Carney Mark 2

The price of the Great British Pound was the story of the capital markets on Tuesday. Sterling took a hit against the euro and the US dollar ahead of Mark Carney’s testimony to the Lords on Brexit. Post the speech, Mr Carney’s balanced comments regarding the impact of triggering article 50, left sterling little changed by the end of the day. He added that he believes the doom and gloom surrounding Brexit is “overdone” and agrees that monetary policy and QE has its “limits”. He also appeared to throw something of an olive branch to Theresa May stating that “he agreed with the spirit” of her comments on Quantitative easing. Unlike sterling, UK gilt prices hardly moved on the back of Mark Carney’s comments.

We have argued in this blog on more than one occasion Mark Carney was unwise to express quite such strong views on the possible impact on the leave vote ahead of it. This left him little room to move post the decision.

We pointed out the strength of the recent US financials results season, particularly relative to analyst expectations. In contrast, we continue to see pain in the European banks. Today on Bloomberg, Frank Investments were asked for their views on the banking sector post the earnings report from the world’s oldest bank, Monte Dei Paschi. Trading in the shares in the bank were suspended after the company announced it was releasing 2500 employees and shutting 500 branches. The bank now has a market value of less than a billion pounds and over 40 billion pounds of bad loans. Not a good mixture.

Europe has been far slower at addressing the difficulties of restructuring its banking sector than the US. The US banks are the responsibility of the Federal Reserve, but it less straight forward in Europe. The European union may have a common currency in the euro, what they do not have is a banking union or a common fiscal policy. For this reason, deciding whose responsibility to address the situation is less clear. Is it the responsibility of the ECB or the individual nation? A common fiscal policy must be a necessity if the euro is to have a far better chance of surviving. On Thursday, Deutsche Bank report earnings, after the recent volatility investors will hope for some reassuring comments, particularly regarding the potential fines over mis-selling mortgages.

Markets in the US finished the day lower as short term US treasury yields continue to creep higher. A  Bloomberg report suggested the market is now pricing in a 70% chance that the Federal Reserve will move in December. Speeches from several Fed members expressed the view that the US economy continues to recover, added to the belief the Fed will move in December. 

Posted on October 25, 2016 .