30 Mar 2012
Equity futures in Europe are following the Euro currency higher as sentiment rises prior to regional finance ministers meeting held later today. The meeting agenda will focus on the vote to increase the level of available bailout funds and so far the positive sentiment seen in markets has been generated by various comments from government officials suggesting that the vote will have no trouble passing with a majority. Oil prices pushed higher for the first time this week and metals followed suit as investors entered into new long positions at lower levels.
Euro Stoxx 50 futures are higher by 0.8 percent prior to the London open, with the S&P 500 looking more unchanged, up o.3 percent. The MSCI Asia Pacific Index showed a similar gain, up 0.2 percent as the index continues to build on its largest quarterly bull run since September of 2010. Oil prices were higher by 0.6 percent on the session, recovering some of its 3.2 percent decline for the week.
In Asian, the Japanese Yen rose after data showed that core consumer prices (CPI) were higher during the month of February and the nation’s jobless rate dropped during the same period. Shortly after, figures out of Australia indicated that New Home Sales improved in February, helping to underpin rate expectations in the Reserve Bank of Australia (RBA).
Looking forward, the main story will come with the result of the European finance ministers meeting, which is being held in Copenhagen and will be conducted over a two-day period. The main proposal is for a one-year provision to raise the ceiling in available bailout funds for indebted member nations, bringing the limit to 940 billion Euros. Macro data will come with the German Retail Sales figures and University of Michigan Consumer Confidence survey, which are both expected to improve from the previous month.
The AUD/USD is continuing to look like a top has formed with prices now caught in a descending channel on the shorter term time frames. Longer term, the main resistance area to watch is the double top now seen at 1.0850 as this is expected to contain prices in the coming months. More immediately, the next major support levels below are seen with the 50% and 61.8% Fibonacci retracements of the rally from 0.9670, and a break here will confirm the top at 1.0850. Selling rallies is now the preferred strategy, with 1.0550 providing a strong area of resistance on the hourlies.
The Nikkei 225 is coming into some very significant resistance areas on the long term time frames (weeklies), with prices now pressuring both historical and trend line resistance levels at 10,205. Given the strong upside rally we have seen no far this year, the main preference is to sell strength until some sort of retracement is seen but this position should be taken with some level of caution, given the MACD readings, which are now coming into positive territory on the same weekly charts. A weekly close above trend line resistance would suggest a strong bull rally in the longer term.
29 Mar 2012
Simon Cawkwell, a British stock market commentator and author known as “Evil Knievil” was caught in the Worldspreads collapse with a £150,000 claim.
Worldspreads is under administration after the new management team discovered accounting irregularities and a shortfall of £13m to pay all clients. Although the Financial Services Authority (FSA) requires client funds to be segregated, Worldspreads didn’t comply and KPMG, the designated administrator, will have a hard time to pay all claims to the 5,000 active clients the company had.
“Evil Knievil” is the first well-known figure to be on the list of creditors. Since his claim is above £50,000 he is not fully protected by the Financial Services Compensation Scheme and will most likely have difficulties to recover the extra £100,000.
Commenting on the situation, Mr. Simon stated:”My total losses from failed stockbrokers and spread-betting firms over the past four years is around £1m.” He also added that he made more than £1m trading commodities at Worldspreads last year.
Simon Cawkwell is known by his short-selling activities. He has been betting against companies he think the price will fall. He became well-known after he exposed the fraud of Robert Maxwell’s accounts. He made a huge fortune betting against Maxwell’s Communication Corporation.
Asian equity markets were lower for the second day in a row, creating the first monthly decline since last November, after Durable Goods Orders in the US and corporate earnings releases came in lower than analyst estimates. The Japanese Yen made gains during the session while Oil prices moved to new lows for the week. Oil saw a large drop yesterday as well, down roughly 2 percent, after supply in US stockpiles rose to their highest levels in 20 months. In equities, the MSCI Asia Pacific Index is down nearly 1 percent and the Hang Sang showing a loss of 1.6 percent. S&P 500 futures are modestly lower, indicating an open 0.2 percent lower.
Ahead today, the main economic data will come from Germany, with unemployment data expected to show that the jobless rate held steady in March. The unemployment rate in Germany is at its lowest levels in two decades so these figures are likely to be Euro supportive during the session. Yesterday, the main story was the Durable Goods figures out of the US, which showed that products with an intended use of more than 3 years rose just 2.2 percent, with the previous month’s numbers being revised down to -3.6 percent. The downside surprise pushed equity markets into negative territory and weighed on the US Dollar during the session.
The Yen was one of the big gainers on the day, on trader speculation that Japanese companies will repatriate their export earnings before the end of this month. Crude oil was another story, however, posting losses after US stockpiles increased by 7.1 million barrels, which is the largest supply gain since the middle of 2010. Markets were expecting a supply rise of 2.6 million barrels. Recently, crude headlines have focused on the proposals made by the US government to release portions of its strategic oil reserves but as of yet there has been no report of official decisions confirming this.
Market volatility in the European session will be guided by the German employment data, which is expected to show a small drop of -10,000 jobs for the month, while the unemployment rate remains unchanged at 6.8 percent. In the UK, the main figures to watch will be the Nationwide Housing Prices, which are expected to show a rise of 0.9 percent.
