Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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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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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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Archive | November, 2016

US bonds are tracking ECB policy

Posted on 31 August 2014 by

An eagle tops the U.S. Federal Reserve building's facade in Washington©Reuters

The link between US monetary policy and US bond yields has fallen apart this year, showing how fears of deflation in Europe are driving global financial markets.

According to analysis by the Financial Times, the correlation between five- and ten-year Treasury yields has fallen to its lowest level on record, with US bonds appearing to track European monetary policy instead.

    The pattern helps to explain why the taper of US Federal Reserve’s asset purchases has caused so little disruption and could make it easier for the Fed to exit from ultra-easy monetary policy.

    “We are seeing a higher probability of easing from the [European Central Bank] and that will dominate the short-term outlook for bond prices and yields,” said Zach Pandl, portfolio manager at Columbia Management.

    Mr Pandl said that the outlook for bonds is quite poor at current valuations, but that the US market may keep rallying in the near term, as investors weigh the prospect of outright asset purchases by the ECB.

    Five-year bond yields closely reflect the path of interest rates that markets expect from central banks. Ten-year yields normally move in tandem. But so far in 2014, the US ten-year has fallen from 3 per cent to 2.4 per cent – even as news on the economy has got stronger – while the US five-year yield has barely changed.

    That is unprecedented: no other global shock going back to the 1960s has ever caused US five and 10-year yields to diverge like this. In recent months, the US 10-year yield has been more correlated with falling five-year yields in Europe.

    It highlights how the world’s two largest central banks are now on different tracks, with the Fed moving towards a first rate rise, even as the ECB is forced to launch new stimulus.

    The demand for US bonds caused by events in Europe has also made it possible for the Fed to taper its own purchases without market disruption, although weak demand in Europe and a falling euro could damp US growth somewhat.

    James Bullard, president of the St Louis Fed, said in a recent interview with the Financial Times: “On the tapering, it’s been remarkable that it’s gone as smoothly as it has. At least in my mind, it’s built some confidence around the [Federal Open Market Committee] that we can do this without major disruptions.

    “I think that is the story of the year in financial markets: that the Fed tapered and yet global bonds rallied.” Mr Bullard pointed to the growing likelihood of quantitative easing by the European Central Bank as the most likely explanation.

    As the prospect of the ECB and Fed pushing their respective monetary policies in opposing directions looms, so a strengthening dollar stands to boost the appeal of US assets such as bonds and equities.

    Alan Ruskin, strategist at Deutsche Bank, says: “A policy divergence will favour the US dollar and the [Treasury] yield pick-up is there. Core eurozone yields are unattractive, full stop, and those of the periphery countries no longer offer a significant pick-up over the US.”

    US banking: too small to fail

    Posted on 31 August 2014 by

    The largest US banks may still be “too big to fail”. The answer will only come in the next crisis. In the meantime, one might wonder if they are too big to succeed. The 6,656 FDIC-insured banks across America reported the second-highest net profits on record in their last set of quarterly results. Combined, they generated $40bn in net income, 5 per cent more than a year ago. This had little to do with Wall Street’s behemoths. Mid-sized regional and small community banks did the heavy lifting. And things are going to get even better for them.

    As one might expect at this point in the cycle, lower expenses were a key profit driver. Loan provisions fell 22 per cent to $6.6bn; loan losses shrank from $14bn to $10bn; goodwill impairments dropped from $4.4bn to almost nothing; and payrolls were a shade lower than a year ago. Meanwhile, stricter regulation helped credit quality. Average tier 1 leverage ratio is at the highest level since 1991. What prevented US banks as a group from posting even better results was the mediocre large banks. They still suffer from poor trading and mortgages businesses.

      Small banks are not only about cutting costs. They are also lending more. According to Federal Reserve data, their average loan volumes grew 7 per cent in the quarter compared with the dreary 2 per cent rise at the top 25 US banks. The little guys outgrew the big banks on all loans: commercial & industrial, residential real estate and home equity. They do even better with mortgage-backed securities. No wonder net interest margins at most small banks are up, while at big banks they have been down.

      Is this sustainable? Yes. If the US Congress, as expected, eases capitalisation standards for non-systemically important banks, small banks will be free to expand their loan books still further. So the strong growth should continue. The risk, in fact, is that it goes too far.

      Tweet the Lex team @FTLex or email on

      Buyout groups invest in UK North Sea oil

      Posted on 31 August 2014 by

      North Sea oil rig©Getty

      Buyout groups Blackstone and Blue Water Energy are providing $500m to Siccar Point Energy, a new UK-focused oil company, in one of the largest ever private equity investments in North Sea oil.

