UK Markets Overview
Shares in UK banks received a significant boost on Friday after the Bank of England’s Governor, Mervyn King, announced measures that will loosen monetary policy and encourage British banks to lend. Royal Bank of Scotland (RBS) shares led the FTSE 100 forward, rallying by 8%. Lloyds Banking Group (LLOY) and Barclays (BARC) also saw shares jump by 5% and 4%, respectively. The measures were announced jointly with the Treasury, demonstrating how policymakers and central banks are looking to shield their economies and financial systems from the worsening eurozone debt crisis.
“Speeches by Chancellor [George] Osborne and Governor King have revealed two new direct credit easing measures coming into effect in the UK," explained Ian Spreadbury, portfolio manager at Fidelity Strategic Bond Fund. "1) A 'funding for lending' scheme to provide cheap funding for banks for up to three to four years at below market rates which is conditional on the funds being on-lent to businesses and households, and; 2) Activation of the Extended Collateral Term Repo Facility. [This is] a UK-style LTRO, that provides six-month liquidity against a wide range of accepted collateral, with at least £5 billion per month made available. This scheme was initially set-up in December 2011."
“These measures are [a] recognition that the BoE’s asset purchase scheme alone is not enough to stimulate the ailing UK economy, although the Governor also hinted at the possibility of expanding the scheme beyond its current £325 billion limit. The market reaction was predictable; Gilt yields have fallen across the curve and equity markets are up, with banks outperforming.”
The jump in large banking shares helped push the FTSE 100 index up by 12 points, or 0.2%, to close the week at 5,479. The FTSE 250 index also made strides forward, rising by 155 points, or 1.5%, to close at 10.730.
For Rodney Hobson's reactions to the BoE's latest moves, read: Unimpressed with Bank of England’s Latest Measures
To learn about how the UK markets faired earlier in the week, read the following articles:
Monday Market Moves: FTSE Deflates After Morning Rally
Tuesday Market Moves: UK Shares Edge Higher Despite Spain Scepticism
Wednesday Market Moves: Sainsbury Sinks, FTSE is Flat
Thursday Market Moves: BSkyB Drags FTSE Lower
Spain and Italian Yields Soar
Spanish and Italian bond yields are rising quickly with Spain's borrowing costs nearing unsustainable levels. This week, Spanish 10-year bond yields, which are inversely related to bond prices, rose above 7% for the first time ever, prompted by Moody's downgrade of Spanish debt from Aa3 to Baa3. Recently, the rise of Spanish yields has accelerated following Spain's request for EUR 100 billion worth of aid from the eurozone.
Meanwhile, Italian 10-year bond yields have also surged, reaching 6.3% on the secondary market following an auction on Thursday. At the auction, Italy sold EUR 4.5 billion of three-year bonds at a yield of 5.3%, up from a yield of 3.9% at its most recent comparable auction. Collectively, the rise in Italian and Spanish bond yields indicates the market's hesitancy to proclaim that the eurozone's sovereign debt crisis has been fully resolved.
Weekend Elections in Greece
Greeks are going to the polls this weekend in an important national election that will likely decide the fate of the country and its future participation in the eurozone.
"There is one thing on the markets’ minds and one thing on global policy makers’ minds at the moment: will Greece manage to stay in the Eurozone?," said Kathleen Brooks, research director at GAIN Capital. "On Sunday 17th June the Greek people head to the polls for the second time in over a month to vote for a new government. The election has turned into a binary outcome; either vote for un-ending austerity and stay in the eurozone or vote for an anti-bailout party and leave. If the latter happens then Greece will be the first country to leave the currency bloc, it would likely cause the economy to fall into a deep depression as Athens returns to a de-valued drachma and it could cause global market volatility akin to the Lehman Brothers bankruptcy in 2008."
"The two main parties in the running to win the election are Syrizia, a radical left party that is pledging to scrap austerity and keep Greece in the Eurozone. The second party is New Democracy, a conservative party who signed the moratorium prior to the May election to commit to austerity after the elections. The latest polls suggest that New Democracy has a slight lead," said Brooks.
Industrial Production Down in the eurozone & UK
In April, industrial production for the eurozone continued its contractionary trend by dipping 0.8% from March, though the drop was less than economists had feared. In the primary bright spot from the report, French industrial production rose by 1.5% from March--further than was expected by most economists and reversing recent declines. Meanwhile, German industrial production fell by 2.2% month-over-month led by a decrease in the production in factory machinery and consumer goods. In Italy, industrial production continued its rapid erosion, declining 1.9% in April after suffering a 5.9% decline in March. In the UK, industrial production figures also disappointed by failing to register any improvement month-over-month despite expectations for a modest gain.
US Jobless Claims Rise, Retail Sales Slip
Data released this week from the US Bureau of Labor Statistics showed that initial jobless claims rose by 6,000 to 386,000 for the week ending June 9 following last week's upward revision. To strip out inter-week volatility, most economists look at the trend in jobless claims by using a 4-week moving average. Following this week's data release, the 4-week moving average of jobless claims rose slightly to 382,000. Sustained jobless claims reports below 400,000 tend to indicate employment growth. However, claims have been moving in the wrong direction of late--rising in five of the past six weeks. The new data continues to corroborate the view that the US labour market may not be as strong as January and February data had previously suggested due to unseasonably warm weather and aggressive seasonal adjustments.
In May, US retail sales slipped by 0.2% and April's retail sales also fell by 0.2% following a downward revision. It is worth noting that the US retail sales report is not adjusted for the effects of inflation. With falling gas prices over the past two months, US retail sales were expected to fall. Specifically, petrol station sales fell by 2.2% contributing to the bulk of the decline, though falling sales for building materials and at drugstores also played a role. With two consecutive months of retail sales declines, the US economic recovery will be hard-pressed to continue since US discretionary spending makes up roughly 70% of GDP.
