Currencies

Renminbi strengthens further despite gains by dollar

The renminbi on track for a fourth day of firming against the dollar on Wednesday after China’s central bank once again pushed the currency’s trading band (marginally) stronger. The onshore exchange rate (CNY) for the reniminbi was 0.28 per cent stronger at Rmb6.8855 in afternoon trade, bringing it 0.53 per cent firmer since it last […]

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Currencies

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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Property

Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Currencies

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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Banks

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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Archive | November, 2016

BTG Pactual shares fall 12 per cent more

Posted on 30 November 2015 by

Andre Esteves, CEO Brazilian BTG Pactual bank is pictured during an interview in Sao Paulo July 22, 2014. Brazilian investment bank BTG Pactual SA confirmed that Chief Executive Andre Esteves was arrested on Wednesday and said it was available to cooperate with investigations. Picture taken July 22, 2014. REUTERS/Nacho Doce©Reuters

BTG Pactual shares plunged Monday after its embattled chief executive officer and controlling shareholder André Esteves resigned amid a corruption investigation.

Shares in Brazil’s largest independent investment bank were down 12.43 per cent at R$20.01 per share in early afternoon trading and have lost nearly a third of their value since last Wednesday, when federal police arrested the billionaire banker at his Rio de Janeiro home.

    The real also weakened 1.45 per cent against the dollar to R$3.90, partly thanks to the investigation into allegations that Mr Esteves had conspired with a prominent senator, Delcídio Amaral, of the ruling Workers’ Party to interfere in investigations into state-owned oil company Petrobras.

    The Brazilian real was “reacting to the news that the government’s leader at the Senate Delcídio do Amaral and . . . André Esteves were arrested as part of the investigation into corruption at Petrobras”, said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil, in a note.

    The detention of Mr Esteves and Mr Amaral, the first sitting congressman to be detained in Brazil’s democratic history, has intensified the investigation into claims that Petrobras executives plotted with construction bosses and politicians to extract R$6bn in bribes from the company.

    Mr Esteves, who denies wrongdoing, built BTG into a multinational bank with operations throughout Latin America, Europe and other regions.

    He was initially held on a temporary arrest warrant. But the Supreme Court extended it to preventive arrest, a status intended to prevent a suspect from interfering in an investigation.

    BTG moved immediately to replace Mr Esteves, appointing two group veterans as co-CEOs, Roberto Sallouti, BTG`s present CEO of its asset management unit, and Marcelo Kalim, chief financial officer.

    Some of those caught up in the Petrobras probe, including Marcelo Odebrecht, head of Brazil`s largest construction company, Odebrecht, have been under preventive arrest for months.

    Brazil’s Globo television news programme, Jornal Nacional, described how Mr Esteves, who built BTG into a multinational financial company, was being held in one of Rio’s toughest prisons, Bangu, where his small prison cell only had a cold water shower.

    BTG said it has also appointed Pérsio Arida, present interim CEO, as chairman and John Huw Jenkins, head of BTG`s international operations, as vice-chairman. The bank said last week it was taking measures to conserve liquidity including not extending new loans and would sell down liquid market positions “if necessary”.

    Separately, BTG is also negotiating the sale of its 12 per cent stake in Brazil’s largest hospital chain Rede d’Or São Luiz, a person familiar with the talks said.

    Mr Esteves was accused of conspiring with Mr Amaral and two others to persuade a state witness to drop testimony against him in the Petrobras case over an alleged corruption petrol station deal. Both men deny the allegations.

    BTG also on Sunday denied a media report that prosecutors had uncovered indications it paid R$45m to Eduardo Cunha, head of the lower house of congress, to pass a measure favouring one of its businesses, a failed bank, Bamerindus.

    “BTG vehemently denies any type of payment for a supposed benefit in reference to the measure,” the bank said.

    Mr Cunha said on Twitter: “I`m revolted by this absurd disclosure.”

    We deride Le Pen and Trump at our peril

    Posted on 30 November 2015 by

    I have a nightmare vision for the year 2017: President Trump, President Le Pen, President Putin.

    Like most nightmares, this one probably won’t come true. But the very fact that Donald Trump and Marine Le Pen are running strongly for the American and French presidencies says something disturbing about the health of liberal democracy in the west. In confusing and scary times, voters seem tempted to turn to “strong” nationalistic leaders — western versions of Russia’s Vladimir Putin.

      In Washington recently, I found most mainstream political analysts dismissing the idea that Mr Trump could win the Republican nomination, let alone the presidency. This struck me as complacent. If Mr Trump were a normal candidate he would be regarded as favourite for the nomination. He is ahead in the crucial early states of Iowa, New Hampshire and South Carolina.

      Outrageous remarks about Mexicans, Muslims, the disabled and women have not dented his popularity.