      The move highlights the continuing international appeal of Britain’s offshore oilfields, in spite of increasing competition from newer and more prolific basins in Africa and the US and uncertainty over the upcoming referendum on Scottish independence.

        Investment in the UK North Sea reached a record level of £14.4bn last year, raising hopes that oil and gas production could start to pick up again after years of decline.

        “This is one of the most opportune times to buy assets in the North Sea,” said Jonathan Roger, chief executive of Siccar Point. “The market is very buoyant.”

        He said the company would look to acquire properties from the international majors, which are divesting some of their older UK fields, as well as from US independents moving back to North America to exploit the shale boom.

        Private equity is no stranger to the North Sea. Warburg Pincus and Riverstone have backed Fairfield Energy, a UK-focused independent, while Barclays Natural Resource Investments has a stake in Chrysaor, a private company focused on commercialising dormant discoveries in the North Sea and Ireland. Meanwhile, Bridge Energy UK, which has assets in both the UK and Norwegian sectors of the North Sea, was taken private by Norway’s HitecVision last year.

        But analysts say Siccar Point’s cash infusion represents one of the biggest private equity investments in a UK oil company in recent years.

        The company’s management team consists of seasoned veterans of North Sea oil exploration. Mr Roger worked at leading independent Venture Production, which was acquired by Centrica in 2009, and went on to head Centrica’s upstream oil and gas arm.

        He said Siccar Point would aim to buy marginal or mature oilfields that don’t meet the majors’ stringent requirements for returns, and gradually build two-to-three core production hubs in the North Sea. The company would also have an exploration arm.

        “We will acquire assets that will . . .  get 100 per cent of our focus, whereas for others they are the tail-end of their business, so they struggle to compete for resources and manpower,” he said.

        Siccar Point is backed by Blue Water Energy, a London-based private equity firm founded in 2011 that last year closed an $861m fund for investments in oil and gas. It has already put cash into a refined product storage company and two oilfield services groups.

        Graeme Sword, a partner, said the plan was to build Siccar Point up into a 20-30,000 barrels of oil a day company which could then be floated or sold to a national oil company or big utility.

        The growth of PE-backed private companies in the North Sea comes at a time when publicly listed exploration and production (E&P) companies have fallen out of favour with investors. Many have discovered oil but have struggled to raise the cash needed to extract it.

        “The independent sector is underfunded,” said Nick Cooper, chief executive of London-listed African explorer Ophir Energy. “A lot of E&Ps are unfortunately at death’s door, or hibernating.”

        Mr Sword said Siccar Point would not be under the same kind of pressure as quoted E&P companies to meet annual financial or production targets. “The PE-backed model has a longer-term horizon,” he said.

        Stocks at records yet recovery is elusive

        Posted on 30 August 2014 by

        Another summer day, another record for the stock market as both the S&P 500 and the Dow Jones Industrial Average set new highs this past week. The Federal Reserve’s desired engineering of high asset prices is intact, having surmounted the threat of even a single adverse note from the chorus of central bankers gathering at Jackson Hole a few days before.

        At the same time, signs of a real economic recovery remain elusive. The main argument in support of continued buoyancy in the equity markets remains technical, rather than based on economic fundamentals. That is not necessarily as obvious as it should be. But some of the things that lead analysts to proclaim that a real economic recovery is in sight actually are symptoms of a deeper malaise.

          For example, one past constraint on a more robust economic bounceback has been the reluctance of banks to lend, despite those low interest rates. But now credit is starting to pick up. In July, the Senior Loan Officer Opinion Survey on bank lending practices showed both an improvement in demand and supply.

          Yet the pick-up in demand has not been as strong as it should be. Any lasting recovery requires first and foremost a turnround in demand. That demand has to come from all players in the economy – from individual households, companies and from government. None are doing enough.

          For example, the individual savings rate continues to go up and at 5.3 per cent is now higher on this side of the Pacific than it is in thrifty Japan. Retail sales slowed sharply across the board in July. Walmart had a bad quarter and if Procter & Gamble did not it was due more to cost cutting than robust sales, according to their most recent quarterly results, announced earlier this month.

          “The rise in the savings rate has occurred against the backdrop of substantial increases in equity prices and house prices which might have been expected to boost spending and drive down the savings rate,” Robert Mellman, JPMorgan’s US economist notes. So much for Fed hopes that asset price inflation would feed through to the real economy, benefiting those lower down the financial pyramid as well as the wealthiest.

