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A classic 'risk off' market sentiment is hurting the pound.
Global stock markets are under notable selling pressure on Friday, amidst bubbling concerns about the health of small U.S. regional banks.
Zions Bancorp and Western Alliance sparked a bank-wide stock selloff after the regional lenders said they were the victims of fraud on loans to funds that invest in distressed commercial mortgages.
The FTSE 100 and its European peers are down by over a per cent at the time of writing, while U.S. futures point to heavy losses at the New York opening bell.
This matters for the pound, in particular pairs like the pound-to-euro and pound-to-dollar, as they tend to fall when investor caution is heightened (think of the record lows reached during the financial crisis of 2008).
GBP/EUR trades down at 1.1460, having been as high as 1.1530 just 12 hours prior. GBP/USD is at 1.3421, having been at 1.3470 earlier in the day. Those with FX payment requirements are welcome to contact us to discuss your needs or simply get a quote to see how we will beat our competitors.
The below chart shows the pound-euro exchange rate overlaying the U.S. S&P 500 index, widely considered the universal signal of investor sentiment. As we can see, GBP/EUR's took a slide when the U.S.'s premier stock index began to fall:
Yesterday, we were watching the GBP/EUR chart as the pair rose into a downward-sloping resistance line. Unsurprisingly, the rally failed here and a retreat is underway.
We didn't have the fundamental narrative to affix to the move at the time, but we've since seen that global stock market selloff putting its hand up as the cause.
Analysts say the revelations from the two U.S. banks raise concerns about the state of credit markets, hence the contagion in bank stock shares in the U.S. and Europe.
As Jaime Dimon, CEO of JP Morgan, said this week: "when you see one cockroach, there are probably more… Everyone should be forewarned on this.”
Context is important here:
Tricolour Holdings, a Texas-based auto lender specialising in loans to borrowers with weak credit scores, went bankrupt in September.
First Brands, a privately owned U.S. auto-parts supplier, filed for Chapter 11 bankruptcy a few weeks later, on September 29; the failure appears to be an opaque borrowing scheme.
Add to this the reports of loan fraud from the two regional banks, and a picture emerges of structural fissures in the loan market, which investors are not comfortable with.
"Worries about regional banks in the U.S. have sent a shiver through markets this morning with the FTSE 100 selling off sharply. Financials, which make up about a quarter of the blue-chip index by weight, skidded 2-4% lower amid credit quality issues bubbling up in the US, sending the index down 1.65% to around 9,280. That would be its biggest daily decline since April," says Neil Wilson, UK Investor Strategist at Saxo Markets.
What does this mean for the pound going forward?
Clearly, those watching sterling will need to watch how this stock market move evolves.
We suspect any bank-related stresses will be addressed by the Federal Reserve, which will make it clear it stands ready to help.
This backstop has arrested similar declines in the past, and we would expect it to be the case this time around too.