How Markets Work

🤣 Never forget when my friend Jamie, a LIFFE floor trader, was asked to explain the markets he was trading, during an interview..

Actual Quote -

"See that number? That's the bund. It has got some shit to do with Germany but all you need to know is it goes up and down and…

— PiQ (@PiQSuite) August 3, 2025

Financial Armageddon Averted

Contrary to the American version of Project Fear, Trump's victory has not brought about financial Armageddon. Markets around the world are rallying, and the Dollar has stabilised.

The lesson here is that markets go down, and markets go up!

The Calm Before The Storm

Eerie Calm Across Markets One Day Before The Main Event: Asia, Europe, US Unchanged https://t.co/SCxWGwyzTV

— zerohedge (@zerohedge) June 22, 2016

China's Black Monday

Chinese stocks have plunged 8.5% today, sending global markets into a tailspin.

The fall is despite the fact that the People’s Bank of China was gearing up to inject some stimulus, likely by reducing the level reserves banks are required to hold and thus unleashing more liquidity, and the fact that the Chinese pension fund is to be allowed to invest up to 30% of its funds in the market.

China is learning, what every other government in the world knows (or has learned through bitter experience), namely that the markets cannot be tamed by grand one off gestures when they are in panic mode.

The Bubble is Pricked.

European stock markets have fallen again for the third day in a row.

For why?

People are becoming very nervous about the knock on effects of the sanctions on Russia, and fears that interest rates may start to rise in the US.

Are these fears justified?

Yes.

That being said, markets go up and markets go down. There will always be another bubble then another crisis to prick that bubble.

Coffin Corner

According to the Telegraph UK stock markets are approaching “coffin corner”, where even the slightest miscalculation could lead to a sharp correction or even a crash.

“Coffin corner” is the point at which a passenger jet is flying at maximum altitude with engines at full throttle. This is when even the smallest mistake can lead to disaster, and it has (so the Telegraph claims) startling relevance for today’s stock markets.

The people piloting the global economy today freely admit they are in completely uncharted territory and largely responding to each event as and when it comes.

I have news for the Telegraph, that is exactly how markets work.

Markets are based on fear, greed and the herd mentality; that is why bubbles form and bubbles burst!

Allegations of Gas Market Rigging Akin To LIBOR

The FSA and Ofgem are looking into allegations that some of the UK's largest utilities have manipulated the UK physical natural gas markets.

Seth Freedman, a whistleblower, told them that he saw evidence that wholesale gas prices, used as the basis for domestic energy bills, were manipulated by some of the big power companies.

Mr Freedman, who worked at ICIS Heren (a firm which reports gas prices), said he saw what he took to be suspect trading on September 28 (the end of the gas industry’s financial year).

The fact that gas is traded like all other commodities makes it susceptible to speculation.

In the event that Mr Freedman's allegations are proven to be true, then this would be a scandal equivalent to the LIBOR rigging by the banks.

You can almost hear the lawyers rubbing their hands with glee at the thought of the lawsuits that are going to come from this.

The Collapse of The Rial - A Warning To The Eurozone

Iran's rial is collapsing, following an "innovation" last week by the Iranian government to supply importers with dollars via an "exchange centre".

Unsurprisingly, people have scrambled to exchange rials for dollars.

Reuters reports that the rial fell by at least 9% today:

"The rial was trading at about 37,500 to the dollar, down from around 34,200 at the close of business on Monday, a foreign exchange trader in Tehran told Reuters. Other Tehran traders said the rial had dropped even further, to 38,000 or 40,000."

The Iranian industry minister, demonstrating a typical politician's lack of understanding of how markets work, said that he hoped security services would root out speculators whom he blamed for the drop.

It would be ironic if the downfall of the Iranian government was brought about, not directly by sanctions or war, but by their lack of understanding of how markets work; ie their own hand.

The bureaucrats of the Eurozone should take note, markets are driven by fear and greed; ill advised attempts to control and manipulate them always end in tears!

Spanish Stress Test Results

Here are the results of the stress test conducted on Spanish banks, as per the FT.

Seven banks failed and seven passed.

The shortfall comes in at under Euro60BN which, bizarrely, Juncker finds comforting!



Here is the reaction of the European Commission:

"The European Commission welcomes today’s publication by the Spanish authorities of the results of the independent valuation of Spanish banks. This is a major step in implementing the financial-assistance programme and towards strengthening the viability of and confidence in the Spanish banking sector.

In line with the Memorandum of Understanding governing the financial-sector programme for Spain, an external consultant conducted over the past few months a stringent bank-by-bank (bottom-up) stress test and a thorough asset quality review. The European Commission was closely involved in this process, as were the ECB, the EBA and the IMF.