          Meanwhile companies still have not invested as much in expanding plant and equipment as one might expect. “We haven’t seen much allocation of resources to capital,” says Bruce Kasman, head of economic research for JPMorgan. “Because labour is cheap, we are seeing companies substitute labour for capital.”

          And if labour is cheap, how can those workers have enough money to spend to support consumption, which is over 70 per cent of GDP?

          Meanwhile, numerous mergers and acquisitions are being taken as signs of a recovery in animal spirits. But that may not be true either. Many companies are merging because that was the only way to increase their revenues after they reached the point where it became impossible to cut costs more. Among the cynics is David Einhorn, founder of Greenlight Capital.

          The pick-up in demand has not been as strong as it should be. Any lasting recovery requires first and foremost a turnround in demand

          “Takeover season has returned and is again causing us losses in our short portfolio,” Mr Einhorn writes in his most recent letter to investors at the end of July. “In reviewing historical takeovers of our shorts where we lost money, almost none proved to be good deals for the acquirers. The prospective buyers ought to . . . walk away. But . . . debt financing is so inexpensive that acquirers can pay premiums and have the deals be accretive to EPS, making them willing to overlook or ignore any problems they discover.”

          And finally, the third actor, government, is a net drag on the economy as it has been for a while. The budget deficit is shrinking and the cost of money is low. The government should be doing far more to put in place the building blocks to support long-term growth by improving everything from education to infrastructure. But in today’s fractured political environment, that is a non-starter.

          Given the disconnect between asset prices and the real economy, with each passing day, the financial vulnerabilities grow. That increases the likelihood that when rates finally do rise, the sort of accidents seen in 1994 may return. The only question is what will be the 2014 equivalent of Mexico and Orange County.

          Week in Review, August 30

          Posted on 30 August 2014 by

          week in review

          A round up of some of the week’s most significant corporate events and news stories.

          Burger King’s Canada deal reignites tax debate

          Tim Hortons signage is displayed outside of a restaurant in downtown Vancouver©Bloomberg

          Burger King’s $11.4bn takeover of the coffee and doughnuts chain Tim Hortons sparked controversy on both sides of the US-Canadian border this week, writes Stephen Foley in New York.

          In the US, the deal was condemned by politicians and boycott-threatening burger customers as another “tax inversion” because Burger King is relocating its headquarters to Toronto, which would help it save taxes on future international profits.

          In Canada, where Tim Hortons is the largest fast-food chain, the company took out a double-page advert in a national newspaper to reassure an anxious nation that Tim Hortons will stay the same despite the takeover.

          Corporate Person in the News

          Emmett Shear, chief executive of TwitchTV

          Emmett Shear, above, and co-founder Justin Kan sold their start-up Twitch to Amazon for almost $1bn this week, writes Tim Bradshaw.

          Continue reading

          Tax inversion deals have incurred the wrath of the White House, which wants to ban them, so some observers were surprised to discover Warren Buffett – an Obama administration confidante and supporter of higher taxes on the rich – providing $3bn in financing for Burger King’s purchase.

          In an interview with the Financial Times, Mr Buffett said that shifting the headquarters north of the border was not a “tax-driven“ decision. “I just don’t know how the Canadians would feel about Tim Hortons moving to Florida. The main thing here is to make the Canadians happy,” he said.

          Brazilian private equity firm 3G Capital Management, which took Burger King private in 2010 before relisting it, will retain 51 per cent of the combined group.

          ● Related Gary Silverman Comment: Burger King’s way is no longer mine

          ● Related Comment: Person in the News

          ● Related Lex note: Burger King – Doughnuts are sugary

          Shell consortium nears $5bn Nigeria oilfields sale

          A consortium led by Royal Dutch Shell is close to selling four Nigerian oilfields and a key pipeline for about $5bn to domestic buyers, as foreign companies retreat from a region plagued by theft and sabotage, writes Anjli Raval in London.

          The sales also highlight the growing presence of Nigerian oil companies
          in sub-Saharan Africa’s oldest oil industry, amid a government initiative to spur domestic ownership and availability of financing.

          Shell is selling its 30 per cent stake in the blocks and a key oil transport artery it co-owns with France’s Total and Eni of Italy that are set to profit from their 10 per cent and 5 per cent shares respectively. The Nigerian National Petroleum Corporation will keep hold of the remaining 55 per cent.

