Admiral Share Spreads Plummet 30 Percent Following Profit Warning
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For today's update see Spread Betting Daily.
The Daily Update from Anthony Grech, Research Analyst, IG Index.
Spread Betting 9 November 2011: 11.00am Update
A resignation announcement from Italian premier Silvio Berlusconi has failed to calm markets this morning, as Italian benchmark yields spike above the all-important 7% level, raising fears that the country is now shut out of international credit markets.
Poor updates from insurer Admiral and bank HSBC also hurt sentiment. By 10.50am (London time), the FTSE 100 was down 1.52% at 5482.81, while the FTSE 250 had fallen 1.15% to 10,299.15. European markets also fell, led lower by the Milan exchange, which lost almost 4%.
Italy circles the drain
In the space of less than a week, the crisis in the Eurozone has successfully forced the resignation of two prime ministers. First up was Greece's George Papandreou, and now Silvio Berlusconi has taken his last turn on the stage of Italian politics.
However, this move, which was in the tradition of Roman politicians falling on their own sword, has failed to have the calming effect that many hoped. Italian ten-year bond yields have pushed above the dangerous 7% level, not helped by a decision to lift margins taken by the clearing house LCH Clearnet.
The closely-watched spread between Italian and German ten-year bonds pushed above 500 basis points, triggering the LCH move, which mirrors the action taken back in March when Ireland was forced to seek financial aid from the EU and IMF. The difference this time round is that Italy is far too big to save.
When in Rome – do as the EU tells you
Handily, EU monetary affairs commissioner Olli Rehn, who oversaw the rescue of Ireland earlier this year, jetted into Rome yesterday, armed with a list of questions for the Italian government. Mr Rehn wants his answers by Friday, and if they are not satisfactory then eyebrows will be raised in Brussels and Frankfurt.
The ECB has been buying Italian government bonds on the basis that Italy will pull its socks up and sort out its finances, and any sign that Rome's determination is wavering could prompt Mr Draghi to halt the bank's purchases. If Rome does seek help from its partners in the Eurozone, then I suspect Mr Rehn will need to book in for a very long stay.
CBI sees UK growth slowing
There was more bad news for the UK economy as well this morning, as the Confederation of British Industry (CBI) cut its growth forecast for the British economy. The CBI now expects the economy to grow by 0.9% this year, and 1.2% in 2012, down from original forecasts of 1.3% and 2.2% respectively.
It blamed the Eurozone crisis for exacerbating the already difficult position of the UK, although it added that the government should doggedly press ahead with austerity measures, in order to maintain lower borrowing costs.
Admiral holed below waterline
Insurer Admiral has had a choppy year, and the seas have got much worse in recent weeks. The company's share price sank 30% to 844p, down 44% this year, after it released a profit warning, saying that a jump in personal injury claims meant that earnings would be at the lower end of expectations.
It still expects profit to be up 10% on 2010, but full-year pre-tax profit will be towards the lower end of expectations.
HSBC's performance worsens
HSBC dropped 5% to 509.5p this morning, after underlying pre-tax profit for the three months to 30 September fell by more than a third, to $3 billion. Debt value adjustments allowed HSBC to boost pre-tax profit by a whopping 66%, but bad debt provisions in the US also rose.
HSBC warned that the global outlook remained difficult, but added that it expects a 'soft landing' in China, ie a gradual reduction in GDP growth, rather than a sharp fall-off.
US pre-market
The carnage seen in European spread betting markets this morning looks to be repeated on Wall Street, with Dow futures down 1.6% and S&P 500 contracts 1.97% lower. There is no real US data of much importance scheduled for release today, so the focus will remain on the Eurozone debt crisis.
Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.
The above comments do not constitute investment advice and neither IG Index nor SpreadBets.org.uk accept any responsibility for any use that may be made of them.
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Spread Betting 9 November 2011: 5.00am Update
Global markets advanced overnight on reports that Italian Prime Minister Silvio Berlusconi will resign.