The capital needs for individual banks disclosed today are a key step in the process of restoring and strengthening the soundness of the Spanish banks. They will form the basis for the eventual recapitalisation of banks with the help of the programme. The necessary State aid provided to Spanish banks will be determined in the coming months. It will be based on today's published results. It will also reflect measures to be taken by the banks, such as the disposal of assets, other restructuring measures and tapping funding markets, and subordinated liability exercises. In addition, the capital shortfall of credit institutions receiving public funds will be adjusted as a consequence of the transfer of assets to the Asset Management Company.

Banks with a capital shortfall will present recapitalisation plans. Upon approval of these recapitalisation plans by the Bank of Spain and the European Commission, banks requiring state aid will present restructuring or orderly resolution plans to the Spanish authorities, which will notify these to the European Commission for approval under EU state aid rules. Upon approval of these restructuring and/or orderly resolution plans, the recapitalisation of a first group of banks is scheduled to occur by November. "

Peter Cummings Fined £500K

The FSA has fined former HBOS director Peter Cummings £500K, and banned him for life from working in the City.

Tracey McDermott, director of enforcement and financial crime at the FSA is quoted in the Telegraph:

“Despite being aware of the weaknesses in his division and growing problems in the economy, Cummings presided over a culture of aggressive growth without the controls in place to manage the risks associated with that strategy.

Instead of reacting to the worsening environment, he raised his targets as other banks pulled out of the same markets." 

However, do not shed too many tears for Cummings, Cummings left HBOS in 2009 with a payout of £600K; so he's still £100K up on the deal!

Beware The Dead Cat Bounce

Markets are rising on the self delusional hopes that "this time" the ECB really will do something tangible to stop the rot, and will buy bonds willy nilly.

Be warned, this is nothing more than a dead cat bounce based on the false delusion of ECB action.

Repeat after me:

- There is no plan
- There never was a plan
- There will never be a plan

#Grexit Next Month?

I see that with the depressing inevitability of the return of an unloved season, there is renewed speculation (which frankly has never gone away) that Greece will exit the Eurozone possibly as early as next month.

CNBC quote Paul Day, Chief Strategist, at Market Securities:

“It’s a question of when, not if. 

Next month there is the ratification of the ESM [European Stability Mechanism] in Germany and you may well see a situation where Greece leaves the euro, the ESM is ratified and Spain and Italy then go in and ask for the money. 

There is a feeling that time is running out.”

He is of course correct, Greece will exit the Euro. The trouble is no one can know for sure when. As I have noted before, as and when it happens, it will have to take the markets and the citizens of Greece "by surprise".

When Greece leaves the Euro there will be, at the very least, the following "events":

- an imposition of capital and border controls,
- atms will run out of cash
- foreign banks and companies will treat Greece as a "plague ship", and stop all financial dealings in the short-term
- credit cards will not be accepted by many establishments (in fact this is already the case)
- there will be issues of street and civil disorder to contend with
- airports will be full, as foreigners rush to leave

Will Greece leave next month?

I don't know.

However, pressure is mounting; eg Greece is seeking a two year extension to its austerity program.

It is just a matter of time.

Sentix Predicts 73% Chance of Euro Breakup

The sentix Euro Break-up Index for July has risen by 22% to 73%. The index mirrors the investors' perceived probability of at least one country leaving the Euro within the next twelve months.

The index predicts that there is a 97% probability that Greece will exit the Euro.

Unsurprisingly, Euro politicians (who have much to lose when the Euro collapses; eg status, ego and salaries) have been quick to panic and have been trying to talk markets up. Step forward Germany's foreign minister, Guido Westerwelle, who has warned Europe's politicians "not to talk Europe apart". He is quoted in the Telegraph:

"We need a strengthening, not a weakening of democratic legitimacy in Europe." 

This is all very well, but the markets will only now believe actions not words (as even Draghi must now realise after last week's dismal showing by the ECB has proven).

ECB Does Nothing - As Predicted

As I predicted this morning, the ECB has done absolutely nothing to alleviate the crisis in the Eurozone.

As per Business Insider President Mario Draghi of the ECB failed to announce any definitive measures to address concerns about the burgeoning sovereign debt crisis in his latest post-decision press conference today.

The markets, that had foolishly deluded themselves that the ECB would act, have taken a tumble.

Here is Draghi's lengthy statement outling that the ECB will do nothing:

"Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,
Frankfurt am Main, 
2 August 2012 

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Rehn.