          Although all buyers have been selected, two bidders are still negotiating contracts, according to people familiar with the matter, after which government approval is required for all parties. These people said the tally, that could amount to $5.2bn, may still change as details are negotiated.

          Nigerian traders-cum-producers Taleveras and Aiteo have offered $2.6bn for the largest field, known as Oil Mining Licence 29, according to the people familiar with the situation. The 60-mile Nembe Creek Trunk Line, regularly attacked by oil thieves, is being sold as part of this package.

          Separately Shell has asked Washington for permission to drill in the Arctic, off the coast of Alaska, which keeps open the possibility the group may resume its exploration campaign there next year.

          ● Related Lombard: Oil auction may end badly for Nigeria

          Telefónica enters exclusive talks on Vivendi Brazil unit

          In a deal likely to reshape Brazil’s telecoms landscape, Spain’s Telefónica this week improved its earlier August offer to buy GVT, Vivendi’s Brazilian fixed-line, broadband and pay-TV unit, writes Adam Thomson in Paris.

          The improved offer came as Telecom Italia weighed in with an offer of its own.

          A pedestrian walks past a Global Village Telecom ad©Bloomberg

          On Thursday, Vivendi, the Paris-based conglomerate, board voted – unanimously, said a person with knowledge of the matter – to enter exclusive negotiations with Telefónica in a deal that represents an enterprise value of €7.45bn.

          Telefónica plans to fold GVT into its existing Brazilian mobile business Vivo, already the country’s wireless market leader, setting the Spanish group up to be the dominant telecoms operator in Brazil.

          But for Vivendi, the deal, in which the group stands to receive €4.663 in cash and a 12 per cent stake of the Spanish operator’s Telefónica Brasil, is arguably even more transformational.

          Two years ago, the group had interests spread across telecoms, gaming, recorded music and television. It also had a heavy debt burden its share price had long suffered from a conglomerate discount.

          By year end, assuming the GVT deal goes through and that it completes an agreement signed in April to sell its SFR French telecoms unit, Vivendi will be a smaller but more coherent pure player in media and entertainment.

          It will also be sitting on a cash pile that is close to €8bn.

          ● Related Lex note: Brazilian telecoms – crowded line

          RBS under fire for ‘serious failings’ on mortgage advice

          Revelations that Royal Bank of Scotland advisers were selling mortgages without properly checking whether customers could afford them marked an embarrassing setback to the bank’s efforts to clean up its image, writes Sam Fleming in London.

          Ross McEwan, who joined the bank two years ago and took over as chief executive last October, has pledged to improve customer service.

          Man walking by an RBS bank©Getty

          But on Wednesday the Financial Conduct Authority slapped a £14.5m fine on RBS, criticising the firm for “serious failings” in its mortgage business between June 2011 and March 2013. RBS staff were found to have failed to advise customers on mortgage terms, provided inadequate advice to individuals attempting to consolidate their debts, and failed to fully consider borrowers’ budgetary positions.

          Some workers even offered customers their own personal predictions about movements in official interest rates, something the FCA described as “highly inappropriate” given the impact it could have on a borrower’s decision.

          One told a customer that rates could reach 5.5 per cent, recommending a five-year fixed-rate mortgage. The Bank of England’s official rate stands at 0.5 per cent.

          RBS sold about 30,000 mortgages on an advised basis during the period examined by the FCA. Of 164 sales reviewed only two were judged to have met overall sales standards. The bank is now contacting customers who received its advice to see if they have any concerns.

          And finally … the lighter side of the news

          Embargoed to 0001 Thursday June 12 File photo dated 25/02/10 of a view of the Gherkin and Canary Wharf at sunrise from the City of London as tourists are forced to splash the cash more in London than in any other major world city, according to a survey. PRESS ASSOCIATION Photo. Issue date: Thursday June 12, 2014. The UK capital topped a city break cost-of-touring table compiled by TripAdvisor, with Paris the next most-expensive destination for visitors. The cities were judged according to cost of a meal with wine for two plus cocktails, two short taxi journeys, and a one-night stay in a four-star hotel. See PA story TOURISM Costs. Photo credit should read: Stefan Rousseau/PA Wire©PA

          ● The battle to own an iconic piece of the London skyline is hotting up with property investors lining up their bids for 30 St Mary Axe, which is better known by its affectionate nickname of the Gherkin. One outside contender that ought to have been involved in the race, pushing up the price tag: Branston Pickle.

          Top shot of two rows of passenger seats. Aircraft interior in business class.

