Europe
Stocks in Europe took a moderate turn for the worse in Wednesday’s trading as large fines for FX market rigging at five banks in the UK, US and Switzerland pressured the respective shares so even a slight improvement in UK and European economic data wasn’t enough to dissuade investors from heading for the exit in overextended markets.
The banks involved had recently made provisions for the fines in or just after recent quarterly earnings reports so the impact is largely priced in explaining the relatively small declines.
The fines are the biggest ever handed out by the FCA but are relatively small compared with those levied in the US for mortgage fraud.
The small size of the fines and the fact that it is the banks and not individuals who face the consequences calls into question the effectiveness of the regulation.
The fines are being paid with shareholder money so the moral hazard within the banks has not been removed; the likely result will be more fines down the road as more manipulation is revealed.
The biggest market impact will likely be a faster move by banks towards automation of market-making activities to remove the human element in trading FX and other markets. Removing the humans lowers the risk of manipulation but could also lead to more of the kind of volatility seen in October; robots just don’t seemingly absorb risk in the same way as a human trader might have when sentiment sharply changes direction.
Eurozone industrial production slightly missed expectations but improved significantly from the previous month rising 0.6% year-over-year. There have been small signs of a turnaround in European data recently so even if GDP data misses on Friday, forward-looking data is looking more positive.
Data for employment and wage growth in the UK were largely positive with the number of people claiming unemployment dropping while the unemployment rate stayed at 6% and average earnings rose more than expected in September. Average earnings increased by 1.3% year over year in September, higher than inflation at 1.2% meaning worker real income increased. The increase in real income puts money into people’s pockets that they can use for consumption or investment.
The Bank of England’s quarterly inflation report painted a less optimistic picture than the labour market data. The Bank lowered its growth and inflation targets for 2015 and projected that inflation will drop below 1% in the next six months. By implication a rate hike before the general election now appears unlikely and could come as late as October next year.
US
The FX market fines were a blow to sentiment in US markets which pulled back from the fifth straight record high for the Dow 30 and S&P 500 ahead of key Chinese and US economic data later in the week.
FX
The US dollar was mostly lower against major currencies on Wednesday with the notable exception being the British pound after dovish forecasts from the Bank of England reduced chances of a rate hike in the UK before the US.
GBP/USD had been holding above 1.68, but a second failed attempt to get through 1.5940 after the stronger UK employment data meant that the pair dropped over 100 pips during the BOE press conference towards 1.58.
Commodities
The mixed performance of the US dollar meant commodities traded largely sideways on Wednesday
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