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Citi, HSBC Suspensions Suggest Currency Upheaval

Market Digest – Week Ending 1/17

Earnings season kicked off with a yawn. Results at early reporting blue chips were mixed. Bank of America beat expectations, but Intel and UPS missed. The S&P 500 finished the week down 0.2%. Emerging markets were down 1%, as investors continue to ponder the credit situation in China. Bonds posted modest gains.

Weekly Returns:

S&P 500: 1,839 (-0.2%)
FTSE All-World ex-US: (-0.2%)
US 10 Year Treasury Yield: 2.82% (-0.04%)
Gold: $1,253 (+0.4%)
USD/EUR: $1.353 (+1.0%)

Major Events:    

  • Monday – Target said the size of its security breach could include personal data on up to 70 million people, beyond the 40 million people originally identified, and that the scope of the types of data compromised could be wider.
  • Monday – Japan’s Suntory purchased Beam, maker of Jim Beam bourbon, for $16 billion.
  • Wednesday – Bank of America reported a better than expected profit, driven by a decline in mortgage losses.
  • Thursday – Intel reported Q4 net income rose 6%, but failed to meet expectations.
  • Thursday – The U.S. Senate approved a $1.1 trillion spending bill that quells for nearly nine months the threat of another federal agency shutdown.
  • Friday – President Obama outlined a plan to curtail the collection and use of phone data. Intelligence officials must now obtain approval from a national-security court for government searches of phone data, and the scope of individual searches has been scaled back.
  • Friday – Major banks including Citigroup and HSBC suspended more currency traders, suggesting unsavory practices expanded beyond a small group.

Our Take:

The explosion of information made possible by the internet and increased computing power continues to profoundly impact the economy. Quite often, the end result is reduced prices for the end consumer, but at the cost of eliminating traditional jobs. The Financial industry is not immune.

Online trading platforms like Schwab radically changed the brokerage industry. Online banking has reduced the need for brick and mortar branches. Upstarts like Personal Capital are empowering retail investors with free information and providing better wealth management services at a lower price point.

One area where consumers have always been taken advantage of is currency exchange. It showed up when you used your credit card in Europe and got hit for 3.5%, but even major investment managers have traditionally been at the mercy of the major banks and investment banks to settle trades in foreign currency. The extent of the conspiracy is starting to come to light. This is good news.

In the end, currency will end up being traded fairly and cheaply, but it will cost the major banks billions in profits. They are already earning less trading stocks and bonds. It is often said investment bankers are nothing more than the best sales people in the world and that they will always find something else to sell. They are going to have to start being more creative. Indeed, the average salary for Goldman Sachs workers for 2013 was released this week at “just” $388,000 – down almost half from the good old days in 2006.

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