18.05.12 Friday Morning

Eurozone peril and U.S manufacturing data were the catalyst as the market remained in reverse gear stumbling to its lowest level since the dip of last November. Contagion is the buzzword as political problems heightened with Greece still unable to form a government with polls revealing voters are once again favouring the pro-bailout parties. Fitch has lowered its rating of the country to junk.

These extensive problems caused the ECB to stop monetary operations to some Greek banks. A bank run took place on Bankia with up to one billion euros being withdrawn whilst foreign currency dealer ICAP stated that it is ready to start dealing in Drachma. Greece’s demise and potential exit from the Eurozone, dubbed the ‘Grexit’, seems to be gathering more speed. Fears of contagion and one of the ‘bigger’ Eurozone states following them led the Eurodollar to plummet to the January low of 1.264 with Moody’s intensifying the fear by downgrading 16 Spanish banks.

Mervyn King outlined the UK’s growth prospects as unusually uncertain in his inflation report and stated that the Eurozone is tearing itself apart without any obvious solution. In a nutshell the BOE slashed growth forecasts from 1.2% to 0.8% and raised near-term inflation outlook with the situation slightly worse than had been forecast in its February report

The FOMC also joined the downbeat crowd with their minutes reflecting wariness about the strength of the recovery. US treasuries pushed forwards after details from the meeting revealed that more monetary support is ready should the economy recover falter. Several members were said to acknowledge that more stimulus could be necessary with some seeing risk inflation pressures building.

Figures also did not make good reading with the Philly Fed manufacturing figure revealing a contraction rather than significant expansion over the past period. However, there should not be overall alarm as the Empire State index, a similar gauge that measures manufacturing in the New York region, surged in May, according to figures released by the New York Fed earlier this week.

In equities focus was on the Facebook IPO and the JP Morgan trading loss, the latter seemingly unravelling as they try to unwind the large position. Facebook have raised $16 billion through the IPO with the initial market capitalisation of the company expected around the $100 billion mark when shares commence trading today. This initial price puts the company above Disney and McDonalds in terms of market size. The jury is out to see how it will perform in the long run. The scandal surrounding JP Morgan seems never ending with the initial $2 billion CDS loss now looking more like double that. Heads are set to roll with Ina Drew, the head of the Investment Office the first casualty. More are likely to follow with most of the fingers being pointed at ‘The Whale’ and Jamie Dimon who encouraged such large positions to be undertaken. The loss prompted the White House to call for tougher banking rules.

In the UK Lonmin saw platinum sales flat in H1, Emed Mining reported an operating loss, G4S saw profits at a similar level to last year whilst ICAP saw an operating profit margin of 22% with electronic business up 4%. Antofagasta reported earnings up 35%, Aviva reported trading in line with views whilst Investec saw operating profit down -17.4%.