Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Archive | November, 2016

UK banks generate less profit than Brazil

Posted on 30 June 2014 by

Rio de Janeiro©Bloomberg

UK banks are still generating less profit than those in France, Australia and Brazil, according to an annual analysis of the global banking sector, highlighting how the UK’s nascent economic recovery has yet to be reflected the balance sheets of its banks.

The Top 1,000 World Banks survey, published by The Banker magazine, a sister publication of the Financial Times, has ranked UK banks eighth globally, with aggregate pre-tax profits of $21.7bn, equivalent to just 2.37 per cent of global banking profits.

    This places the UK below Brazil, in seventh place with profits of $26.1bn, and Australia, in sixth place with profits of $38.6bn.

    Last year, the UK was ranked 10th worldwide, with profits of $19.6bn accounting for 2.61 per cent of the global total, reflecting the impact of greater regulation, historically low interest rates and the challenging economic environment.

    Before the 2008 financial crisis, the UK accounted for 11 per cent of global banking profits. However, its banking sector continues to outperform some struggling European counterparts such as Italy, whose banks were the most lossmaking in the survey losing $35bn.

    For the second year running, Chinese banks were the world’s most profitable, with aggregate pre-tax profits of $292bn, equivalent to nearly a third of total banking profits worldwide.

    Top Ten banking profits by country

     Rank  Country  Aggregate pre-tax profits ($m)  % of total
    1 China 292,499 31.78
    2 US 183,242 19.91
    3 Japan 64,127 6.97
    4 Canada 39,248 4.26
    5 France 38,633 4.20
    6 Australia 38,619 4.20
    7 Brazil 26,100 2.84
    8 UK 21,772 2.37
    9 Russia 21,659 2.35
    10 India 16,754 1.82
       
    Total top 1,000 pre-tax profits:
     920,420  100.00

    Source: The Banker’s Top 1,000 World Banks

    HSBC was the only UK institution to be ranked among the top 10 world banks by tier one capital. It slipped from fourth to fifth place with $158bn, placing it below ICIB, China Construction Bank, JPMorgan Chase and Bank of America.

    HSBC, which makes more than half its profits in Asia, suffered a 20 per cent fall in pre-tax profits at its first-quarter results last month citing the impact of “challenging market conditions” in its investment banking activities.

     Rank (previous rank)  Bank name  Country  tier one capital ($m)
    1 (1) ICBC China 207,614
    2 (5) China Construction Bank China 173,992
    3 (2) JPMorgan Chase US 165,663
    4 (3) Bank of America US 161,456
    5 (4) HSBC Holdings UK 158,155
    6 (6) Citigroup US 149,729
    7 (9) Bank of China China 149,729
    8 (8) Wells Fargo & Co US 140,735
    9 (10) Agricultural Bank of China China 137,410
    10 (7) Mitsubishi UFJ Financial Group Japan 117,206

    According to the survey, UK banks have a total of $9.9tn in assets, roughly four times UK GDP. However, Brian Caplen, editor of The Banker, warned that the figures demonstrated that a yes vote in September’s independence referendum could see the Scottish economy “in danger of being destabilised by its own banking sector.”

    If Scotland left and became responsible for Scottish-headquartered banks such as RBS, HBOS and Clydesdale, it would have banking assets equivalent to 12 times Scottish GDP, he said. This would be even larger than the 10:1 ratio of Iceland’s banks before that country’s banking collapse.

    “Had Scotland been independent during the financial crisis, there is little doubt that an independent Scotland would have been devastated and forced to turn to the IMF for help,” Mr Caplen said. “The temptation in future under independence would be to give Edinburgh light touch regulation to make it more competitive as a financial centre. That might have serious consequences.”

    The survey, which the industry magazine has been running since the 1970s, analyses the audited year-end financial results of global banks.

