The ECB becomes jury, judge and executioner for the European Banking System

Week Commencing Monday 22nd October 2012

Overriding Market Themes

A deal has been struck between the Eurozone members to tighten cross border banking, ultimately leading to a banking union of some sort. The French President, Francois Hollande was the first politician to come out of the discussions, assuring the public that this decision ensures more rapid advances to the commonly held dream of a united Europe. It has been agreed that the European Central Bank, as an umbrella organisation for all the regional financial watchdogs, will have the power to intervene in any of the Eurozone’s 6000 banks. The deal appears to be a compromise between Germany and France, the Eurozone’s two biggest economies, whom both disagreed over the timing and the number of banks the Central Bank would oversee. By the end of the year, a legislative framework should be in place, with supervisory work commencing sometime mid-2013. Markets have reacted favourably to this news, unsurprisingly. It seems than any consensus from the immensely bureaucratic parliament in Brussels is welcome news these days. I would imagine however, that if they can get this Single Supervisory Mechanism (SSM) off the ground, we could see a reversal in the Europeans fortunes moving into early to mid-next year.


The UK is being widely seen as escaping recession in the third quarter of this year, according to a number of world leading economists. The economy appears to have grown the most in 2 years in a rebound after one-time disruptions plagues the second quarter. We estimate that the Gross Domestic Product will rise approximately 0.6% from the previous 3 months, when an extra bank holiday led to a 0.4% drop. This seems to be in line with market expectations, and we will know for certain on the 25th October when the Office of National Statistics publishes its preliminary report. We are wary however, as this surge does mask some underlying weakness in the economy that might still prompt the Bank of England to extend its quantitative easing program. 


In even more good news for the UK, Retail Sales rocketed as demand for winter clothing and school uniforms fuelled sales in September. Volumes were up by 0.6% last month as compared with a 0.1% decline in August, although we were all watching the Olympics in August so it is unsurprising! Prices have also risen faster than the average, with textiles leading the charge with 1.3% higher prices in September than in August. Unemployment is also looking better, with only 2.53 million unemployed in the 3 months to August, taking the jobless rate down to 7.9% from 8.1%. 


The US and Israel began their biggest joint air and missile defence exercise over the weekend amid rising tensions with Iran, and a fiercely contested foreign policy debate in the US. Although the Israeli military spokesman stated that this exercises planning started 2 years ago, it does little to ease commodity markets as traders continue to speculate whether a conflict will finally erupt between the 2 nations. Setting aside the enormous human and environmental damage a new war in the Middle East would cause, it would almost certainly render the Strait of Hormuz impassable, causing the price of oil to climb massively. 

GBP This Week

Bank of England governor Mervyn King starts the ball rolling for Sterling this week as he speaks at the South Wales Chamber of Commerce in Cardiff. This probably won’t be the most exciting talk he has ever given, but watching Mervyn is important in case he gives any clues of future interest rate movements or changes in the banks Quantitative Easing program. After that, we are watching the GDP release on Thursday, which should come in around 0.6% against the previous -0.4% release in August. All in all Sterling should continue to have a good week against most majors, with perhaps the exception of the Euro after the single currency’s good news last week.

USD This Week

Most of the US Dollar data seems to be released towards the end of the week, with New Home Sales at the front on Wednesday afternoon. I expect the number of new homes sold in the US to remain relatively flat against August figures, so expect a quiet Wednesday evening on the markets. We also have the FOMC Statement on Wednesday evening which again, should be rather uneventful. Thursday sees the release of Unemployment Claims, Core Durable Goods and Pending Home Sales. I expect Unemployment Claims to decline to around 366k from last month’s 388k, signalling that the US is following their British cousins in seeing employment pick up. Durable Goods should post around 0.8% against -1.6% in August and Pending Home Sales to post 2.4% against -2.6% in August. Finally, Advance GBP for the quarter should come in around 1.8%. Although all the news is positive from the US, expect the US Dollar to trade down as investors continue to see the Eurozone and other international hotspots as more lucrative investments then in the good old greenback. 

EUR This Week

Most Euro news seems due on Wednesday, when Mario Draghi is speaking at a closed-door meeting about the budget, European affairs and finance committees, and Outright Monetary Transactions (OMT) program at the Deutsche Bundestag, in Berlin. We than are looking out for both German and French Flash Manufacturing PMI data, which should come in both better than expected. German Ifo Business Climate is also due, with once again, a better than expect outlook. This should be a good week for the Euro, as it continues to capitalise on its new found bullishness after the Spanish bailout withdrawal and bank harmonisation talks. 

In Other News

It seems the BBC has got themselves into trouble again as newsnight producers warned editors not to drop the program investigating Sir Jimmy Savile. Newsnight editor Peter Rippon stood down from his role after it emerged that the corporation had repeatedly ‘misled’ the public over why it axed an expose showing that the TV star possessed a dark side. This isn’t the first time this year the BBC has come under fire for its conduct, with accusations that they leaked the Queens private views over Abu Hamze al-Masri still burning a hole through the tabloids, someone seems set to get into a lot of trouble.


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