          ● Passengers with a penchant for the window seat will not need to race to be at the head of the queue in the future. Windowless aircraft with the interior fuselage covered in screens projecting images of the sky outside will give everyone a view. Although you have to pity the poor blighters stuck in a holding pattern over Luton.

          A PlayStation 4 controller is displayed at the 2014 Electronic Entertainment Expo, known as E3, in Los Angeles, California June 11, 2014. REUTERS/Kevork Djansezian (UNITED STATES - Tags: SCIENCE TECHNOLOGY SOCIETY BUSINESS)©Reuters

          ● Cybercriminals targeted Sony’s PlayStation Network and Microsoft’s Xbox online gaming services with denial of service attacks, preventing gamers from merrily shooting each other. Parents with little tech savvy have been practising denial of service attacks for years: unplugging the console when they want to talk to an engrossed teen.

          zara top

          Zara suffered a wardrobe malfunction with its efforts to evoke the spirit of the Wild West with a “sheriff” shirt for youngsters. Unfortunately, the main thing it triggered was a social media lynch mob that complained the garment bore a resemblance to the uniforms Jews were forced to wear in Nazi concentration camps.

          Lending to small groups must be simpler

          Posted on 30 August 2014 by

          European businesses are still struggling to get credit and their woes are hitting growth. Despite an alphabet soup of programmes aimed at stimulating growth, overall eurozone bank lending to the region’s businesses has fallen by €561bn since 2009, according to research by Royal Bank of Scotland. In the UK, lending to small and medium sized businesses under a programme specifically aimed at getting money to them dropped £435m in the second quarter, after dropping £700m in the first three months of the year.

          As banks have scaled back in the wake of the financial crisis, European and UK corporates have suffered, in part because they remain far more dependent on bank lending than their US counterparts. In the US close to three-quarters of all corporate funding comes from investors through the capital markets. Medium-sized companies there routinely issue high-yield debt. In Europe banks still account for close to two-thirds of corporate funding and SMEs have been skittish about tapping the capital markets.

            This week, Standard & Poor’s announced plans for a cheaper, less detailed “ratings lite” product that they say could help make it easier for European SMEs to sell debt. The “mid-market evaluation” is a stripped down credit report that can be shared with investors during a private fundraising. Aimed at smaller companies with less than €1bn annual turnover and no more than €500m in outstanding credit facilities, the product costs less and takes less management time.

            In theory, a simpler rating system for smaller companies is a great idea. Bankers have long pointed out that lending to SMEs requires a lot of analysis and absorbs a lot of capital, especially in comparison with doling out home mortgages. Under pressure to reduce their balance sheets in the wake of the financial crisis, many banks have become far more selective about their lending in this area. While peer to peer lending platforms are picking up some of the slack, many medium-sized corporates would like to tap capital markets directly. But convincing investors of their creditworthiness can be difficult, particularly in Europe. Companies wanting a credit rating have to pay for the privilege, and that cost can be prohibitive for a small debt deal.

            Still, there are pitfalls. The 2008 financial crisis revealed that not all credit ratings are worth heeding. Many AAA-rated securitisations of subprime mortgages turned out to be virtually worthless. All the credit rating agencies have tightened up their methodology since then, and S&P insists its ratings of companies (as opposed to securitisations) have always been more sceptical. “If the markets don’t take our opinions seriously, we don’t have a business,” says Roberto Rivero, who does market development for S&P.

            There is also a question of access. The evaluations are private – meant only for investors who are considering whether to participate in a deal. S&P says it plans to monitor who accesses the reports to make sure companies are not sharing the information with some prospective buyers and not others. Either way, it means investors will know more about some companies than the rest of us, but that has been a fact of life since debt markets got going.

            In an ideal world, someone would find ways to simplify and automate the small business lending process, much as FICO credit scores have done for mortgage loans. But in the meantime Europe and the UK really need more market-based finance to replace the retreating banks. The S&P evaluations seem like a step in the right direction, as long as they prove as reliable as their promoters claim.


            Mortgage rules ‘deter first-time buyers’

            Posted on 30 August 2014 by

            An estate agent arranges a "Help to Buy" sign amongst a display of residential properties up for sale in London, U.K., on Monday, Dec. 30, 2013. U.K. house prices rose in December and will extend gains in 2014, led by London and southeast England, Hometrack Ltd. said. Photographer: Simon Dawson/Bloomberg©Bloomberg

            Tougher regulations on mortgage lending have sharply cut the number of people who can afford to buy their first home, research has found.

