A Week is a Long Time in the Markets

Written by Barbara Ridpath

Equal and opposite news seems to flash across the screen at an ever increasing pace. ‘Euro crisis’ paired with ‘Euro rescue’, ‘Senate banking bill stalled’ followed by ‘Senate banking bill passed.’ It is little wonder the markets are confused. The cumulative effect of a variety of domestic moves, few of which are in keeping with the G20 idea of collective action, and the layer upon layer of new regulation over and above what has been proposed by the Basel Committee is difficult to disentangle. This week alone we have seen the first passage of the AIFM in Europe, the passage of the US Senate Banking Bill, the German naked short selling restriction, and uncertainty over the timing and direction of UK coalition’s study groups on banking and non-doms.

The upcoming G20 meetings on 26 and 27 June in Toronto cannot come soon enough, if consensus is to be salvaged from the wreckage of the last few weeks on an international approach to financial regulation. The crisis phase is over. Domestic political expediency now dominates in many of the members. The Euro crisis has brought into focus the primacy of fiscal policy and sovereign debt issues in many jurisdictions, but most acutely in the Eurozone.

The markets are confused between the uncertainty of the impact new regulatory measures will have on growth and the availability of credit, and the impact European debt exposures will have on bank balance sheets, exchange rates and interest rates. They are not inclined to find the Greek rescue package or the longevity of the Euro credible without legitimate means to enforce fiscal discipline within the Eurozone.

It is very difficult to sort the opposing directional signals from this week’s various news items, and even more difficult to determine the cumulative impact of the regulatory decisions made and underway. What is evident, however, is that the markets want more clarity than they are currently receiving on the direction, cost and implications of these new moves. Heterogeneous and disparate moves from nation to nation and market to market will not bring the clarity they seek. Moreover, in order to handle the risk transfer inherent in the financing of existing fiscal deficits, it’s critical that we have a fully functioning financial system with confident supplies of liquidity. For this reason alone, the G20 will have to find that consensus again, if the next crisis is to be avoided.