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Global stock markets staged something of a comeback yesterday. The FTSE 100 managed to claw back a full 100 points or so.
But we’re far from in the clear. While blue-chips saw their values perk up, the bad news continued to roll through from the US subprime mortgage market.
And now we’ve got commentators starting to put numbers on the likely City job losses from the subprime fallout.
That’s bad news for one sector in particular…
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Jonathan Said of the Centre for Economics and Business Research, reckons that up to 5,000 jobs could go from the City over the next six months, as “banks, private equity firms, hedge funds, stockbrokers and other financial groups… try to cut their losses”, he told the BBC. City bonuses are also set to fall by up to 15% this year, he reckons.
So there’s just not going to be as much money out there to prop up all the businesses that have benefited from the City trickle-down effect. And no one will be hurt worse than luxury businesses.
Wine merchants are already warning that they’re in for a hard time. Alun Griffiths, wine director of Berry Brothers and Rudd told The Sunday Telegraph that fine wine prices could fall by as much as a third as investors in need of cash sold their collections at knock-down prices.
And on the BBC, Patrick Sandeman of wine merchant Lea and Sandeman reckoned that “expensive bars in the West End” would suffer as “City workers become a little more cautious with their cash.”
The knock on effect of course, will be lower profits for luxury firms, leading almost certainly to further job losses.
Sellers of luxury flats in the centre of London may well find that buyers are in shorter supply too. All those talking of how London is a separate little bubble from the rest of the UK may be unpleasantly surprised by how rapidly that bubble deflates once the City starts to flag.
And job losses aren’t just a threat on this side of the Atlantic. Bonuses on Wall Street are looking equally shaky, and are expected to fall by at least 5%, according to pay-tracking firm Options Group. One in three workers who are involved in parcelling up bonds backed by mortgages could lose their jobs, while bonuses in that sector could dive by up to 40%. Recruiters say that they’re already seeing a lot of CVs from staff at hedge funds and private equity funds who’ve seen the writing on the wall.
Meanwhile, the bad news continues to pour in from US housing.
Profits at US housebuilder Toll Brothers fell 85% in the three months to the end of the 31st July, from $174.6m a year earlier to $26.5m. The number of cancellations rose its highest in 21 years.
Chief executive Robert Toll tried to put the problem as delicately as he could. “We continue to wrestle with the inter-related challenges of softer demand and excess housing supply in most markets.” In other words, there’s too many houses and nobody wants to buy them.
And we also learned yesterday that a total of 2,500 staff are to be cut by mortgage lenders, including Accredited Home Lendings, HSBC, and H&R Block. Mortgage applications fell 5.5% last week, the biggest slide in almost three months.
“You’re looking at what will be in all likelihood the worst case of home price deflation since the 1930s,” said John Lonski at Moody’s.
That strong employment picture that everyone keeps pointing to looks weaker everyday. You can read more about which sectors we think you should be avoiding in the next issue of MoneyWeek, out on Friday.
Turning to the wider markets…
London market close: FTSE 100 – 6,196.00 (+109.9)
European markets: Paris CAC-40 – 5,518.17 (+99.39); German DAX-30 – 7,500.48 (+75.73).
US markets: Dow Jones Industrial Average – 13,236 (+145.27); S&P 500 – 1,464 (+16.95); Nasdaq – 2,552 (+31.50).
Asia markets: Japanese Nikkei – 16,316.32 (+415.68); Hang Seng – 22,960.28 (+613.40).
Crude oil: $69.38. Brent spot: $68.02.
Gold: $656.90. Silver: $11.59.
Currencies: pound/dollar: 1.9991; pound/euro: 1.4748; dollar/euro: 0.7376; dollar/yen: 116.0400.
And our recommended articles for today…
Index points to economic expansion – or does it?
– July’s economic data led one commentator to declare: ‘index suggests US economic expansion’. But a closer look at the data suggests that there could in fact be a recession on the cards. For more on the outlook for the US economy, read: Index points to economic expansion – or does it?
Biggest bond yield fall since Black Monday
– Yields on short-term bonds registered their sharpest fall since October 1987 this week. It’s good news for those who bought US Treasuries back in June, but what are the implications for the rest of the market? To find out, click here: Biggest bond yield fall since Black Monday