            The number of first-time buyers unable to purchase homes has reached 1.8m since 2007, according to a report by mortgage insurer Genworth.

              It said the limits placed on high loan-to-value mortgages were a key factor in declining rates of home ownership, hitting the 25 to 34-year-old age group hardest.

              It warned that the potential withdrawal of the government’s Help to Buy scheme would cause construction rates to fall back and worsen the mismatch of supply and demand. Even with Help to Buy, it said, first-time buyer numbers in 2014 would fall 41 per cent short.

              Simon Crone, Genworth European vice-president for mortgage insurance, said the crisis concerned both lending to first-time buyers and low rates of house building. Help to Buy, he said, “remains a temporary fix to a problem currently hard-wired into the market. But we must avoid its removal until there is a long-term solution in place.”

              The report comes amid countervailing figures this week from the Council of Mortgage Lenders, which found loans to first-time buyers totalled £3bn in the second quarter of 2014, up 17 per cent on the same period in 2013.

              Acknowledging the rise, Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said there was nonetheless “a real danger” it could be shortlived without robust planning for the ending of Help to Buy.

              “The proliferation of new regulations and capital requirements has tightened the market by limiting borrowing options and restricting lenders’ ability to serve the full range of creditworthy consumers.”

              Ray Boulger, senior technical manager at mortgage broker John Charcol, suggested there was a contradiction at the heart of the government’s policy on home loans.

              “Either the government believes the stricter, and increasing, regulations now in place are necessary to protect the integrity of our banking system – in which case it is difficult to understand why it also believes it is appropriate to introduce schemes designed to get around the problems these cause – or it now recognises the regulations are causing unintended consequences, in which case it should change the regulations.”

              Trend-setting dollar lifts frustrated bulls

              Posted on 29 August 2014 by

              Dollar bulls have been waiting a long time.

              A year ago, the near-consensus view of investors was that the greenback was bound to rally from post-crisis lows as US growth picked up speed, while Japanese and European policy makers were still struggling to inject stimulus into their sluggish economies.

                Yet their bets were repeatedly frustrated – by the delay of tapering; by last autumn’s US debt crisis; by the arrival of a persistently dovish Fed chair; the effects of a bitter winter on US growth; and the euro’s unexpected resilience. Instead, ultra-loose monetary policy across the developed world kept equities close to all-time highs, depressed bond yields and left major currencies rangebound.

                Markets Insight

                Rising risk of currency market volatility

                PIMCO's Chief Executive Officer and Co-Chief Investment Officer Mohamed El-Erian speaks during an interview at Thomson Reuters in New York March 31, 2011. PIMCO would reconsider buying back U.S. government debt, including Treasuries, if the Newport Beach, California firm sees value in them again, El-Erian said on Thursday. REUTERS/Shannon Stapleton (UNITED STATES - Tags: BUSINESS)

                FX instability will spread as policy divergence widens, writes Mohamed El-Erian

                Continue reading

                But now, many traders are betting that a divergence between major central banks will bring the currency market back to life, stirring up the volatility on which they thrive.

                Since May, when Mario Draghi first signalled that the European Central Bank was set to step up monetary easing, the dollar has gained 5 per cent against the euro. In the past month, following more hawkish language from the US Federal Reserve, it has also climbed about 2 per cent against sterling and 1.5 per cent against the yen. The same trends are apparent in futures markets: the latest data from the Commodity Trading Futures Commission show speculators have been building up bets on a stronger dollar, and on the euro’s further fall.

                Euro against the dollar, US dollar trade-weighted index, Two-year Treasury yield

                Investors drew support for these views from last week’s gathering of central bankers at Jackson Hole, where Janet Yellen said nothing to change market expectations that the Fed would start raising rates around the middle of next year – and Mr Draghi’s comments led markets to price in a much greater chance of ECB quantitative easing.

                Data have also bolstered the trend, with an upward revision to second-quarter US gross domestic product this week contrasting with falling eurozone inflation that adds to the pressure on the ECB to step up stimulus.

                “For the first time in a while, we’ve really got trending markets – the euro is trending lower, the dollar is trending up and this will be the eighth consecutive week that the pound will finish lower,” says Marc Chandler, head of currency strategy at Brown Brothers Harriman. He notes that while actual volatility in currency markets is still close to record lows, implied volatility has already picked up in options markets.

                This is not just the result of speculation on monetary policy divergence. Paul Lambert, head of currency at Insight Investment, says the change in the euro-dollar exchange rate has been fuelled by portfolio managers switching from European bonds and equities into Asian or other higher-yielding markets.