    BNP’s big threat could be to its reputation

    Posted on 30 June 2014 by

    A photo taken on June 24, 2014 in Lille, northern France shows the logo of the French bank BNP Paribas. US regulators next week plan to announce a $9 billion settlement with BNP Paribas to settle charges the French bank violated American sanctions, a person familiar with the talks said today. After lengthy negotiations, the big French bank, the US Department of Justice and New York state banking regulator Benjamin Lawsky have reached a broad agreement on a settlement, said the person, who spoke on the condition of anonymity. AFP PHOTO / PHILIPPE HUGUENPHILIPPE HUGUEN/AFP/Getty Images©AFP

    At the start of the year, BNP Paribas executives thought they were destined for little more than a slap on the wrist for violating US sanctions.

    France’s largest bank by market capitalisation took a $1.1bn provision in February, less than a fifth of 2013 profits, after an internal investigation revealed improprieties in its trade finance unit dealing with Sudan, Iran and Cuba.

      But the bank badly misjudged the situation. Four months later, it faces a fine of almost nine times that amount, more than wiping out this year’s profits. It is also expected to submit a guilty plea and to suffer a one-year suspension of its US dollar clearing licence for its oil and gas financing unit.

      The trades in question occurred mostly between 2002 and 2009 and were related to the bank’s trade finance division based in Geneva and Paris. US authorities estimate BNP handled a total of about $30bn in allegedly illicit trades.

      The bank was processing transactions with blacklisted countries, for example, helping Sudan sell billions of dollars worth of oil, and also stripping identifying information from wire transfers to be cleared by its US operation.

      The US authorities heard about possible wrongdoing in about 2007. A year later, the bank approached the US authorities and launched an internal investigation.

      BNP said it had been co-operating fully, but the US prosecutors thought otherwise. While most of the transactions ended in 2008, some continued for several years after they had been told in no uncertain terms to stop.

      Profile on Prot

      BNP Paribas

      For much of the past decade, Baudouin Prot has formed a potent duo with his mentor Michel Pébereau. Together they built BNP Paribas into one of the eurozone’s biggest banks with €1.8tn in assets and more than 185,000 employees in 75 countries. But since he handed over the reins as chief executive to Jean-Laurent Bonnafé and stepped up to chairman in 2011, Mr Prot has had to deal with some tough situations

      See below for more

      The US authorities were livid, but BNP executives were still not sure how much trouble they were in back in February. Then the negotiations started in earnest, led on the bank’s side by Jean-Laurent Bonnafé, chief executive, and Jean Lemierre, a “senior adviser” to the bank and a former head of the European Bank for Reconstruction and Development. “The situation got a lot worse very quickly after that,” said one person close to the bank.

      Two months later, in April, the bank admitted to the market that the fine was likely to be “far in excess” of the $1.1bn provisioned. A few weeks after that, news started to leak about exactly how much more the prosecutors were pushing for – sending BNP shares into a steady decline.

      In mid-May, there were reports that the fine would be $3.5bn;
      a week later it was $5bn. By the start of June, the rumoured number was $10bn, accompanied by a temporary suspension of BNP’s ability to clear dollars – a crucial client service – and a criminal conviction.

      Until late May, most analysts’ attention had been on Credit Suisse, which that month became the first big bank in two decades to plead guilty to criminal wrongdoing in the US over allegations of helping Americans evade taxes.

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      Once Credit Suisse’s settlement was announced, the focus rapidly shifted to BNP. In Paris, some politicians were starting to panic. French President François Hollande raised the issue with US President Barack Obama in a letter in early April, followed by a phone call and weeks of quiet lobbying by French officials.

      Officials were acknowledging that BNP “had to be punished” for its crimes, but furious about what they saw as a “crazily disproportionate” punishment being mooted that could potentially be “a killer for the bank”.

      Bank fines for US sanction violations

      Date Bank Fine/forfeiture ($m)
      2014 BNP Paribas 8900 (estimated)
      2012 HSBC 1900 (includes money laundering fine)
      2012 Standard Chartered 667
      2012 ING 619
      2009 Credit Suisse 536
      2010 ABN Amro, now RBS 500
      2009 Lloyds 350
      2010 Barclays 298
      2013 Bank of Tokyo-Mitsubishi UFJ 250
      2014 Deutsche Börse 152

      A fine of close to $10bn would far outstrip anything paid by other banks that settled allegations of sanction breaches, including HSBC, Standard Chartered and ING, which together had paid about a third of that amount.

