subject: Trading The Stock Markets And Reading The Money Supply Data [print this page] So we have seen the M4 money supply numbers come out from the UK Treasury and the numbers are broadly steady but limited. This state of affairs is not good enough for the UK, or for any other country. If the money supply is falling or just low-and-steady then growth prospects must be limited.
If you are trading but less familiar with the money supply numbers, the M4 is classed as the cash outside banks (ie in circulation with the public and non-banking firms) + private sector building society and retail bank deposits + private-sector building society and wholesale banking deposits as well as certificate-of-deposits.
The M4 is generally discussed rather than the M0 which is classed as cash outside the Bank of England and Banks' operational deposits with Bank of England. The different definitions of money supply are designed to reflect the differing stores of money. M4 numbers are often quoted because they represent the most illiquid measure of money supply.
So the new albeit provisional numbers were rather unimpressive. Seasonally adjusted figures show that M4 fell by 0.7 billion (0.0%), compared with an average decrease of 1.9 billion for the previous six months. Compared to May, the twelve month growth rate increased from 2.7% to 3.0%. Note that M4 Lending fell from 2.5% to 2.4%.
So what does this all mean? Perhaps it means that we should stop berating the banks. It is understandable that the Government wants increased lending (for growth) and also wants the banks to exercise a higher level of fiscal control (for reduced risk).
However as Simon Denham of Capital Spreads points out, The new coalition rebukes the banking sector for not lending enough money. At the same time it is asking for ever greater levels of protection for tax payers and less of the speculative-banking from the various big bank trading units. It should seem quite obvious that these requirements are somewhat incompatible with each other.
The problem for UK growth is exacerbated by the European Basle 3 Accord. Although Basle 3 is yet to be ratified it would put increased capital requirements on European financial institutions. At the same time the UK is suffering, as is the rest of the world to a certain degree, from the retrenchment of most banks within their own domestic markets.
How does this affect you if you are trading the stock markets via shares, futures, CFDs or spread betting? Put simply, this has left RBS, Barclays, HSBC and Lloyds with a rather large hole to fill. Understandably they already have a number of their own problems and are finding the situation rather difficult. With M4 at such low levels it does make you wonder where the 225bn of Quantitative Easing funding has gone.
Money supply for 2005-2007 was around 12%, for the remainder of 2010 it could well be negative. This means that we are in a situation where we are hoping that the economy will grow but we fear that it will not. With State spending being reduced and money supply turning towards negative territory, the omens are not exactly positive. If you are trading stocks and shares, pick your trades carefully and do not bank on broad growth any time soon.
