Reports » UK

UK stock market commentary (September 25, 2012): New state bank unlikely to help much

Plans for a state bank have been batted around for a while, but as with most things that politicians suggest and implement in practice it is unlikely to make any huge difference. For existing banks themselves it is yet another kick in the teeth as the government says “since you are not lending to consumers and business, we will create a bank that will”. Banks have been told not only by politicians to improve their balance sheets by holding more capital, but central bankers have demanded it and regulators have made it a rule.

The banking crisis and subsequent sovereign debt crisis has caused far worse growth in the major economies than had been previously expected and as a result made it very difficult and very risky for banks to lend. This is why it is very difficult for business to get loans and homeowners to get a half decent and competitive mortgage. If the eurozone crisis did worsen with countries exiting then this could knock the banks for six again, so it is no wonder they are being so cautious.

So the new state bank will be the answer all our lending woes! What is also a concern is that this new bank plans to leverage itself nine times as well. At least lenders to it will have some solace in the fact they are lending to what is currently considered a safe haven state (!). The only one thing that is good about the plan is there the government will have no problem in recruiting bankers, possibly on the cheap too, since there are so many that have been made redundant recently.

The FTSE continues to see-saw, up a bit, down a bit, sideways a bit, and is at 5850 at the time of writing, just in the black having opened flat. Clients remain rather bearish of indices in general and it doesn’t seem an unreasonable position to hold considering all the bad news that is out there at the moment, yet the markets remain well propped up by the recent action from central banks and so declines don’t seem to be following through with any meaningful lurch to the downside.

This is particularly the case for US indices which remain just off their year highs and the Dow last night gave back just a few points to take it to 13558. Already this morning we are calling the Dow to open 25 points higher at the time of writing as it edges ever close to the 14,000 mark.

Europe’s biggest economy, Germany, showed weakness of its own as IFO Business Climate dropped for a fifth straight month. In addition, the whole pushing and pulling regarding Spain seeking a bailout does not help either, casting further doubts on a short term solution for the sovereign debt crisis. Consequently, the euro pulled back 45 pips to 1.2930 as it becomes increasingly apparent the bond buying program is not an all problems solver. This morning there’s a tinge of bearishness in the single currency with EUR/USD trading at 1.2915 at the time of writing.

The apparent Spanish delay in asking for a bailout which was later priced in, has sent gold investors to the exit yesterday. A rebound in the greenback also put downside pressure on the precious metal’s price which lost $8.70 to $1764.20. Will it be a battle with the US dollar for the safe haven spot, or all that talk about devaluation of paper currency and long term inflation giving gold prices another boost?

The economic data from China, the world second biggest oil consumer indicated the failure of a rebound in manufacturing with authorities deciding not to increase domestic investment. On top of that even Germany, the hope behind a European bailout is struggling. Faced with this gloomy outlook, energy investors took a step back and raised questions about oil demand going forward, sending the WTI crude prices $1.25 down yesterday to $91.93.