      The French business newspapers were calling it a “declaration of war” by the Americans, while business leaders and rival bank executives were complaining about how the constant unpredictable leaks were undermining confidence in the sector.

      Henri de Castries, the chief executive of insurer Axa, at the height of the leaks criticised the “unpredictability” of the US regulators, with the expected level of the fine for sanctions violations “changing every week”.

      At BNP, the escalating pressure was taking its toll. The stress heaped on chairman Baudouin Prot, who was chief executive from 2003 to 2011, forced him to take a couple of months off with fatigue.

      And lower down the management chain, heads were starting to roll as the bank scrambled to put its house in order. Dozens of people were fired from the Geneva office while Dominique Remy, the head of the trade finance unit, left after 25 years at the bank.

      Georges Chodron de Courcel, chief operating officer and chairman of its Swiss subsidiary, stepped down after 42 years. The 64-year-old was allowed to retire with dignity rather than being pushed by US authorities, who had demanded his departure.

      As fears at the bank and in the French government escalated, Paris began to publicly lobby for BNP. In early June, Mr Hollande threatened Mr Obama with “economic and financial” consequences if the US did not back down.

      The lobbying seemed to fall on deaf ears. “I don’t pick up the phone and call the attorney-general,” Mr Obama said. “These are decisions made by an independent Department of Justice. Perhaps it is a different tradition than exists in other countries.”

      Initially, BNP relied on a legalistic defence, arguing that the transactions were not illegal under European law and presenting opinion letters from law firms backing up its case that it had done nothing wrong.

      The French bank also warned of the potential dire consequences for the banking system if US regulators imposed an excessively tough penalty. But regulators have grown weary of that argument, which Preet Bharara, the US attorney in Manhattan, called the “Chicken Little routine”.

      While the fine, guilty plea and partial suspension of dollar clearing are all painful, the biggest threat to BNP could be to its reputation.

      In particular, the bank is worried that its oil financing deals will be portrayed as having propped up the government of Sudanese President Omar al-Bashir, who has been indicted by the International Criminal Court for alleged war crimes.

      For a bank that prides itself on being run by some of the smartest people in the business and on coming through the financial crisis with its name relatively unblemished, these have been dark days.

      Profile: BNP Paribas chairman Baudouin Prot

      For much of the past decade, Baudouin Prot has formed a potent duo with his mentor Michel Pébereau. Together they built BNP Paribas into one of the eurozone’s biggest banks with €1.8tn in assets and more than 185,000 employees in 75 countries, writes Martin Arnold.

      After replacing Mr Pébereau as chief executive in 2003, Mr Prot led the bank’s expansion into Italy with the acquisition of BNL in 2006 and then took advantage of its relative strength after the financial crisis to acquire Belgium’s Fortis Bank in 2009.

      But since he handed over the reins as chief executive to Jean-Laurent Bonnafé and stepped up to chairman in 2011, Mr Prot, pictured, has had to deal with some tough situations.

      BNP Paribas chief executive officer Baudouin Prot©AFP

      Firstly, the eurozone crisis struck in 2011, causing investors to question the financial solidity of French banks in particular, as US money market funds withdrew funding from the sector en masse.

      A couple of years later the bank was forced to make the embarrassing admission to US authorities that it had continued to process transactions with countries under sanctions even after being told to stop and put itself under investigation in 2007. This came as a shock to Mr Prot, who that year had imposed rules banning any dealing with Sudan, Iran and Cuba.

      Add to these setbacks the fact that Mr Prot has felt squeezed between his predecessor, Mr Pébereau, who remained on the board as honorary chairman, and his successor, Mr Bonnafé, who is very much his own man, and it is understandable that he felt under pressure.

      At the start of this year, as the investigations gathered pace by US authorities and by the bank itself into the alleged sanction breaches involving Sudan, Iran and Cuba, Mr Prot was forced to take a couple of months off because of fatigue.

