Bank lawsuit looms large over the equity markets

THIS morning’s direction for the markets will be dominated by the news which came out late on Friday evening that a US regulator is suing 17 financial institutions for mis-selling billions of dollars’ worth of mortgage bonds, which ultimately proved toxic when the US housing market collapsed. The targets included not only major US banks such as Goldman Sachs and Bank of America, but also Barclays, RBS, Deutsche Bank and Societe Generale.

GFT quotes two-way prices on stock indices around the clock, even when the underlying markets are closed. The FTSE 100 index is called to open down over 1 per cent or 62 points at 5,230. In Europe the German DAX is expected to open down 73 points at 5,465 and the French CAC is quoted down around 40 points at 4,108.

The lawsuit was officially announced just after the close of US stock markets on Friday. Potentially exacerbating the angst among investors is the fact that today is a Labor day holiday in the States. With local stock markets closed, US investors will be forced to sit on the sidelines and wait until tomorrow before they can react.

The timing of the Labor Day holiday itself is also rather unfortunate; there is little for American workers to celebrate following Friday’s non-farm payrolls number which showed job creation has stalled, with zero jobs added in August; a shockingly low number which triggered another downward lurch in shares, and which many are now seeing as further justification for the Federal Reserve to announce further monetary stimulus. The real question however is on the effectiveness of any such move, and whether a QE3 or similar push would actually give people the confidence to borrow.

This week sees an avalanche of speeches for us to be alert to, including those from various Federal Reserve heads, plus on Thursday we have Ben Bernanke himself as well as President Obama’s job proposal. Finally, as if any more spice were needed to the trading calendar, we have an incredible five central banks announcing interest rate decisions: Australia (small chance of a cut), Canada (no change), Japan (no change expected), UK (no change) and most interesting of all the ECB, where rate hikes will likely be abandoned for now and we'll see a possible complete u-turn, with a rate cut possibly being signalled.

Martin Slaney is director of Global Dealing Operations at GFT