German Refusal to use ECB Funds to Solve EU Crisis Pushes FTSE Spreads Down
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For today's update see Spread Betting Daily.
The Daily Update from Anthony Grech, Research Analyst, IG Index.
Spread Betting 18 November 2011: 11.00am Update
The FTSE 100 slipped again this morning, as Eurozone woes persist, keeping investors in 'risk off' mode.
German officials continue to insist the ECB cannot finance Eurozone governments, thus blocking off the one possible solution to the crisis.
By 10.40am (London time), the FTSE 100 was down 0.96% at 5371.34, while the FTSE 250 had fallen 0.8% to 10,064.71.
Anglo-German summit talks
This morning David Cameron is going to Berlin for talks with his German opposite number, Chancellor Angela Merkel.
It might be nice for Ms Merkel to actually have talks with a country which isn't being run by Eurozone bureaucrats and IMF officials, but the two are unlikely to find much to agree about.
Mr Cameron has been vocal in calling for the ECB to step up and begin mass purchases of sovereign debt in order to stem the crisis, instead of the dribs and drabs it currently buys at present.
In addition, he will go into bat for the City of London, arguing against the imposition of a financial transaction tax that many fear will drive firms away from the UK's financial hub.
However, Germany remains firmly wedded to the idea of a new tax, and definitely against a major uplift in ECB bond purchases.
In fact, what we have is the worst of both worlds; the ECB is in fact conducting a sustained, low level programme of bond purchases, currently running around €10 billion per week. This means that it is in effect financing sovereign governments, a clear breach of various EU treaties.
However, these small purchases are accompanied by constant declarations that it will not keep buying forever and that countries must sort out their own finances. As a result, investors are constantly fretting that the ECB will cease buying, which could prompt a rout in bonds issued by Rome and Madrid.
Until this problem is resolved, either by Germany and the ECB going all out to support their Eurozone partners, or by kicking said partners out of the single currency, there will be no end to this crisis. Markets will remain fundamentally vulnerable on both the upside and downside to the latest set of rumours from Europe.
The issue was neatly, if unintentionally, underlined by Germany's foreign minister, Guido Westerwelle. He wrote in the FT this morning that 'putting the ECB's printing presses to work would only bring short-term relief' and that the main aim should be to 'improve competitiveness'.
Herr Westerwelle may have forgotten that short-term confidence would bring much-needed breathing space for indebted countries, and also that Italy, Spain and Greece are not Germany. They cannot be made to behave as Germans overnight, and single-minded austerity without some sort of monetary stimulus will only push these countries into a black hole from which there is only one escape, that of leaving the euro. Still, it's his call to make, and Eurosceptics will wish him well.
Capita keeps dropping
Business outsourcing company Capita has been steadily losing ground since the beginning of November, and the falls have continued today. The share price is down 3.8% to 642p, off just over 100p from its recent high of 744p.
Capita expects organic growth, i.e. growth excluding the impact of acquisitions, to drop by 7% in 2011, as the bleak economic outlook keeps companies nervous on approving major spending projects.
Investors have ignored the comment that 2011 is likely to be the company's best-ever year for contract wins, beating the £1.89 billion won in 2007.
US pre-market
Ahead of the US open, we expect the Dow to start around 61 points higher, with S&P futures currently up 5.8 points.
At 3pm (London time), October leading indicators for the US economy will be published, with growth of 0.6% forecast, from a September figure of 0.2%.
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 18 November 2011: 6.00am Update
Global markets slid overnight on the back of a deepening European debt crisis.
Borrowing costs in Europe continued to rise, keeping investors at bay and causing heightened risk aversion. A Eurozone official was also reported as saying there are no plans for aid for Italy from the EFSF.
In addition, the Super Committee talks in the US have reportedly stalled with less than a week until the deadline to propose a plan to cut the deficit. Everything just seems to be going wrong at the same time.
Among the major US stock market indices, the Dow Jones Industrial Average declined 1.1% to end at 11,771. The S&P shed 1.7% to close at 1216 and the Nasdaq dropped 2% to finish at 2588.
The losses in US markets came despite yet another round of strong US economic data. Unemployment claims dropped and builders started work on more homes than expected in October.
Asia & Australia
Across Asia, regional markets are weaker after picking up a negative lead from US and European markets.
Fresh concerns over Europe’s debt crisis, amid rising borrowing costs, are causing heightened risk aversion. Spanish government bonds hit a euro-era high ahead of this weekend’s election, leaving global markets on edge.
Around the region, the Shanghai Composite is down 1.4%, the Nikkei has lost 1.3% and the Hang Seng has declined 1.8%.
Australia's ASX 200 index remains soft after hitting a two-week low of 4180.4, following a 1.7% fall in the S&P 500. There's been no let up in the crisis, with no sign of officials deciding on anything that's going to calm markets.
Materials names are leading broad-based declines after a tough night for commodities and other risk assets. BHP Billiton, Rio Tinto, Newcrest and Fortescue Metals are down between 1.5% and 2%.
Energy stocks are also underperforming, with Woodside, Santos and Oil Search all lower between 1.3% and 2.5% after Nymex crude oil fell 3.3% to $98.82 overnight.
Volume continues to be light, indicating that investors are remaining cautious. The Australian index is down 1.5% at 4194.
Europe
Spain will be heading to the polls this weekend after a shocker of a week on the bond spread betting markets.
Last night, the Spanish Treasury issued €3.6 billion of 10-year bonds at an average yield of 6.975%, their highest level since 1997. Many consider these levels unsustainable after the demise of the likes of Greece and Portugal when their yields hit similar levels.
Opinion polls in Spain are predicting that the ruling Socialist party will be toppled. We have seen little reaction, however, to the prospect of a new government.
Recent leadership changes in Italy and Greece have failed to drive the market to a sustainable recovery, suggesting it will take much more than a leadership change to appease investors.
Today brings Germany producer prices, Italy industrial orders and current accounts. Arguably, however, price action will be dictated by moves in bond yields.
ECB President Mario Draghi will be speaking and investors will be looking for further insight on his position towards an expansion in the ECB's bond purchases.
Ahead of the open we're calling the FTSE down 59 at 5372, the DAX down 61 at 5789 and the CAC down 36 at 2979.
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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"German Refusal to use ECB Funds to Solve EU Crisis Pushes FTSE Spreads Down" last update by AG, 18-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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