The GBP/USD is pressuring key resistance on the hourly charts with prices now seen close to 1.5980 resistance. An upside break would be encouraging but given the proximity of Fibinacci resistance just ahead, short positions are looking much more favorable. Bias changes with am upside break of the 61.8% Fibonacci retracement.
Oil prices are showing some strong declines on the short term time frames but when we pull out to the dailies, prices are seen stabilizing near the highs above 105. Significant support can be seen at 104.20, which is a level that has been tested four times now, and with the lack of a real bounce from this area, it is looking like a downside break is imminent. Preferred strategy is to wait for the break and get into new long positions at the lower levels.
Three of the biggest spread betting providers are calling for stricter oversight of the industry after the recent Worldspreads and MF Global bankruptcies showed several flaws in the FSA supervision role.
One of the most important rules governing the financial activity respects to the segregation of client funds. Spread betting and CFD providers should separate client funds from their own. When opening an account and depositing funds, a client is not buying an equity position in the provider but rather contracting its services. The client is responsible for any losses deriving from its buying and selling activity but it should not incur in any risk deriving from the provider activities. In this sense, the FSA imposes providers to segregate client funds, holding them in separate accounts from the company funds.
Unfortunately both MF Global and Worldspreads did not comply with FSA rules and client funds simply vanished. To protect from this situation there is still another rule known as the Financial Services Compensation Scheme that fully protects the first £50,000 a client holds in his account. Although the vast majority of clients is in this situation, there are some that hold more than that amount and will see their money burned by the provider with no guarantee of recovering beyond the £50,000 threshold.
IG Index, CMC markets, and London Capital Group stated that the FSA has been spending too much resources with the biggest providers in the industry but was not able to conveniently scrutinise the financial affairs of the smaller operators. They are asking for further scrutiny of the industry and in a more equitable way.
It is doubtful that the FSA has the necessary resources to further scrutinise all the smaller players, at least in the same way it does for the biggest ones. One thing is for sure, something needs to be done regarding the segregation rule. Regulation should be changed such that client funds are assured to be separated from provider funds. It should be created a mechanism such that the client is not relying on the provider complying with its obligations but instead being certain the funds are held in a risk-free account.
Spread betting companies complying with FSA rules are concerned that clients may lose confidence after the Worldspreads and MF Global cases and have been sending emails to clients in order to further assure them their funds are secure. Spread Co is just an example. Earlier this month, Jonathan Silvester, Head of Compliance, stated in an email: “…all funds that you deposit with Spread Co, as a Retail Client, in connection with your account, are held as Client Money in accordance with FSA rules. This means that your funds are segregated from Spread Co’s own money.” He also added that “controls and procedures are designed to ensure that our clients are protected in the unlikely event that Spread Co was to become insolvent.”
28 Mar 2012
The Irish spread betting and CFD provider Worldspreads has entered administration after the new board discovered an accounting fraud that left £13m missing in client funds.
Worldspreads has nearly 5,000 active clients with funded accounts to whom the company owes £29.7m but it only carries £16.6m in cash balances. The Financial Services Authority (FSA) requires financial companies to hold client funds in segregated accounts such that if something happens to the company, client funds are not compromised. Worldspreads did not comply with FSA rules.
A few months ago we assisted to a similar situation in which a provider was missing money from clients that led to a lengthy insolvency process. MF Global abruptly entered administration and clients were caught off guard.
A few weeks ago, Worldspreads issued a profit warning stating it was expecting a net loss for 2011. Niall O’Kelly, Worldspreads financial director, resigned at that time. Conor O’Folley, the company founder and CEO also resigned. The new executive team investigated accounts and found the £13m hole just two days later. The new board of Worldspreads had no option other than making an application to the High Court for an administration order.
At this point KPMG is managing the insolvency process under the new FSA rules that try to expedite the process and return money to clients as quickly as possible. According to KPMG there is no interest from any provider in buying Worldspreads, although there are rumours on ETX Capital being interested in some assets. Unlike what happened with MF Global no one seems interested in Worldspreads’ client list so far.
Although the segregated funds rule failed again, there is still another protection for client funds. The first £50,000 of each account is protected under the Financial Services Compensation Scheme. Even in the case the company has no funds to commit to its obligations regarding clients, they will be returned up to £50,000.
Worldspreads has been desperately trying to expand its business out of Ireland since 2009. With the financial crisis that put Ireland in a difficult economic situation, the company decided to sell its Irish operations and invest the proceedings in the UK and Continental Europe. Despite its Irish division being responsible for the most part of profits, Conor Foley decided to sell it and for only 2.6 times its prior year pre-tax profit, or £9.3m. At that time the company was making £3.86m in pre-tax profit, and £3.60m were from the Irish division. The gigantic growth prospects propelled operating costs. In 2010 Worldspreads saw its revenue grow 28% and its expenses 87%. By opening several new offices in Continental Europe and running an aggressive marketing plan the company inflated the cost structure. Its zero spreads campaign led to an erosion of gross margins. The company ended losing money in 2010 and warned it would happen again this year a few weeks ago.
Despite this huge investments, Worldspreads was never seen as a threat by many of the leading spread betting companies.“We didn’t see them as much of a threat – their platform was pretty slow and clunky,” says the chief executive of one competitor. In an environment spread betting providers have been investing hugely in mobile platforms and tools offered to traders, Worldspreads preferred to invest in an internationalisation plan that put the company on a track leading to the abyss.