      The move underlines the extent to which the alleged sanction abuses have taken their toll on the 63-year-old, who was in the CEO seat when much of the alleged illicit activity took place between 2002 and 2011.

      Since US regulators started pushing for senior executives to be dismissed from the bank over the sanction violations, BNP has closed ranks around Mr Prot.

      However, the settlement with US authorities – expected to include an $8.9bn fine, guilty plea and partial suspension of dollar clearing rights – is likely to leave a stain on an otherwise almost spotless record.

      Euro jump wipes out post-ECB retreat

      Posted on 30 June 2014 by

      European Central Bank (ECB) President Mario Draghi addresses the monthly ECB news conference in Frankfurt June 5, 2014. The European Central Bank said on Thursday it will offer banks a targeted long-term refinancing operation (LTRO) to persuade them to lend, was preparing to purchase asset-backed securities in future and will discontinue sterilising previous bond purchases. REUTERS/Ralph Orlowski (GERMANY - Tags: BUSINESS TPX IMAGES OF THE DAY)©Reuters

      The euro hit a six-week high against the dollar, wiping out falls since the European Central Bank’s June policy meeting when Mario Draghi unveiled a range of anti-deflation measures meant to weaken the currency.

      The euro’s strength reflected worries about the pace of US economic growth, which have weakened the dollar, as well as an apparent fall in the likelihood of the ECB embarking on US-style “quantitative easing”, or large-scale asset purchases, analysts said.

        The single currency’s rise could lead fresh attempts by ECB president Mr Draghi to talk the currency lower at the central bank’s July governing council meeting, which concludes on Thursday.

        “It is a significant problem for the ECB,” said Ken Wattret, European economist at BNP Paribas.

        The central bank had hoped June’s measures “would lead to a step change in expectations for policy and the exchange rate,” he said.

        As part of the ECB’s strategy to head off deflation risks, Mr Draghi announced a month ago that the ECB would impose a negative interest rate on its overnight deposit facility.

        In addition, a “targeted” longer-term refinancing operation, aimed at encouraging banks to lend to the private sector, would inject as much as €400bn into the eurozone financial system.

        Mr Draghi also kept open the option of full-blown QE at a later stage.

        FT Video

        How the euro was saved

        F Comment: Save the euro

        May 2014: Peter Spiegel recounts the moments in 2011 and 2012 when the euro came closest to collapse, and how politicians and bureaucrats battled over the solutions that eventually saved the euro.

        The euro fell in the days after the June meeting but has since risen with last week’s weak US growth data convincing traders that Janet Yellen, Federal Reserve chairwoman, will be in no hurry to tighten monetary policy, even if US inflation is rising.

        The latest rise in the euro, “highlights the fact that the ECB is still very much in the shadow of the Fed”, said Jane Foley, currency strategist at Rabobank.

        “As long as Yellen remains dovish, it is going to be quite hard for the ECB to push back against that.”

        By late trading in London, the euro was up 0.3 per cent against the dollar to $1.3690.

        Adding to the upward pressure on the euro were stronger than expected German inflation data last week, which reduced the chances of the ECB being forced into a large QE programme.

        Foster + Partners to buy back 3i holding

        Posted on 30 June 2014 by

        The Swiss Re Insurance building, also known as "the Gherkin", centre, which was designed by Norman Foster’s architecture firm©Bloomberg

        Partners at Norman Foster’s architecture firm, which designed the famous Gherkin tower in the City of London, have agreed to buy back the minority holding held by UK-based private equity group 3i in their business.

        3i, which invested in Foster + Partners in 2007, received £108m from the sale of its minority stake and the repayment of loans, the buyout group said in a statement on Monday. It will also receive a deferred payment of £40m, plus interest, at a later date.

          The deal allows 3i, which is the UK’s biggest publicly-traded private equity group, to make an 80 per cent cumulative gain on an investment which it signed on the eve of the global financial crisis.

          The UK private equity firm invested in the architecture firm to help it grow and diversify and had always planned to return the stake to partners, according to one person with knowledge of the original deal.

