Mortgage Swaps and High Commodities Prices
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Mortgage Swaps and High Commodities Prices

Mortgage Swaps and High Commodities Prices


Trading Features / Strategies from Simon Denham of Capital Spreads.

RBS is coming in at the higher end of expectations asking for 12 billion pounds of cash from its shareholders issuing 11 new shares for 18 old at 200p. A 14% discount on last nights close which may be enough to get it away. As the Bank expects to write off another £46 billion pounds in 2008 the net effect may be less than hoped and the comment that the dividend may be cut will also not exactly encourage buyers. If the stock comes in under the 340p level in the interim / before payment day there may be a struggle to get it away.

Unfortunately we are looking at the prospect of this being the first of many. There is an argument that says...‘better to get it done first and tap the liquidity before the others’ but on the other hand there is the, understandable, sentiment that would have investors think ‘better to get in on the last one which will at least come in at the bottom of the cycle’. It is difficult to get excited about buying something when you know that there may be more along the way.

The Bank of England £50bn cash for mortgages swap is all very well and at least has the prospect of longer term availability than the ECB or Fed offerings. However, again, unfortunately, it begs the question of a borrower saying to a lender. “Yesterday you would not lend to me. Today I have swapped all my best quality assets for cash (at a discount) whilst keeping hold of the credit risk AND at the same time I have retained all my bad credit loans. Will you lend to me tomorrow?” Not exactly encouraging. Anyone going to the bank under the requirements demanded (12% discount on high quality debt) runs the risk of appearing desperate to the rest of the market. Simplistic, but sometimes people, even very intelligent ones, are simplistic.


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The UK economy is now being squeezed on many fronts with the cost of everything we import getting more and more expensive (even ignoring the currency effect) and the value of our exports declining. But stop for a moment to consider the effects of the current price action on the rest of the world.

The price of crude oil is now insinuating its way into virtually everything as the cost of the energy needed to ‘manufacture’ anything from bread to cars gets higher and higher. With commodity prices driving to ever greater peaks the prospect of serious disruption to the economies of the West and to the public order in poorer parts of the world increases by the day. At a time when the global economy not in a good position to be helping out with credit or aid, countries with low commodity extraction potential are struggling to feed their populations. Even the roaring tigers such as China, India and Vietnam, huge successes from the industrial point of view, are still very poor on a personal wealth point of view. The populations outside the urban conurbations cannot afford the huge food and energy price hikes. And these are the success stories…

OPEC might consider that high crude oil prices are a thing but in reality the people who suffer are not the rich (at least not too much) but the poor.





The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Mortgage Swaps and High Commodities Prices' edited by SD, updated 22-Apr-08



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