Equity markets subdued as UK Chancellor raises bank levy

Equity markets across Europe started the day in subdued fashion following an announcement by UK Chancellor George Osborne of plans to increase the levy on UK banks. The levy, currently at 0.05%, will be raised to 0.075%, helping to raise an additional £800 million for the Treasury in 2011. Initial plans outlined in December stated that banks would incur a 0.075% charge on short-term wholesale finance, with the charge for the first year being a softer figure of 0.05%. The softer first year charge has now been scrapped and charges for March and April will be 1% in order to recoup lost money for January and February, before the figure is returned to 0.075% for the remainder of the year. Analysts and investors alike are attempting to decipher whether the sudden raising of the levy is purely an attempt to raise additional funds for the Treasury or reflects a shift in sentiment from the government towards UK banks. Should UK banks be performing better than previously expected, there may well be a change in sentiment from the Treasury.

The raising of the UK bank levy has helped to put a lid on equity markets this morning despite a positive US session yesterday evening. US markets posted new 52-week highs in trading late last night, giving many European investors reason to expect a strong open when coupled with a positive update from Xstrata pre-market.

Xstrata, the largest exporter of coal used for power, reported an increase in annual net profit to $6.49 billion, a sevenfold increase from 2009. Revenue was also up year-on-year by +34% to $30.5 billion. Xstrata’s update reflected strong commodity prices throughout 2010. Analysts at JP Morgan commented that 2010 preliminary results were “overall a seriously impressive set of numbers.” Pre-market calls were expecting Xstrata to be trading around 30p higher. This never quite materialised, opening +7.5p higher. During the first hour of trading, Xstrata posted a high of 1494p, +26.5 or +1.8%.

With only ‘lesser’ followed macro data due out this afternoon from the US, it is hard to see where investors will source direction or sentiment from. Investors need volatility to create uncertainty, which in turn creates trading opportunities. Investors will be hard pressed to seek out trading opportunities of note whilst the volatility index trades around low levels not seen since April last year. The VIX is currently trading around 16.28, down nearly 2% from 10 days ago during the onset of the Middle East tensions. If volatility remains low, investors may believe the only way is up, the first quarter of 2011 could close with a slow drift upward should volatility not return. For now, no news may well be good news for investors.

At 9am GMT the FTSE 100 was trading down around 8 points at 6042, with the DAX at 7287 (+4 points) and the CAC 40 at 4086 (-4 points).

Chinese rate hike knocks miners
However, just after 10.30am GMT when news filtered into the markets of a Chinese interest rate hike of 25 basis points, traders sold off mining stocks, forcing the sector lower by 0.6%. Traders have been expecting more fiscal action from China to curb spiralling inflation and this is seen as the latest move in those efforts. As a result, the sell off was more of a knee jerk reaction and can be seen by and large as more of a subdued response by traders.