          Since buying the stake, Foster + Partners has expanded into the US and Asia where it now generates more than half of its revenues. Recent projects include the US headquarters of Apple and Bloomberg’s new London base. Foster + Partners is posting a “record £290m order book”, the architectural firm said.

          The private equity investment has also enabled Foster + Partners to expand the partnership, which has grown from just four partners before 3i bought its stake, to 140 now.

          Lord Foster said 3i had helped the firm on a number of fronts including strategy, investment in research, governance, planning, and accessing new markets.

          “The practice is more international, offers a greater diversity of services and is more exciting than ever before,” he said.

          Argentina lashes out at US over debt

          Posted on 30 June 2014 by

          Argentina called a US court decision to block payments on its restructured debt a violation of international law and an infringement of its sovereign rights as it teetered on the brink of technical default for the second time in less than 15 years.

          Payments on the South American nation’s bonds were due Monday, but a New York federal court has forbidden it to pay interest on its restructured debt without also paying so-called holdout creditors, who refused to take part in the restructurings.

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            The country can still avoid a formal default by settling with holdout investors during a 30-day grace period.

            In a full-page advertisement published in global newspapers, Argentina said having bonds issued under US jurisdiction “does not mean accepting court decisions that are impossible to comply with. All the more so if any such decision violates the sovereign immunity principle effective in the US.”

            US District Judge Thomas Griesa ruled that the country’s attempts last week to proceed with $832m worth of payments on its restructured debt, without settling with holdouts first, was illegal.

            On Friday, Judge Griesa urged the nation to “get to the table” to discuss debt repayments to holdouts, putting an end to a decade-long battle that has raged in US courts since the aftermath of the country’s massive default of 2002.

            Argentina said last week’s decision to deposit the funds to meet the bond payments – mostly through accounts with Bank of New York Mellon – was a display of its “willingness to comply with its obligations, to honour its debts and to rule out any artful interpretation involving the introduction of the ‘technical default euphemism’.”

            The country said it has reiterated a request to Judge Griesa for a stay on his decision in order to enable “dialogue” with the holdouts.

            Early this month, Argentine officials agreed to meet the holdouts, led by hedge fund NML Capital, a subsidiary of billionaire investor Paul Singer’s Elliott Management, to discuss a settlement that the government claims may reach up to $15bn.

            A meeting between Argentina and holdout creditors has yet to take place, according to the holdouts.

            “There are no negotiations under way, there have been no negotiations, and Argentina refuses to commit to negotiations in the future,” said Jay Newman, senior portfolio manager at Elliott Management. “Argentina’s government has chosen to put the country on the brink of default. We sincerely hope it reconsiders this dead-end path.”

            Argentine bonds had rallied earlier this year but the securities tumbled last week. Bonds maturing in 2033 fell 0.4 per cent on Monday to trade at 83.33 cents on the dollar, according to Bloomberg data.

            Eurozone inflation holds steady in June

            Posted on 30 June 2014 by

            Eurozone inflation remained at its lowest level for more than four years this month.

            Eurostat, the commission’s statistics bureau, said on Monday that headline inflation for the euro area was 0.5 per cent in June, the same as in May and in line with the lowest reading since the autumn of 2010.

              The core figure, which excludes changes in the prices of more volatile items such as food and energy, edged up slightly to 0.8 per cent, from 0.7 per cent last month.

              The stagnation of the headline figure means inflation remains little more than a quarter of the European Central Bank’s target of below but close to 2 per cent.

              Policy makers from the currency bloc will gather in Frankfurt this week to discuss recent economic developments.

              After announcing a range of exceptional measures, including negative rates and an offer of up to €400bn in cheap four-year loans in June, few expect any significant policy change from the ECB on Thursday. But the longer that inflation remains subdued, the greater the chances that the central bank will resort to mass bond-buying, known as quantitative easing.

              “While the ECB is unlikely to act again this week, we think that it will ultimately implement a large-scale quantitative easing programme to tackle the risk of deflation,” said Jennifer McKeown, economist at Capital Economics.

