European bank shares plunge

19th August 2011

The website reports the fact that "On Wednesday an unnamed bank tapped the European Central Bank's emergency lending facility for $500 million (£303 million). This was the first time the window has been used in over a year."

FT.com reports on the banking story in more detail with some investors concerned about Switzerland.

"Worries that the eurozone debt crisis could infect the financial system hit the short-term funding markets, forcing some European banks to pay higher rates for US dollar loans. Switzerland's two largest banks, Credit Suisse and UBS, both denied they had made use of the Federal Reserve's swap facility via the Swiss National Bank. There had been speculation that a Swiss bank had accessed the U.S. liquidity facility via a $200 million repurchase transaction with the SNB the previous week."

Here Market Watch is looking at the futures on US stocks but the news is not good with the Dow Jones futures market down by 160 points to 10,857.

It quotes ProSpreads managing director Simon Brown saying:"I can't see where the positive news comes from" in the near term, leaving the way open for further selling But typically low August trading volume has exacerbated market moves in both directions which could make for heightened volatility through the remainder of the month."

Still with Market Watch, columnist Mark Hubert is not sure we are at the bottom of the market. He thinks it could be weeks away.

"One gets the distinct impression that there are a not insignificant number of advisers out there eager to jump back into the market at the slightest excuse. This is not reminiscent of the thoroughgoing pessimism and despair that you often see at tradeable bottoms.

"If I had to pick one historical parallel to what we're in the midst of now, I am increasingly inclined to pick the period after the Oct. 19, 1987, stock market crash. The closing low of that year's Fall correction, as it turned out, didn't come until early December, six weeks later."

And the mood in markets worldwide wasn't lightened by the European Central Bank's chief economist coming out against Eurobonds as the Economic Times reports here.

Juergen Stark said joint eurozone bonds would represent "a transfer of creditworthiness from stable, solid countries to states that have less solid state finances" and he is opposed.

On FT Alphaville the bailout arguments continue. The Finns are now worried that the Greeks will not provide promised collateral in exchange for its bailout funds.

But it is today's FT's FT Lex column that probably best sums up the investor's dilemma in the midst of such stock market carnage.

"The terror of adulthood is having to make your own choices without knowing how they'll work out. Similarly, investors would love to know if the return of market mayhem on Thursday should be dismissed or if it is a portent of things to come. Unfortunately, for all the plunging equities and bond yields, it is still too early to say." Quite.

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15 thoughts on “European bank shares plunge”

  1. Andy Zarse says:

    Shaun, literally half an hour before I read this I just phoned my supplier and ordered central heating oil. They quoted me 79p per litre. I checked and they told me I’d paid 59p per litre in October 2011, just four months ago. So that is a rise of 33% in four months and if the increase is sustained all year (which i doubt, but) it gives an annual inflation rate of near enough 100% on 28 sec burning oil, as used widely by industry…

    1. Eric Bingham says:

      Andy, 79p per litre – they are having a laugh at your expense!
      The current UK average price for heating oil is 62p per litre as per the following link:   http://www.boilerjuice.com/heatingOilPrices.php

  2. JW says:

    Hi Shaun,
    As well as Iran, the rises are also due to the CBs QE, as it chases oil and other commodities higher. So the professed strategy of ‘helping the economy grow’ does the exact opposite by taking money away from consumers ( but of course the CBs are really only interested in the inflationary effects on notional GDP)
    I have seen an estimate in the States that every 10c increase in ‘gas’ takes $13bn away from consumer spending.
    You are correct that oil price increases affect electricity prices directly and indirectly. Directly for any oil generation ( not much in UK), indirectly a) because most gas contracts are indexed to oil in one way or the other and b) coal substitution in other parts of the world ( ie more coal used rather than oil products in generation) forces coal prices up sometimes even as they are being shipped to the UK.  If the SoS doesn’t know this she should be sacked!
    Commented previously that the Gallup mid-Feb figures have US unemployed up to 9% from 8.3% mid-Jan, interested to see how this is ‘seasonally adjusted away’ this month.

    1. JW says:

       notional should have read ‘nominal’, sorry, trying to engage brain.

    2. Anonymous says:

      Hi JW
       
      I have been analysing the U-6 unemployment numbers for the US.It is hard to get a clear pattern from the unadjusted numbers but there is a hint of issues over the year end as discussed before. If so then May/June is a significant period as the numbers then tend to jump back up sharply.
       
      If we do get #carboncopy2012 in this repect then we will be overoptimistic in the spring and lose it in early summer….

  3. Mike says:

    The price of oil, like other comodities & land, have indeed been driven up by QE and continue to be so.
    This is having a dramatic downward effect on spending on other goods & services, while GDP will not necessarily be affected overall. There is only so much money in the system so oil takes more and other busineses less.
    I note that the price of land has increased by 100% over the last 4 years!! This is also due to QE and high oil prices as speculation builds on biofuels & safe havens. This feeds through to food prices.
    QE is ruination, it is causing prices on lifes basic goods to spike during a resession just when they should be getting cheaper and previous balances have been wiped out. We will not see any recovery while this continues.
    Meanwhile a very few will get very very rich, while the 99.90% will struggle.