                “It’s no longer obvious to go to the [eurozone] periphery for yield,” says Elsa Lignos, strategist at RBC Capital Markets. She adds that if US equity investors – who for many years have tended not to hedge currency risk – were to start protecting their holdings against a long-term dollar rally, the move “would be self-reinforcing”.

                Still, many analysts say that markets read too much into Mr Draghi’s remarks last week, and warn that the euro could rally if the ECB dashes over-exuberant hopes of immediate action at its meeting next week. Moreover, price fluctuations over the past month may have been accentuated by thin holiday trading volumes. Next week, when the market is back in full swing, will be a better test.

                FT Video

                Can weaker euro finally be good news?

                Aug 18, 2014: The FT’s Ralph Atkins considers whether the correlation between the euro/dollar and Europe’s equities has returned to normal

                Watch video

                Simon Derrick, strategist at Bank of New York Mellon, acknowledges that he expects only an “incremental” rise in the dollar against sterling, and “relative shading” against the yen. But he argues that its move against the euro since May would have seemed striking even in the more turbulent currency markets of previous years.

                The dollar is still weak by historical standards – both on trade-weighted measures and going by the dollar index, in which its level against the euro is given greater weight. And there is still plenty that could throw US monetary policy off course – especially if geopolitical tensions in Ukraine and the Middle East worsen. But investors’ conviction that the market is on the move again is getting stronger.

                “Activity has been subdued all year . . . unless you’ve had to play in FX, a lot of people have chosen not to,” Mr Lambert says, noting the higher returns available in equities and credit markets. But in the year ahead, he adds, “the environment will be more favourable for FX managers, especially on a relative basis with other asset classes”.

                Mr Chandler says: “A lot of people like myself have been frustrated for months . . . now that they have this I don’t think they are going to let it go.”

                FCA orders banks to reopen 2.5m PPI claims

                Posted on 29 August 2014 by

                Inside The Financial Conduct Authority As Investigations Begin Into Private Accounts Of Forex Traders©Bloomberg

                The City watchdog has ordered lenders to reopen more than 2.5m payment protection insurance claims, clearing the way for consumers to seek additional compensation for Britain’s biggest financial mis-selling crisis.

                The Financial Conduct Authority (FCA) has requested that banks, credit card providers and personal loan companies reassess claims from 2012 to 2013 that have not received sufficient compensation or were “unfairly rejected”.

                PPI is a type of insurance added on to loans that is meant to cover repayments if a borrower is made redundant or falls ill. It was sold by lenders – including Britain’s biggest banks – on mortgages, credit cards and other types of debt.

                  In many cases, the policies would not have paid out due to hidden clauses or they were sold to borrowers without their knowledge.

                  Martin Wheatley, chief executive officer at the FCA, said that ensuring consumers who were previously mis-sold PPI are treated fairly and gain redress is “an important step in rebuilding trust in financial institutions”.

                  “In around two and a half million complaints this was not necessarily the case so, at our request, firms will be looking at these complaints again,” he said.

                  Complaints of mis-selling grew rapidly in 2011 after a High Court case which ruled that banks must pay compensation. Although around 90 per cent of cases won redress at that time, by late 2012 only 60 per cent had been compensated, prompting the FCA’s review into how lenders handled complaints.

                  The watchdog’s order to investigate old mis-selling cases could be a fresh blow to smaller lenders, who may not have made sufficient provisions.

                  Mike Trippett, an analyst at Numis Securities, said the larger banks have had to raise additional provisions in the first half of the year, mainly because customer-initiated complaints have not fallen as quickly as anticipated.

                  How much more lenders will have to pay back, he said, was “a roll of the dice” at this stage.

                  Lloyds, which has the biggest PPI bill of any lender, has earmarked more than £10bn so far, taking the industry total set aside for claims to above £23bn.

                  A spokesperson for the lender said it had paid compensation in 70 per cent of cases to date. Lloyds is aiming to conclude work on just over 500,000 complaints as part of the FCA’s reopening of past cases by early next year. Lloyds has already taken into account the cost of this review within its existing provision, the spokesperson added.

                  The FCA also noted “very serious past failings” among some of the six larger firms who receive around 80 per cent of complaints. It could consider further regulatory action.

                  Lenders have so far handled more than 13m PPI complaints since 2007. Seven out of 10 claims have been upheld in the borrower’s favour.

                  “The process is now working well. In just over three years, £16bn has been put back into the pocket of the consumer. That is unprecedented,” said Mr Wheatley.