              Inflation is expected to remain weak in the months ahead.

              Reinhard Cluse, economist at UBS, said: “QE will only be triggered in the event of more disconcerting signs that the eurozone is about to slide into deflation. Yet, greater clarity on this issue will only evolve in the final quarter of this year, when moderately higher inflation rates should generate some relief.”

              Separate data from national statistics authorities pointed to growing differences in inflation across the currency bloc.

              In Germany, the region’s largest economy and one of the strongest, figures published on Friday showed inflation accelerated to 1 per cent last month, from 0.6 per cent in May, exceeding analysts’ expectations.

              In Italy, inflation fell from 0.4 per cent to 0.2 per cent. In Spain, prices were flat in the 12 months to June.

              Christian Schultz, economist at Berenberg, said: “The divergence in inflation rates between core and periphery is key for the speed of the competitive rebalancing within the eurozone. As production inputs, including labour, becoming relatively cheaper in the former crisis countries, they are regaining competitiveness against Germany.”

              Comment: Banks to be defined by tech

              Posted on 30 June 2014 by

              The global banking industry is at crossroads and evidence of change is more tangible than ever.

              Banks’ fixed income and equity trading businesses have been major casualties of the past few months, a result of both secular and cyclical trends; a decline further exacerbated by lack of investment in trading technology.

                There are many drivers to the bank restructurings we are seeing, including rising cost of capital, declining profit margins, litigation risk, rising technological complexity and costs. The universal banking model may be threatened as a result of these changes, but it’s too soon to write its epitaph.

                Nevertheless at this juncture the future viability and profitability of banks will be determined by the choices banks make around innovations and investment in technology.

                Once a bank has made the decision about which businesses it wants or can still afford to be in, the decision about how it participates in the intermediation and the trading process becomes crucial. A good understanding of how the market infrastructure is evolving will be essential to making informed decisions. In my view, the new market structure that is emerging will have five key pillars:


                First are the global exchanges. They have survived the liberalisation and fragmentation of trading, innovating to meet the needs of a growing and more diversified customer base. They have also been able to turn regulations to their favour by expanding and diversifying their revenues. The same can be said about other infrastructures such as clearing houses and securities depositories.

                These entities will not only survive but will remain key to the market structure of the future, as long as they continue to adapt their business models to the market and retain scale.


                Second are the large broker-dealers. They will continue to exist despite the trend towards declining margins and profitability. However, there will be fewer players that have the scale and the liquidity needed to facilitate trading in key asset classes like derivatives. To the extent that they can break their own internal silos, and invest to replace their legacy technology, these select few players will survive and thrive.


                Third are the global banks. While broker-dealers are at the forefront of product innovation, global banks play a key role; in the distribution of financial products through their retail arms; managing wealth through their private banking businesses; and protecting and segregating assets through their custodian businesses. The breadth of these services will inevitably lead to an ‘arms race’ to achieve scale and efficiency, driving further specialisation by client type or asset class.


                Fourth are the market makers who have managed to carve an increasingly important role for themselves in today’s market structure. They are big clients of exchanges, and increasingly take on execution of trades that have been outsourced by many of the broker-dealers. They have revolutionised the world of equity trading. Their recent move into other asset classes such as foreign exchange is a sign of their ability to continue to disrupt the status quo.


                Fifth are the technology and software providers which do not compete with any of the above, but develop tools for other market participants. Players such as regional banks and brokers, private banks and wealth managers are increasingly outsourcing their trading technology to software houses to give them the ability to build scale and make the process of client intermediation and trading more efficient.

                Mapping this market structure of the future, I am reminded of the so-called ‘creative destruction’, a term first coined by Joseph Schumpeter in the 1940s to denote the destruction of the old by the creation of the new. A term perhaps overused by dotcom era enthusiasts, but which holds some truths for today’s banking industry.

                We are entering an era of high specialisation driven by consolidation towards a five-pillar market structure. Once this overcapacity in the system is removed, market participants will increasingly have less choice per type of client or asset class, and will rely on companies who aggregate different services.