    1. Anonymous says:

      Hi Mike
      I was emphasising the effects on Western nations in this article but the 1%/99% argument does apply on the other side of the game as oil price rises lead to richer oil Sheikhs….
      I did not know about the scale of the rise in the price of land and will take a look….

  4. Aptrayes says:

    This situation is even more complex than it seems. Worldwide production of “Oil” is 86M BBD currently. Conventional oil stands around 75M, the balance being “Other liquids”. Oil in production is tailing off at 5% or more per annum, $20 to produce has be replaced with $80 to produce oil. Price at at least $100 is required to continue production replacement. Not all oil is equal, “other liquids” are less energy dense for the same volume so there is a trick in play, after all we want “energy” not oil, which is the carrier. (Diesel has 10% more energy than petrol). So the supply side needs an increasingly high price to maintain current levels of production, let alone increase it.

    Now factor in demand destruction in the West due to recession (e.g US gas consumption has collapsed in the last qtr), the “spare capacity” has been picked up by BRICS. The demand/supply balance is precariously maintained but in a way that the headroom for the West to expand energy consumption again has gone…forever. 

    There are many other factors at play, politics and war, amongst many but you get the idea. OIl Price has indeed now become a powerful moderator on economic performance. It will show continued volatility as leads and lags in consequences play out and may well show us $170 as the brakes go on, or $70 as demand collapses again but the effect will be to suppress growth. Unhelpful statements about “100 years of shale gas” creating bubbles only exacerbate the situation (data shows around 24 years of shale gas play only).

    The key message is that modern economics still insists it is the master of nature and that the law of substitution is inviolate. It is not. There is no substitute for energy dense hydrocarbons in sight. We are accelerating the depletion of natural resources, many sources are getting close to the point of uneconomic extraction (Energy.Return.On.Energy.Invested at one or less, eg tar sands). The EROEI is heading off a cliff, we currently use 6M BBD (it used to be 2 a few years ago) to win the 86M we use and that is accelerating and that number is not properly accounted for at present.

    Of Course, People are right, there still are Trillions of barrels of oil in the earth, we aren’t “running out”. But to try getting them barrels out with a positive energy return is increasingly difficult and heading for a cliff, as easy oil goes. So hell yes, the oil situation is drastically affecting the economic dynamic right now and is one hell of an elephant in the corner waiting to dump on everyone. And of course people have spotted this and are gaming the system , as they always do, speculation is inevitable, if unhelpful.

    1. Anonymous says:

      Hi Alan and welcome back
       
      I think you point is well made (about the increasing marginal cost of oil extraction) and it seems that such pressure is likely to make the oil price itself even more volatile. This of course may well make economic performance more volatile too as we go forwards

    2. Anonymous says:

      Hi Alan

      I have replied again as I read something in the Spectator magazine which I meant to point out before as it travels in the opposite direction to your thoughts. An article written by Matt Ridley I think said that you could get the same amount of energy from US $4 worth of shale oil that you could from US $25 on ordinary oil. He quoted the US EIA as having established this.

      I await your thoughts on this which on the face of it suggests we should switch to shale oil everywhere we can which seems to say the least to be doubtful…

  5. JW says:

    Hi Shaun
    Off topic, back to Greece.
    They have just changed the acceptance %age required for the PSI to 75% to tie in with the English-law bonds. They will never get this. Germany will walk, its over!

    1. Anonymous says:

      I think that holders of the Greek bond which matures on March 20th may look at the timeline and think that “Just say No” might work as a good piece of game theory….

  6. Anonymous says:

    Hi Shaun,

    On topic of electricity – I read in Spiegel that electricity price rises are starting to cause problems for German industry. this is a direct result of the nuclear shutdown.

    Cameron is saying that he wants nuclear plants substantially engineered and manufactured in the UK. In short he should not trust the French because they always support their national champions and do not allow foreign firms to compete.

    The UK should reject boiling water reactor design which is responsible for 5 meltdowns (Fukushima * 4 and Three Mile Island) of the 6 nuclear power plant meltdowns. Put safety before EDF & Westinghouse lobbying. There are safer designs – British AGR, Candu, Pebblebed and Thorium molten salt reactors.

    With decisive action to ensure a reliable electricity supply for industry, Cameron could help support an industrial renaissance.

  7. JW says:

    Hi Shaun
    Mr Cook is forecasting that Brent will hit $60 in Q2 2012 as Glodman/BP unwind their ‘dark’ positions. Coincides with US election requirements and plunges Iran into crisis.
    For all those ‘peak oil’ people, this is not a lot to do with actual supply/demand of oil, but backwardation deliberately manipulated on futures, ie its financial.

    1. JW says:

       Goldman

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