Threat of US Credit Downgrade Looms Over Financial Spread Betting Markets
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For today's update see Spread Betting Daily.
The Daily Update from Anthony Grech, Research Analyst, IG Index.
Spread Betting 2 August 2011: 11.00am Update
The FTSE 100 stumbled again this morning as bleak US manufacturing data raised fresh concerns about the health of the global economy.
Despite the US appearing to have averted a debt default after the House of Representatives approved a deal last night to raise the government's borrowing limit, the threat of a potential US credit rating downgrade still added pressure on the financial spread betting markets.
Mining stocks weighed on the leading index this morning, on fears that the global recovery is running out of steam, but gains by banks, which were helped by passable results from Barclays, prevented heavier losses.
By 10.10am (London time) the FTSE 100 was down 0.45% at 5748.63 and the broader FTSE 250 was almost 0.8% lower at 11,351.95, as UK-focussed stocks suffered as a result of comments from the IMF.
House of Representatives passes budget deficit cuts
The debt deal agreement reached on Sunday night cleared its primary obstacle last night when the Republican-led House of Representatives passed the measure despite vocal opposition from conservative Tea Party members, who wanted more spending cuts, and Democrats who were angered by the absence of tax increases.
The US is poised to avoid economic disaster today as the impasse between the two US political parties appears to be over.
The Democratic-controlled Senate is widely expected to approve the deal to cut the country's bulging deficit and lift the $14.3 trillion debt ceiling until 2013. It calls for $2.1 trillion in spending cuts spread over ten years and creates a congressional committee to recommend a deficit-reduction package by late November.
The vote is due to take place at 5pm (London time) and be signed into law shortly afterwards. Though this would end anxiety over the US defaulting now, it does not signal an end to uncertainty over the sustainability of US tax and spending policies, and the deep political divide that the deficit debate has exposed.
Market concerns will also now turn to the struggling US economy and the risk that the deal is not enough to avoid a possibly damaging downgrade of the top-notch US debt rating.
UK PMI construction data
UK PMI construction data released this morning showed that the industry grew slightly faster than expected last month, in a sign of hope for the overall economy after a slew of weak indicators.
The PMI construction index fell slightly in July to 53.5 from 53.6 in June. This however surpassed analysts' expectations of a decline to 53.0. Nonetheless, the better-than-expected results had little effect this morning as yesterday's announcement from the IMF still weighed on market sentiment.
The IMF said yesterday that the UK government should cut taxes and the BoE should take more steps to pump money into the economy if Britain looks to be heading into a long phase of weak growth (UK PMI data showed that the manufacturing sector contracted for the first time after two years).
Investors should be cautious about reading too much into the construction indicator, since it is the smallest sector compared to manufacturing and services.
Mixed earnings data from banks
Earnings data released today from Barclays showed that its first-half pre-tax profits was £2.64 billion, down 33% from a year ago, but above the average forecast of £2.4 billion among analysts polled by the company.
Following the announcement of poor first-half results, Barclays announced that it would cut 3000 jobs. By 9.30am (London time) Barclays' shares had slightly recovered from the morning low and were 0.14% higher at 217.25p.
BNP Paribas announced that second-quarter profits advanced 1.1% as higher consumer-banking earnings helped cushion a loss on its Greek government debt holdings. Net income rose to €2.13 billion from €2.11 billion a year earlier. BNP Paribas shares were up to 43.74p by 9.30am (London time).
US pre-market
US September futures were trading lower this morning, suggesting that the debt deal approval had done little to lift market sentiment following yesterday's abysmal ISM data from the US.
With the sustainability of the budget deficit cuts in question, Dow Jones futures were 0.24% lower at 12,011.00 and S&P futures were down 0.41% at 1286.94 this morning at 10.10am (London time).
This afternoon, the growth and health of the US economy will be tested by personal income and consumption expenditure data scheduled for release at 1.30pm (London time).
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 2 August 2011: 6.15am Update
In the US overnight, the major indices finished lower for the seventh straight session ahead of a crucial vote on the debt deal in Washington.
The sell-off, which occurred in the first half hour, came on the back of a very weak manufacturing report that bordered on contractionary, showing commodities spread betting investors just how fragile the US economy really is.
The NASDAQ and S&P 500 were the worst performers - both declining 0.4% - while the Dow Jones Industrial Average fell a more modest 0.1%.
Asia
Across Asia, regional markets are all lower, reversing yesterday’s gains, as the US markets fell overnight following the much weaker-than-expected manufacturing PMI data.
This focused attention once again on the perilous state of the US economic recovery. The Kospi is the worst performer - down 2.1% - while the Shanghai Composite, Nikkei 225 and Hang Seng are all down between 0.7% and 2.1%.
So much for the relief rally that was supposed to occur on the back of the proposed debt deal. The focus has now shifted to the global economy with manufacturing deteriorating across most global economies, with seven out of twenty-four major economies now showing contraction in July.
It was positive to see traders stepping in and defending the 200 day moving average on the S&P, with the rally from the lows pricing in a positive outcome in the house vote. The result was that the deal easily got the 215 ‘yeas’ needed to pass the vote onto the senate but, as expected, it caused little volatility in asset classes.
It appears the measures which look firmly set to be put in place have done enough to win the support of both parties, though perhaps not to convince the spread betting market that this is in the best interests of the economy.
Given most of the cuts won’t actually be known for some time, the uncertainty this has created will keep optimism contained, not to mention the very real probability that the size of the cuts will not appease S&P.
Europe
Asian markets, which were abuzz with talk of potential BOJ intervention, have done little to inspire European traders who are still coming to grips with fears that the EFSF may have to be dramatically increased to fully address contagion issues. That said, given the late session rally on Wall Street we should see relief from yesterday’s sell-off.
We are clearly seeing an investment strike in global equity markets. A deteriorating economic picture just detracts the investment case from stocks as an attractive asset class, whilst boosting the case for increased weighting to bonds.
What is clear though is that with little returns in the fixed income market and given US treasuries are hardly a ‘risk-free’ investment anymore, the case for quality, high-dividend-paying stocks has increased just that bit more now.
On a company specific level Barclays and Xstrata announce their earnings pre-market with Barclays to see a sharp slow down in Q2 revenues. Though the stock looks attractive at these levels, with huge tail risks in the banking space it is hard to get too excited if taking a short term view.
Ahead of the open we're calling the FTSE up 1 at 5775, the DAX down 12 at 6941 and the CAC down 6 at 3582.
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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"Threat of US Credit Downgrade Looms Over Financial Spread Betting Markets" last update by AG, 02-Aug-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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