Mid Morning Market Report, 3rd August 2012

by Mike Franklin, Head of Investment Stratagy, Beaufort International Associates

The positive impact on Eurozone markets from his introduction of three-year funding in late-2011 earned the European Central Bank’s President Mr Draghi the nickname ‘Super Mario’ as he set about trying to fix the plumbing of a system with inherent terminal flaws. Yesterday, that soubriquet slipped a little as he appeared to oversell and under-deliver on his recent promise to ‘do whatever it takes’. This is what the markets want to hear but they also want to see it – now – since they operate on a much shorter timescale than do bureaucrats and politicians trying to turn back the Eurozone clock by ten years or so. However, though Mr Draghi may not be able to implement changes, such as direct sovereign bond purchases as quickly as the markets crave, he is laying the foundations for a system that attempts to make Eurozone governments accountable for their fiscal policies to their fellow zone members.

Recognition of this fact is reflected in the improving tone in equity markets in Europe this morning, despite the sharp rise late yesterday in the yield of the Spanish Governments 10-year bond back to the 7.2% level. Key practical issues here are that while the various zone governments, subject to their own national timetables and mandates, need to be persuaded to cooperate, each month that passes is another month of recession or weak economic growth and mounting bills to pay for the basic social services provided by hospitals, schools and fire crews.

As it became clear yesterday that Mario Draghi had no quick fix up his sleeve and given that neither the Bank of England (earlier in the day) nor the Federal Reserve, on Wednesday, had announced any new support measures, the markets dropped dramatically. Spain’s IBEX 35 fell by 5.2% on the day while the FTSE 100 dropped by a more measured 0.9% to 5,662. By their closes, the S& 500 and DJ Industrial indices had lost around 1.2%.

In the absence of any hint of concerted stimulus action by Central Banks, including China, mining stocks in London took a hit with Vedanta (-7.1%) and Antofagasta (-5.2%) notable fallers against a weaker trend in base metal prices. Talk of full-blown nationalisation left 81% public-owned Royal Bank of Scotland shares down 5.1%.

In the U.S., smaller stocks continued to display an unusually wide range of percentage rises and falls – Sealed Air Corp (-17%) and First Solar (+21%) – while the majors broadly reflected the instant switch to ‘risk off’. Following on from the ‘algo-disrhythms’ of earlier in the week, the broker at the centre of that computer program failure, Knight Capital, has seen its market value implode by 75% to $250 million after revealing that it estimated a loss of $440 million from the trading errors. Unsurprisingly, the company is now fighting for its very survival and this brings to mind the problems incurred by the Nasdaq Exchange in connection with the Facebook launch where the legal claim threatened by UBS may far exceed the amount set aside by the exchange for such events. The attractions of making profits by providing services involving the big volume, rapid turnover, markets have to be tempered by the awareness that, if you fail to deliver, losses can mount very quickly and destroy you. Perhaps, with a little super-hero help, this ‘dark’ Knight will yet be able to rise.

A reduction in transaction fees has lifted the Shanghai Composite by 1% this morning as broker shares have rallied. In Tokyo and Hong Kong, lower closes suggest that investors remain preoccupied with the poor economic and corporate outlook. Europe, however, is partying again as if there is no tomorrow. (There’s a sobering thought). With the S&P 500 futures up 0.6%, markets are nailing their hopes on poor U.S. jobless numbers later today being weak enough to force the Fed to take stimulative action. Certainly, with the Presidential Election now only three months away, President Obama must be hoping for a miracle on the economy as well as a few more Olympic Gold medals to overhaul the Chinese.

Mike Franklin, Head of Investment Strategy, Beaufort International
  Mike Franklin
Chartered FCSI
Head of Investment Strategy
Beaufort International Associates


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