Market Recap – Global Banks In Hot Water This Week

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Market Digest – Week Ending 5/22

Equity markets were calm this week in spite of renewed fears about Greece’s debt crisis. On Wednesday, Germany’s finance minister made comments suggesting he couldn’t rule out a Greek debt default when certain IMF loans start coming due in mid-June. The week ended with “constructive and congenial” negotiations continuing but “very intensive” work still needed to be done to reach an agreement. In the US, Fed Chairwoman Yelled said the central bank is still on track to rates to rise in 2015, but will likely proceed slowly and cautiously. The dollar rose nearly 4% against the Euro.

Weekly Returns:
S&P 500: 2,126 (+0.2%)
FTSE All-World ex-US: (-0.8%)
US 10 Year Treasury Yield: 2.21% (+0.07%)
Gold: $1,204 (-1.7%)
USD/EUR: $1.101 (-3.8%)

Major Events:
• Monday – The Supreme Court said companies managing 401k plans have a duty to ongoing monitoring of investments and a duty to remove imprudent ones.
• Monday – Alibaba was sued by the maker of Gucci and Yves Saint Laurent for encouraging and profiting from the sale of counterfeit goods.
• Tuesday – The ECB said it would accelerate bond purchases in its 1.1 trillion Euro program, ahead of an expected summer lull. The Euro fell.
• Tuesday – The NYSE launched a Bitcoin index to track the price of the virtual currency.
• Wednesday – Four global banks agreed to pay more than $5 billion and plead guilty to criminal charges to resolve an issue involving currency rate manipulation.
• Wednesday – Minutes from the Fed’s April meeting suggested a rate hike in June is unlikely.
• Wednesday – German Finance Minister Wolfgang Schauble said he would not rule out the possibility of Greek default.
• Wednesday – Chinese solar panel maker Hanergy thin power group shares fell nearly 50%. Allegedly the bulk of the losses occurred in less than one second.
• Thursday – Islamic State fully captured the Syrian city of Palmyra and its archaeological treasures
• Friday – The State Department Friday released emails from Hilary Clinton regarding the attacks on an American diplomatic facility in Benghazi, Libya. It is so far unclear if they would have any impact on Clinton’s reputation.
• Friday – Fed Chairwoman Yellen said the central bank remains on track to raise interest rates in 2015 but is likely to move slowly and cautiously.
• Friday – The Bank of England accidentally emailed planning information about a possible referendum for England to exit the EU to the Guardian.

Our take:

For years, it has been a poorly kept secret that major banks and brokerage firms were manipulating foreign exchange rates at the expense of customers. This week, four of the biggest global banks agreed to over $5 billion in fines and plead guilty to antitrust violations in connection with currency manipulation. If you’re keeping score, JP Morgan Chase, Citibank, Barclays, and Royal Bank of Scottland plead guilty to felonies. UBS may still be charged, and Bank of America simply agreed to pay a fine with no charges filed.

Consumer and market reaction? Yawn. The agreement allows the banks to continue operations and there is not expected to be meaningful customer reaction.

Fines are nothing new to big banks, but this is the first time major banks have been convicted of serious charges in decades. It may mark the first time major financial institutions have been convicted as felons with no significant impact. In the short term, that keeps the waters calm and is good for markets. In the long run, it may open a Pandora’s box. Criminal charges used to be akin to death for a financial firm. If that is no longer the case, it makes it that much easier for executives to ignore wrongdoing further down the pyramid. And that is where the most damage is done.

2008 saw the current financial system on the brink of collapse and proved that the financial system does require some oversight. Banks have always looked for creative legal ways to increase profit, often at the expense of stability. If they now feel they can venture outside the lines with just a slap on the wrist, the next crisis may be even more interesting.

As one Barclays trader said in a chat room transcript, “if you aint cheatin, you aint tryin”.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Craig Birk, CFP®

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