Still trapped in financial mess

Considering the dead weight financial sector, stock markets could have fallen a lot further than they eventually did over the course of last week. However, there's no getting away from the mess that financial shares are in. Just over two years ago today, the RBS share price hit an all time high of £7.24. Last weeks low of just 10p highlights the markets underlying concern that the financial cancer has not been completely removed. Last weeks treasury announcement regarding a second round of bailouts seemed to have little impact. In fact, in many ways it had the complete opposite effect.

The spectre of full nationalisation looms large over the likes of RBS and Lloyds, and the prospect of this is weighing heavily on the beleaguered pound. Sterling is being shunned as traders speculate on the scale of the governments eventual liability with regard to the banks.

The finger of blame for the current collapse in banking shares is pointing at the short sellers once again. John McFall, Chairman of the Treasury Committee, wrote to the head of the FSA asking them to investigate anecdotal evidence that some hedge funds have been shorting stocks.

It is almost inevitable that the short sellers get the blame; they are after all a convenient target. However, it should be recognised that conventional investors selling their holdings in droves can have a greater effect on a share price. After nationalisation of Railtrack and Northern Rock, investors could be forgiven for taking their cash and running at the faintest whiff of nationalisation for Barclays, RBS or Lloyds. While the short sellers may be playing a part, it is record losses, ongoing rumours and unquantifiable risks that rattle share prices the most.

Barry Ritholtz of www.ritholtz.com put it rather bluntly Go Swedish. Wipe out shareholders, bond holders, and all the bad debt and junk paper these firms hold. Zero it out, spin out the assets with clean balance sheets. The Treasury has effectively admitted that it has no idea how much this will all cost UK tax payers eventually. This coupled with a rumoured downgrade to the sovereign credit rating of the UK government has pushed sterling down to below 1.3700 against the dollar level. The final nail in the coffin for Sterling came when the UK GDP figures came in well below estimates at -1.5% for the last quarter.

The coming weeks big ticket item is the next FOMC interest rate decision. With rates currently at 0.25%, there is little room for manoeuvre. Speculators will be following the announcement closely to see if the Federal Reserve will follow Japans lead from the 1980s, and cut rates to zero. Almost as important as the rate decision, will be any accompanying announcements on other measures the central bank is taking to get credit markets functioning again.

Volatility is likely to continue next week on the currency markets with sterling possibly continuing to come under pressure. Against the Dollar, the Pound hit levels not seen for years, yet against the Euro the pound is yet to fall to the 2008 low. The Euro is also weak against the dollar as the so called SPIG countries (Spain, Portugal, Italy/ Ireland & Greece) weigh against the relative strength of North European nations. Sterling could have further to fall; the Euro is not as strong as it was once perceived to be.

By placing a Double Touch trade predicting that the EUR/GBP ex

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Mike Wright

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