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area remains weak, with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment. A further intensification of financial market tensions has the potential to affect the balance of risks for both growth and inflation on the downside.

The Governing Council extensively discussed the policy options to address the severe malfunctioning in the price formation process in the bond markets of euro area countries. Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

Let me now explain our assessment in greater detail, starting with the economic analysis. On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3% in the previous quarter. Economic indicators point to weak economic activity in the second quarter of 2012 and at the beginning of the third quarter, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually, with growth momentum being further dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on financing conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum, which is also affected by the ongoing global slowdown.

The risks surrounding the economic outlook for the euro area continue to be on the downside. They relate, in particular, to the tensions in several euro area financial markets and their potential spillover to the euro area real economy. Downside risks also relate to possible renewed increases in energy prices over the medium term.

Euro area annual HICP inflation was 2.4% in July 2012, according to Eurostat’s flash estimate, unchanged from the previous month. On the basis of current futures prices for oil, inflation rates should decline further in the course of 2012 and be below 2% again in 2013. Over the policy‑relevant horizon, in an environment of modest growth in the euro area and well‑anchored long-term inflation expectations, underlying price pressures should remain moderate.

Risks to the outlook for price developments continue to be broadly balanced over the medium term. Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term. The main downside risks relate to the impact of weaker than expected growth in the euro area, in particular resulting from a further intensification of financial market tensions. Such intensification has the potential to affect the balance of risks on the downside.

Turning to the monetary analysis, the underlying pace of monetary expansion remained subdued. The annual growth rate of M3 stood at 3.2% in June 2012, slightly higher than the 3.1% observed in the previous month and close to the rate observed at the end of the first quarter. Overall, inflows into broad money in the second quarter were weak. Annual growth in M1 increased further to 3.5% in June, in line with the increased preference of investors for liquid instruments in an environment of low interest rates and high uncertainty.

The annual growth rate of loans to the private sector (adjusted for loan sales and securitisation) declined to 0.3% in June (from 0.5% in May). As net redemptions of loans to non-financial corporations and households (both adjusted for loan sales and securitisation) were observed in June, the annual growth rates for loans to both non‑financial corporations and households (adjusted for loan sales and securitisation) decreased further in June, to -0.3% and 1.1% respectively. To a large extent, subdued loan growth reflects the current cyclical situation, heightened risk aversion and the ongoing adjustment in the balance sheets of households and enterprises, all of which weigh on credit demand. A considerable contribution of demand factors to weak MFI loan growth is confirmed by the euro area bank lending survey for the second quarter of 2012. This survey also shows that the net tightening of banks’ credit standards at the euro area level was broadly stable in the second quarter of 2012, as compared with the previous quarter, for loans to both enterprises and households.
Looking ahead, it is essential for banks to continue to strengthen their resilience where this is needed. The soundness of banks’ balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalisation of all funding channels.
To sum up, the economic analysis indicates that price developments should remain in line with price stability over the medium term. A cross-check with the signals from the monetary analysis confirms this picture.

While significant progress has been achieved with fiscal consolidation over recent years, further decisive and urgent steps need to be taken to improve competitiveness. From 2009 to 2011, euro area countries, on average, reduced the deficit-to-GDP ratio by 2.3 percentage points, and the primary deficit improved by about 2½ percentage points. Fiscal adjustment in the euro area is continuing in 2012, and it is indeed crucial that efforts are maintained to restore sound fiscal positions. At the same time, structural reforms are as essential as fiscal consolidation efforts and the measures to repair the financial sector. Some progress has also been made in this area. For example, unit labour costs and current account developments have started to undergo a correction process in most of the countries strongly affected by the crisis. However, further reform measures need to be implemented swiftly and decisively. Product market reforms to foster competitiveness and the creation of efficient and flexible labour markets are preconditions for the unwinding of existing imbalances and the achievement of robust, sustainable growth. It is now crucial that Member States implement their country-specific recommendations with determination."

The hostage to fortune is of course this phrase:

"The euro is irreversible."

As previous failed currency unions have shown, the Euro is reversible.

Don't Believe The ECB Hype

The markets and some commentators are trying to delude themselves that the ECB will finally do something tangible to "save" the Euro.

ECB President, Mario Draghi, has managed to con some people who should know better into believing that the ECB will conduct a major bond purchasing campaign. In theory the bond buying campaign will reduce the interest rates of Spain and Italy (note Greece is not included, because it has been thrown to the wolves) and thus save the Euro.

However, people are ignoring the two very large elephants in the room:

1 Any such decision and action to buy bonds will not occur until after 12 September, when Germany’s top court rules on the ratification of the ESM. This being over a month away means that Spain and Italy, because of crippling interest rates, will most likely have imploded by them.