The news came after Mr Berlusconi won a budget vote earlier without a majority. He offered to step down as soon as Italy’s Parliament approves austerity measures in a vote expected to occur next week.
The news saw some risk assets snapped up with gains across equities. Italian debt yields continued to rise to alarming levels, with the 10-year Italian bond yielding as high as 6.79%.
That said the Italian bonds haven’t had a chance to react to the resignation news yet, as markets were already shut when the story broke. We are likely to see yields start to cool from these elevated levels following the news.
Among the major averages, the Dow Jones Industrial Average climbed 0.8% to end at 12170. The S&P added 1.2% to close at 1276 and the Nasdaq tacked on 1.2% to close at 2727. Gains were also logged across European markets, buoyed by some strong company earnings reports.
Asia & Australia
Across Asia, regional markets are stronger after reports from Italy suggested that the news from. The key event in Asia today was China’s CPI numbers, which were released at 12.30pm. China’s CPI rose 5.5% in October, in line with forecasts.
However, its inflation rate fell to a five-month low, which could give policy makers room to support economic growth as the European debt crisis clouds the outlook for exports. The news is likely to be supportive of equity spread betting markets and other risk assets.
The Hang Seng is leading the region with a 1.5% gain, while the Nikkei is up 0.9%. However, the Shanghai Composite is 0.6% weaker.
Australia's S&P/ASX 200 index is up 1.3% at 4348, after hitting an eight-day high of 4365 as confidence continues to improve after Mr Berlusconi agreed to resign. Risk appetite is improving, with investors favouring cyclicals over defensives amid relief that Mr Belusconi is stepping down.
Resources, industrials and consumer discretionary stocks are over-performing, with BHP Billiton up 1.9%, Brambles advancing 2.7% and Fairfax stronger by 2.8%, while Telstra is down 0.6%. Australia’s September housing finance data released at 11.30am was better than forecast, but had a fairly muted response.
Either way, it is encouraging to see the Aussie market holding on to its early gains deep into the session.
Europe
On the international front, traders will continue to monitor developments from Europe. News of Mr Berlusconi’s exit came out after the Italian bonds stopped trading, so yields remained at high levels. Today’s session will be the first chance traders get to react to the news.
Investors will be hoping to see a sharp retreat in 10-year bond yields from the elevated levels we have seen recently. We are also likely to start getting a bit more of a reaction to the China CPI numbers as analysts decipher the reports. Markets would be hoping the moderated figures will encourage some monetary policy loosening.
Turning to Europe and another bright start is expected, notably the Dax which should open 102 points higher above 6000. With the S&P 500 putting on a show for traders in the final stretch, European markets will be the key beneficiary of this positive flow.
As we have previously mentioned, any signs of buying in Italian bonds should provide further support to risk assets especially given there is a 497 basis point spread versus German bunds, with fears a breach of 500 basis points could see clearing houses increase margin calls or haircuts on repos, subsequently accelerating the selling of Italian debt.
Data is thin on the ground both in the UK and Europe, whilst US mortgage applications will hardly set the markets alight even if they come in significantly better than expected. Stock pickers will be keen to go over numbers from supermarket giant Sainsbury, whilst market heavyweight HSBC will publish Q3 2011 earnings.
Ahead of the open we're calling the FTSE up 64 at 5631, the DAX up 102 at 6063 and the CAC up 35 at 3178.
Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.
The above comments do not constitute investment advice and neither IG Index nor SpreadBets.org.uk accept any responsibility for any use that may be made of them.
Advert:
IG Index Spread Betting - No Fees, No Commissions, Free Charts and Live Prices.
Spread Bet on Indices, Forex, Commodities, Shares and more. For details see IG Index.
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"Admiral Share Spreads Plummet 30 Percent Following Profit Warning" last update by AG, 09-Nov-2011
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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