Tony's Ten: Soar away markets

28 May, 2013
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Soar away markets…yen it reverses

Hmmm, not the greatest pun ever. Equity markets look ahead and it seems from the face of it that they like what they have been seeing. Despite a huge reversal in Japan, which saw a near 8% decline on Thursday, generally there has been much positive attitude to the economy…or has there?

The reverse in Tokyo reflects the fear that asset prices are simply being supported by massive state intervention in money supply. Programmes of quantitative easing around the world provide banks with cheap money which is recycled into asset prices without actually creating much new economic activity bar a rise in asset prices. At least that is the concern; eventually economic activity has to catch up with the efforts being made to shore up the financial system.

On Wednesday Ben Bernanke, Chairman of the Federal Research in the US, said that there is the potential that central bank monetary authorities may at some stage have to rapidly reverse their quantitative easing policies if inflation needs to be headed off. Given that Japan is experimenting with Abenomics, a term derived from the unprecedented scale of its QE programme, it is not surprising there was a massive sell off from the booming Japanese markets. It shows how sensitive the recovery is to the extreme policies still in place to try to get the economy back on track. Clearly these policies cannot be maintained forever, so a correction when there is even a hint of change is not surprising, unless there were real signs of increased economic activity on a global scale. Indeed, I guess that is the positive, a big correction in Japan has taken place, and a mild one elsewhere – markets are still very bullish though, so maybe they see an improvement in the economy, who knows, they don’t.

Lloyds Banking Group unwind

The failure of the Co-operative Bank to purchase Lloyd’s spinoff Project Verde branches has not been the end of Lloyd’s efforts to unwind parts of its business and realise some value from it. It has sold a second tranche of shares in the wealth management company St. James’s Place, a majority shareholding to which it acquired in the disastrous acquisition of HBOS. On Thursday it announced it had sold a stake worth £450m on top of the £520m stake it sold in March. It is also preparing (according to Bloomberg) to sell a large block of US mortgage backed securities, again acquired via HBOS. The securities are estimated to be worth $8.7 billion. The timing is good, residential property prices in the US, after so many years of catastrophe, had bounced back an amazing 10.5% in March 2013 compared to March 2012 according to house price watcher CoreLogic Inc.

Lloyds still faces a problem, it has to sell the Verde branches and time is starting to run out with an EU bailout condition drawing closer. However, there are signs that the bank is moving forward with its programme to resolve the many issues it has had since the takeover of HBOS.

Meanwhile the Co-operative now has much to do to show it can plug a capital deficit and replace its senior bank leadership. All is not lost for co-operative and mutual business structure. While the Co-operative seems to have swallowed a very ‘poison pill’ when acquiring a commercial property portfolio when it merged with the Britannia Building Society, the Nationwide has been performing well, achieving its highest ever share of the UK new mortgage market, 15.1% - a market which, like many others seems to be showing signs of life.

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