For the past week you could be forgiven for thinking the world was going up the spout. Not only do we have our own insular riots in Britain – for which Iranian leader President Mahmoud Ahmadinejad calls on the UN to intervene over the UK’s “violent suppression” of opposition forces or be accused of being hypocritical – but we’ve also had markets in turmoil.
The market turmoil has been going on for months – stemming back to the first Greek bailout in 2010, or some would say years back to the Northern Rock collapse of 2007 and the subprime before – and it’s not getting any better.
In the past week, we’ve seen the double-wahmmy of US debt crisis combined with the European sovereign debt fears bubbling not panic.
This is not just another mild week, but a second meltdown of markets and I predict it’s going to get worse.
Because the Bear Stearns crash of 2008 led to the Lehmans crash and, before, the jitters in the markets during August led to the Northern Rock crash.
Much of this is driven by short selling hedge fund strategies, and some is based on hedge fund managers sitting on beaches with Blackberries stimulating market fear and craziness.
What this means is that markets that are traditionally under liquidised, under utilised and under staffed in August, are artificially volatile. Any volume plays the hedgies put into these markets can therefore swing the markets wildly.
This all became obvious yesterday when the French bank shares went into a violent swing lower.
Worries that France might lose its Triple-A credit rating combined with fears over French bank exposure to sovereign debt across Europe meant that Société Générale, BNP Paribas, Crédit Agricole and more all took a beating. At one point, Dennis Berman tweeted that SocGen was down -14,34%, BNP -9,86%, Crédit Agricole -9,02%, Natixis -7,08% yesterday.
Why so high and particularly for SocGen?
Could it be due to scaremongering, with some newspapers making scurrilous claims. From today’s Daily Mail:
In an article that appeared in the print edition and online version of the Mail on Sunday on 7 August 2011, it was suggested that according to Mail on Sunday sources Société Générale, one of Europe's largest banks, was in a 'perilous' state and possibly on the 'brink of disaster'. We now accept that this was not true and we unreservedly apologise to Société Générale for any embarrassment caused.
For the truth Simon Maughan, a banking analyst at MF Global, is saying that it’s a message from the markets to France to say they cannot afford to bailout Spain and Italy, so what’s the European plan?
The Financial Times concurs, saying that SocGen was routed because a French insurer was rumoured to have been forced to liquidate positions in the French bank because of financial difficulties, along with the fears over French debt and credit overall.
The trouble is that this fear spreads to other French banks – overall on Wednesday, Crédit Agricole closed down 12%, BNP Paribas lost 10% – and also to the rest of the Eurozone – Italian banks lost 14% of value at Intesa Sanpaolo, 10% at Monte dei Paschi and 9% at UniCredit, whilst UK banks felt the same impact with RBS shares down 4% yesterday to 26.2p.
RBS is a particular case in point as it has over £1 billion exposure to Greek sovereign debt which contributed to the reasons why it has lost a quarter of its value in the past two weeks and is around half the level at which the Government bought the shares to take an 83% ownership.
This wasn’t just confined to Europe though, as the US still has issues and this hit US bank shares yesterday too. Goldman lost 10.1% of its value yesterday, while Morgan Stanley shed 9.7%. Even the mighty JP Morgan fell 5.6%.
Is it all doom and gloom?
Yes, for the moment.
I think August will continue to see major bank shares volatility as the US and EU governments try to get to grips with bringing confidence around their abilities to handle their debt.
There is no confidence there right now, and it’s why their banks’ share prices are plummeting.
However, bearing in mind that all the banks mentioned are too big to fail, it tells me that at some point the shares will bounce back so I’m listening to Warren Buffett's advice to buy when everyone else sells: “We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend … Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”