2 Germany’s top court may well not ratify the ESM. Even if it does, all 17 eurozone members would need to agree to it as well. Fat chance!

Therefore, don't believe the ECB hype.

The Euro, in its present form, is finished!

Bank of England Increases QE £50BN

The Bank of England has left interest rates unchanged. However, it has increased quantitative easing by £50BN over the next four months.

The rationale for turning on the printing presses again being the persistent lack of economic growth, slowing export markets and weak business indicators.

Jerry del Missier Resigns From Barclays - One Month Into His Role #Dismissier

In June 2012 Jerry del Missier was appointed as Barclays Co-Chief Executive of Corporate and Investment Banking.

Less than one month on, and he is resigning from Barclays.

Another career shattered by greed and fraud.

Here is his resingation statement:

"My 15 years at Barclays have been a time of great accomplishment, both for me personally and for the bank. I am grateful for the opportunities that were provided to me and proud of what we achieved. We built one of the premier global investment banks from scratch – something that we are all very proud of. The firm is as strong today as it ever has been and is incredibly well placed to succeed within the post financial reform competitive landscape.   

I have every confidence that the Board and Executive Management of Barclays will be successful in executing their plans, and I wish them the best of luck in doing so."

Here is his Barclays resume (which now acts as a form of career obituary).

Jerry
del Missier

Chief Operating Officer

Mr. del Missier is Chief Operating Officer of Barclays. He is a member of Barclays Executive Committee.

Mr. del Missier joined Barclays in June 1997 as Head of Derivatives and went on to assume responsibility for Trading, Sales and Research. He was appointed Co-President of Barclays Capital in 2005 and appointed President in 2008. In 2009, Mr del Missier became Co-Chief Executive of Corporate and Investment Banking, and assumed his current position in June 2012.

Prior to Barclays, he was at Bankers Trust in London as a Senior Managing Director of Derivatives Products, responsible for the European business. Previously, he was based in Toronto, Canada, responsible for the Canadian Dollar interest rate derivatives business. Before Bankers Trust, he worked for Bank of Nova Scotia.

Mr. del Missier is Chairman of the Board of the Securities Industry and Financial Markets Association (SIFMA), and serves on the Boards of Room to Read; the Global Financial Markets Association (GFMA); the Markets Management Group (MMG) of the International Institute of Finance (IIF); British American Business Council; the Metropolitan Opera in New York, and the Advisory Board of the Queen’s University School of Business in Kingston, Ontario. He is a past Board member of the International Swaps and Derivatives Association (ISDA) and the Queen’s University Board of Trustees.

Mr. del Missier has a BSc in Chemical Engineering (1985) and an MBA (1987), both from Queen’s University, Ontario.

The Dead Cat Bounce of The Greek Election

The markets are currently going through the motions of a dead cat bounce, in response to the results of the Greek election (which did not, at this stage, put Syriza into office).

However, the results show a deeply divided nation (29.7% to New Democracy and 27% to Syriza) which is going to need a third bailout by July if it is to avoid complete financial collapse.

In other words the fundamentals have not changed, and the problems that Greece and the Eurozone face have not gone away!

Whither Project Merlin? - Osborne's Maxed Out Plan A

Kudos to Mervyn King and George Osborne for gamely trying to shore up the British economy, against the oncoming Eurozone tsunami, with a £100BN support programme.

The FT reports that:

"the chancellor told a City audience on Thursday night that he was working with Sir Mervyn King, the Bank of England governor, to “deploy new firepower” amid fears that turmoil in the Eurozone could lead to a severe credit crunch and higher interest rates in Britain.

Mr Osborne’s aides spoke of a “maxing out of Plan A” – taking advantage of the country’s record of fiscal discipline and credibility with the markets to unleash an aggressive monetary policy offering cheaper loans to businesses and households."

The markets have reacted favourably (as they always do) to "hopeful" news.

This is all very well, if one could trust the banks to lend the money on to companies and individuals. However, all that the banks will do it use the £100BN to shore up their own balance sheets.

Not one penny of this will reach the business or individuals who need it, and would be the engines of growth for the British economy.

It would be better of Osborne took the £100BN and simply dropped it from a helicopter over the UK, that way he could be sure that it will have some positive effect on the economy.

Am I being too cynical?

I don't think so, have you all forgotten the hopes and hype wrt Project Merlin?

Whatever happened to that then?

Spanish Bailout Mañana III

Spain will make a formal request for a bailout after the US markets have closed tonight.