                In an environment in which technology is creating change, complacency and efforts to protect the status quo will only lead to destruction of value and loss of market share. It is market participants that understand their strengths, establish which markets they want to be in, and then use technology to achieve scale, that will remain profitable in this new era.

                Matteo Cassina is executive vice-president, head of business lines at Saxo Bank

                Rupiah stages rally ahead of elections

                Posted on 30 June 2014 by

                Indonesian presidential candidate Joko Widodo, center, greets his supporters during a campaign rally in Gresik, East Java Indonesia, Sunday, June 29, 2014. Indonesia will hold its presidential poll on July 9. (AP Photo/Trisnadi)©AP

                Indonesian presidential candidate Joko Widodo

                The rupiah gained strongly yesterday, extending a rally that began on Friday as volatility hit Indonesia’s markets in the face of growing uncertainty about the outcome of next week’s presidential elections.

                Having gained 0.9 per cent on Friday, the rupiah – which was one of the least loved emerging market currencies during the first five weeks of the year – pushed a further 1.4 per cent higher.

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                  It reached as high as Rp11,831, the best two-day rally since February and its highest for two weeks.

                  Polls for the July 9 election put reformist candidate Joko Widodo, the Jakarta governor known as Jokowi, in the lead with 43 per cent of the vote.

                  But his only rival, nationalist former general Prabowo Subianto, with 34 per cent, has been narrowing the gap – and 23 per cent of the sample have still to make up their minds.

                  Although the rupiah had rallied strongly in February and March, climbing about 8.5 per cent from its January low to its March high, the currency subsequently dipped 7.5 per cent over the next three months as Prabowo’s campaign gathered pace.

                  He is strongly nationalistic and investors fear policies that would discourage foreign investment.

                  The IDX Composite – Jakarta’s benchmark stock index that was the worst performing equity market in dollar terms in 2013 – had been among this year’s best performing Asia-Pacific emerging market indices up until last month.

                  Since May 19, the IDX has fallen 4.2 per cent, reflecting the narrowing lead Jokowi held over Prabowo.

                  Interactive

                  FT Explainer: Indonesia election

                  Indonesia election

                  FT Indonesia correspondent Ben Bland makes sense of one of the world’s most complicated elections

                  Also having a positive impact on the rupiah in the last two trading sessions has been the hope of a return in the coming months to a trade surplus.

                  Trade data, due this week, are seen shifting strongly towards balance as the deficit is expected to narrow sharply in May.

                  Analysts at ING, however, were not so hopeful. “We think the trade balance will remain an overhang on the rupiah this year.”

                  Siddharth Mathur at Citigroup acknowledged that inflation remained high and political certainty had all but vanished.

                  “If sentiment towards Indonesia deteriorates further, external vulnerabilities may reassert and policy makers may again face a choice between further currency weakness or higher rates.”

                  “But,” he added, “if the presidential election can trigger investor optimism – as witnessed in India last month – even a small increase in the pace of portfolio flows may paper over the residual vulnerability.”

                  German retail sales fall 0.6% in May

                  Posted on 30 June 2014 by

                  MUNICH, GERMANY - DECEMBER 18: Shoppers walk through a pedestrian area near Marienplatz on December 18, 2013 in Munich, Germany. As christmas nears, a lot of people visit shops in downtown Munich to do their shopping. (Photo by Joerg Koch/Getty Images)©Getty

                  German retail sales fell by 0.6 per cent in May in real terms, compared with the previous month, according to data released on Monday.

                  Analysts expect German shoppers to display an increased willingness to spend, as the country’s labour market is robust and interest rates are low.

                    But sales figures in recent months have been disappointing.

                    The Easter holidays started three weeks later this year, compared with 2013, but the monthly figure for April showed no boost to retail sales volumes.

                    The month-on-month decline in May follows a fall of 1.5 per cent in April, compared with March 2014, according to data published by Germany’s federal statistical agency.

                    A strong retail performance in January, when sales rose 1.9 per cent month-on-month in real terms, has helped boost figures when compared on an annual basis.

