Friday, 21 May 2010

Markets expect something nasty soon

Equity markets are again on the slide today with the FTSE down below 5000 at one point today. Merkel has got her Greek rescue package through the German lower house but at what cost to her government and authority? She demands tougher regulation of banks and markets but as this will inevitably mean reduce corporate profits its hardly surprising equity markets are falling. The Euro has improved today but Sterling continues to slide which is beneficial to the rebalancing of the UK economy.

The markets don't like the split at the heart of the Eurozone between France and Germany. The delectable French finance minister, Christine Lagarde, does not agree with Merkel on the way to reform the markets. I wish we had finance ministers as stunning and as able as Madame Lagarde. How does Sarkozy get all these women? The market view now is that the EU/IMF rescue package will not work and some countries will have to leave the Euro for their own good and the future health of their governing clique.

Over the pond the rise in US jobless claims also spooked the markets, fertile ground for spread of the Greek contagion. There simply a worldwide lack of investor confidence and appetite for risk. The US will certainly go back to the Glass Steagall Act splitting retail and investment banking but anything further is dangerous. What we are seeing is a flight to quality in the sovereign debt market. German 10 year yields are at an all time record low 2.68%.And Greece? Well their 10 year is at 8.28%. Says it all.

What our regulators and wee George should remember before signing up to Merkel's mad schemes is how much of the UK corporate tax take, around 25%, comes from the banks. Markets will start to focus on the UK sovereign debt situation more and more and I expect to see Sterling slide further against the dollar. Whatever wee George and our diminutive local LibDem MP Lawsy come up with it had better be good. As Byrne said in his one sentence billet doux to Laws, there is no money left.

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