US overnight saw some of yesterday’s losses diminish but US markets still managed to finish the day sharply lower, and while we haven’t as yet revisited the lows from last month, we’re not that far away, with the very real prospect we could head lower in the coming days.
EUR/USD – currently finding support 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.
GBP/USD – the pound found some support around the 1.4350 level yesterday before rebounding. 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.
EUR/GBP – continues to remain well supported and moved above the recent highs at 0.7755 bringing with it the prospect that we could well see further gains towards the 200 week MA at 0.7945.
USD/JPY – yesterday’s close below the key 116.00 support levels that kept a floor under the US dollar for all of 2015 could well open up the prospect of a move towards 114.00 and even possibly a move towards 110.00. We need to see a recovery back through 118.20 to stabilise.
Equity market calls
FTSE100 is expected to open 16 points lower at 5,676
DAX is expected to open 50 points lower at 8,929
CAC40 is expected to open 11 points lower at 4,055
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