                  More than 3m letters have been sent to borrowers who are likely to have been mis-sold PPI, but have yet to complain. A further 2m letters are expected to be sent out in coming months.

                  The watchdog hopes to scale back ts work on PPI next year if the number of complaints continues to fall and companies improve the redress process.

                  RBS mortgage fine ‘might not be last’

                  Posted on 29 August 2014 by

                  BRISTOL, ENGLAND - AUGUST 07: The early morning sun shines on houses in Bristol on August 7, 2009 in Bristol, England. According to recent surveys by two of the UK's largest lenders, house prices actually rose for three months in a row, suggesting to some commentators that the worst of the housing market slump may be over after house prices have fallen on average by 20 percent. However, while the figures were generally welcomed with caution by some, other factors such as rising unemployment and interest rate rises may still dampen house prices. (Photo by Matt Cardy/Getty Images)©Getty

                  Regulatory action against Royal Bank of Scotland over failures in its mortgage advice process should act as a warning to other institutions as they absorb new rules on home loan affordability, brokers said.

                  The Financial Conduct Authority this week slapped RBS with a £14.5m fine for giving unsuitable advice in its mortgage business. Only two out of 164 sales that the City watchdog reviewed at the bank met the standards it expected in the sales process.

                    David Hollingworth, a director at mortgage broker London & Country Mortgages, said: “This acts as a clear warning that the regulator will act if others don’t sharpen their procedures.”

                    Andrew Montlake, director at mortgage broker Coreco, said the failings in 2011 and 2012 occurred at a time when borrowers were often able to take out a mortgage without advice as to its suitability. “There’s every reason to believe other banks might be under the microscope and the regulator might find similar failings,” he said.

                    The mortgage market review, which in April brought in tough requirements on lenders to assess whether borrowers could afford loans, is likely to lessen the risks of a repeat of RBS’s problems. Under the new measures, all potential borrowers go through a supervised and documented process that obliges lenders to give advice.

                    “Previously you’d have customers going into a branch feeling they’ve received advice when actually they’d only been given information,” said Mr Hollingworth. “Now lenders have to say – this is our recommendation based on your requirements. It’s certainly more of a level playing field.”

                    There’s every reason to believe other banks might be under the microscope and the regulator might find similar failings

                    – Andrew Montlake, director at mortgage broker Coreco

                    RBS was criticised for failing to rectify its shortcomings on advice and record-keeping even after the regulator issued a warning in 2011. An audit a year later found mistakes had not been fixed, and a mystery shopping exercise by the FCA revealed sales advisers were not obtaining the right information from customers, were giving unsuitable advice or no advice at all when they should have done so.

                    The FCA highlighted three instances where sales staff offered their personal opinions on the future direction of interest rates to its mystery shoppers, conduct it regards as “highly inappropriate” and potentially detrimental to customers’ interests.

                    Brokers nonetheless said that it would also be damaging for customers if lenders were to interpret the FCA’s ruling as suggesting that they were not permitted any discussion of interest rates with clients, particularly when considerations about future base rates form part of any assessment of affordability.

                    Mr Hollingworth said such discussions were frequently provoked by homebuyers: “It shows what a difficult line it can be because all the customer wants to talk about is what’s going to happen with interest rates. The problems come when staff go too far and turn their personal opinion into fact.”

                    A man walks past a branch of The Royal Bank of Scotland (RBS) in central London August 27, 2014. Britain's financial regulator has fined Royal Bank of Scotland for selling mortgages without checking if customers could afford them, undermining Chief Executive Ross McEwan's efforts to repair the bank's image. REUTERS/Toby Melville (BRITAIN - Tags: BUSINESS)©Reuters

                    RBS said it had “completely overhauled its processes” since the problems were identified and had taken all of its advisers off duty for a period of further training.

                    Even if the failings in mortgage advice prove to have been an industry-wide problem, they are nonetheless unlikely to spark a rush for compensation on the scale of claims for mis-sold payment protection insurance (PPI), a scandal which is set to cost the sector a total of £23bn.

                    Identifying the costs of a mis-sold mortgage would be harder to pinpoint than compensation for PPI, a discrete charge often added on to loans. Lenders might also choose to compensate customers by crediting their mortgage rather than with a lump-sum payment, discouraging interest from the claims management companies which have profited from PPI redress.

                    Ray Boulger, senior technical director at mortgage broker John Charcol, said: “A claimant is going to have to work hard to identify any loss. It’s not black and white.”