Why it’s a horrible day for Barclays shares

A summer-long battle between bulls and bears shows little sign of producing a winner. A brick wall has prevented a breakout to new highs ever since the early June peak, while enthusiastic bargain hunters make a seasonal crash equally unlikely.

It’s difficult to see a sustained decline in equity markets until returns on other asset classes improve, and that’s still some way off despite next week’s probable UK interest rate rise. There is clearly a catalyst missing here, though.

Don’t expect it from European Central Bank (ECB) president Mario Draghi in his scheduled speech following today’s ECB policy decision. Eurozone interest rates will not likely budge until 2019, but it’s the rhetoric that matters here.

Draghi should give us a much better idea of the size and timing of the taper from €60 billion of bond purchases per month currently. Draghi’s objective is to keep a lid on the euro while the ECB steers inflation toward its target of ‘below, but close to, 2% over the medium term’.

Halving monthly purchases for up to 12 months but keeping the door open if conditions deteriorate, and promising not to raise interest rates until 2019, is the market-friendly option.

Concerns about US earnings looks like an excuse to take some money off the table, and could prove temporary following better-than-expected third-quarter GDP and largely in-line company results.

However, after a decent set of numbers from Lloyds (LLOY) yesterday, there are problems at Barclays (BARC). Years of restructuring are over, but the lender made £300 million less than expected in the third quarter.

Blame the investment banking business where income fell 5% versus market forecasts for modest growth, and costs increased. Fixed income currencies and commodities (FICC) is the real culprit and, while lower volumes and lack of volatility are industry-wide problems, the pressure is on chief executive Jes Staley after years of share price underperformance.

Staley has done a great job restructuring Barclays, but investment banking remains a drag and questions will be asked about its future.

New targets for return on equity and costs should be a positive, but Staley has still got to deliver. Like a struggling football manager, he can tell the team what to do, but he can’t run on the pitch and do it for them.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.