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UK stock market commentary (February 04, 2013): It's bash a banker day

Gorgeous George is to bash the banks today as he sets out his plans to ring fence their operations. Not for the first time we will see a politician making a populist speech to show that the nasty old Tories are being tough on the banks to make them safer and ensure that we don’t see a repeat of the banking crisis of 2008 and that ultimately that UK tax payers will not have to bailout banks in order to prevent money from being distributed from cash points all over the country. We’re most likely to see an attempt to try and curry some favour with the electorate more than anything else as bashing a banker remains a very popular pastime, particularly as scandal after scandal continues to hit the industry.

There’s no question that banks became too big during the boom years, RBS in particular and even in years since the banking bubble burst the industry is going through seismic changes. Completely splitting up the banks however isn’t going to help the industry or the economy in the long run either, regardless of whether it might be a popular move or not. What we need now is the banking industry to support the economy by lending to businesses and consumers and stringent ring fencing or splitting of the “casino” bank and the retail bank is likely to curtail this. Despite the government’s best efforts to apply the pressure on banks to lend more, regulation is hampering their efforts as banks have to hold more regulatory capital, so on one hand you have the funding for lending scheme and on the other you have the government looking to separate the banks which would be counterproductive to their goal of increasing the flow of credit.

Banking stocks haven’t been affected too much this morning ahead of the Chancellor’s speech but the FTSE has got off to a negative start for the week. On Friday the big US nonfarm payrolls data for January came in slightly lower than expectations at 157k but what caught investors’ attention were the upside revisions for the previous two months. In addition, other bits of economic data were a pleasant surprise with manufacturing also surpassing expectations. As a result, the Dow Jones closed above the 14,000 mark, the first time since 2007 marking in a 150 point gain.

As mentioned though this has translated into strength for Europe this morning with the FTSE trading a little lower to 6330 at the time of writing. To the upside bulls will be closely watching the resistance and year’s highs around 6350.

The risk appetite was boosted on Friday by a stronger US job sector and reassurance from the Federal Reserve that it will continue to pump money into its economy. Benefitting from the news was the common currency which went on to reach above the 1.3700 level. Towards the close the euro pulled back slightly but nevertheless closed 77 pips up at 1.3654. A bullish feature (for the euro) worth considering is the decline in the ECB’s balance sheet which added to the general optimism regarding the common area.

Gold closed at $1667.3 on Friday and is expected to trade in a narrow range of between $1660-1680 by many as its shine has been taken off by upbeat economic data in the US. This morning it is edging up slightly. The world's largest economy has gained traction and other good news of signs of recovery across key economies has meant that the case for monetary stimulus measures weakens and the demand for the precious metal as a hedge against inflation falls. Gold's safe haven appeal has taken a knock due to this new optimism.

After China it was the US confirming that its economic recovery is on course as the employment report pleased investors. So with the two biggest oil consumers staying strong, crude prices were well supported with the WTI gaining 24 cents to $97.62 a barrel on Friday. Adding the unrest in the Middle East and North Africa its outlook remains positive.