                    Overall, sales for the first five months of the year are up 1.4 per cent on the previous year.

                    The data show that online and mail order sales rose 5 per cent in the first five months of 2014, compared with the same period last year.

                    Sales of clothing and shoes grew 3.4 per cent in January-May 2014, while sales of medicines and cosmetics grew 4 per cent in the same period.

                    On an annual basis, retail sales in May were up 1.9 per cent in real terms.

                    Long-dated US debt emerges as 2014 winner

                    Posted on 30 June 2014 by

                    Long-dated US sovereign bonds have emerged as one of this year’s strongest performing assets, eclipsing gains in the benchmark S&P 500 stock index and commodities including oil and gold.

                    The returns on long-dated Treasuries, which are on course to record a total return of 13 per cent for the first half of 2014, have confounded expectations at the start of the year, when many strategists forecasted that prices would fall and yields rise as the market priced in prospects of higher inflation and an end to ultra-loose Federal Reserve monetary.

                      “The surprise of the first half was the performance of bonds and equity sectors related to interest rates. Interest rates moved far more than what many people expected at the beginning of the year,” said Jack Ablin, chief investment officer at Harris Private Bank.

                      Among leading commodities, spot gold has risen nearly 10 per cent to $1,316.15 an ounce. US crude oil prices have gained more than 10 per cent, with West Texas Intermediate trading near $107 a barrel, up from a low of $90 in January.

                      The S&P 500 has risen 6.1 per cent so far this year to a record high just shy of 2,000.

                      But investors have reaped double-digit percentage gains from sectors including biotechnology, real estate investment trusts, semiconductors, utilities, energy and healthcare, along with gold and silver miners as commodity prices have rallied.

                      The strong performance across diverse asset classes points to the uncertainty surrounding the economy and future central bank policy moves. Rising commodity and equity prices suggest strengthening activity, while firmer gold and Treasury bond prices are regarded as havens by investors worried about the economy.

                      Contrary to expectations that the US economy was poised to accelerate at the start of the year and propel interest rates sharply higher, a harsh winter resulted in activity shrinking markedly during the first quarter.

                      Long-dated bond yields, which move inversely to price, remain near their low for the year, with traders betting that the Fed will raise interest rates less forcefully than current central bank estimates for 2015 and 2016.

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                      Heading into 2014, commodities forecasts were tepid. Booming oil output from the US, large crops in breadbasket regions, slower growth in China and a long downtrend in gold suggested a continuation of three straight years of losses for the Dow Jones-UBS commodity index.

                      The surprise of the first half was the performance of bonds and equity sectors related to interest rates. Interest rates moved far more than what many people expected at the beginning of the year

                      – Jack Ablin, Harris Private Bank

                      Instead, the index – to be renamed the Bloomberg Commodity Index on July 1 – delivered total returns of 8.1 per cent through Friday. Oil prices have been lifted by geopolitical tensions which have also supported gold. Indications from central banks that monetary policy will remain loose has given gold a further boost.

                      Tom Kendall, head of global commodities research at Credit Suisse, said the strong performance of leading commodities indices had reignited investor interest.

                      “Very few people saw commodities outperforming emerging market equities or high-yield corporate bonds at the start of the year,” he said. “The diversification benefits of commodities also started to resonate with investors as correlations between commodities and other asset classes broke down,” Mr Kendall added.

                      After a record $50bn of net redemptions during 2013, Citigroup estimates net inflows into commodity investment vehicles of more than $6bn this year. Returns from commodity investing were also improving because of a broad “backwardation” in futures markets – when prices for more immediate delivery are above those for later.

                      US equity prices have moved steadily higher since the market set its 2014 low in early February, with investors in stocks counting on a strong second half rebound for the economy.

                      Stronger employment growth in recent months has bolstered hopes that the economy will accelerate over the summer while in the eurozone, aggressive central bank action is seen boosting activity.

                      Lagging areas of the equity market have been small capitalised stocks along with consumer related companies, telecoms, industrials and financials.