      Many Democrats chortle that if the Republicans are mad enough to nominate Mr Trump, he would certainly be trounced by Hillary Clinton in the presidential election. But even that cannot be assumed. The most recent national poll on a Trump v Clinton contest had Mr Trump winning by five points.

      Some of Mr Trump’s statements are so openly racist that they make Ms Le Pen look like a moderate. The leader of the French far right has been carefully softening her image in preparation for a run at the presidency in 2017. Even before the terrorist attacks in Paris, almost all surveys showed her reaching the final round of the election. This month her National Front may make a significant breakthrough by winning regional elections, making it look more like a potential party of government.

      The rise of the political extremes is not confined to the US and France. Ultra-nationalist parties are in power in Hungary and Poland, both members of the EU. Nationalist parties are on the rise in Scotland and Catalonia, threatening the survival of the UK and Spain as nation states.

      A sense of crisis is growing in Germany with the expected arrival of more than 1m refugees this year, leading to a backlash against Chancellor Angela Merkel’s government. With recessions and debt crises in southern Europe, “fringe” parties have moved into government in Greece and Portugal.

      So what is going on in western politics? The overarching development is a loss of faith in traditional political elites and a search for radical alternatives. Behind that, it seems to me, there are four broad trends: an increase in economic insecurity, a backlash against immigration, a fear of terrorism and the decline of traditional media.

      The overarching development in western politics is a loss of faith in traditional elites

      The US has now experienced several decades of declining or stagnant real wages for the majority of Americans. In many European countries, including France, double-digit rates of unemployment have become the norm. The financial crisis of 2008 has resulted in an enduring loss of trust in the competence of elites and the fairness and stability of western economic systems.

      Economic insecurity has been supplemented by a sense of social instability, linked to rising immigration. The influx of Hispanics into the US and of Muslims into western Europe has allowed the Trumps and Le Pens to argue that feckless elites have allowed fundamental social changes to take place without consulting ordinary people. Mr Trump has called for the deportation of 11m illegal immigrants from the US and Ms Le Pen once compared Muslims praying in the streets of France to the Nazi occupation.

      Nicolas Sarkozy, the former French president, who is likely to run against Ms Le Pen in 2017, has joined in the assault on “multiculturalism”. This kind of rhetoric about Muslim immigration and elite betrayal is also now commonplace in Germany.

      In the wake of the Paris attacks, fear of terrorism is merging with hostility to immigration. The shockwave from the French capital was felt across the Atlantic — where Mr Trump, along with most of the Republican field, has been quick to claim that admitting refugees would increase the risk of a terrorist attack.

      For populists, nationalists and extremists across the western world, a common theme is that the mainstream media are suppressing debate and are controlled by an untrustworthy elite. Republican candidates have learnt that chastising reporters is an easy way to win applause. In France and Germany the argument that the politically correct “lying media” have suppressed debate about immigration is increasingly popular. Meanwhile, the rise of social media has allowed alternative narratives to flourish. Those Americans who want to believe that President Barack Obama is a Muslim find like-minded souls online or in the echo chamber of talk radio. Conspiratorial talk is flourishing on social media in Europe.

      The late senator Daniel Moynihan said: “Everyone is entitled to his own opinion, but not to his own facts.” In the age of social media, that is no longer true. For the likes of Mr Trump, Ms Le Pen and Mr Putin, anything can be labelled “true”. In this climate, against a backdrop of economic, social and physical insecurity, extremism flourishes.

      gideon.rachman@ft.com

      Swiss banks face uncertainty on ECB move

      Posted on 30 November 2015 by

      Headquarters of the Swiss National Bank©Bloomberg

      Headquarters of the Swiss National Bank

      Earlier this year, housebuyers in Switzerland thought they had hit the jackpot.

      On January 15, the Swiss National Bank announced the world’s lowest official interest rates, pushing market rates deep into negative territory where lenders, in effect, pay borrowers to take their funds. For mortgage applicants, it seemed 2015 would be the year in which Swiss banks funded property purchases for next to nothing — or even less.

        In fact, the opposite happened. Defying apparent financial logic, the biggest Swiss banks have increased mortgage interest rates during the year.

        In doing so, banks have preserved profits and perhaps the stability of the Swiss housing market — but also highlighted how unconventional monetary policies are producing perverse and unpredictable effects in European banking.

        “We had some explaining to do why [mortgage] rates were not moving in parallel,” says Paulo Brügger, treasurer at Raiffeisen co-operative bank.

        The lessons could soon become highly relevant. The European Central Bank, which meets on Thursday, could push eurozone interest rates deeper below zero in its attempts to stimulate the region’s economy. In response the SNB, which meets a week later, may be forced to go even further — with uncertain consequences for Swiss domestic banking.

        “At the moment, we’re in a stable equilibrium. Whether it remains stable if the SNB decides to cut interest rates, I don’t know,” warns Martin Bardenhewer, treasurer at Zürcher Kantonalbank (ZKB), which is owned by the canton of Zürich.

        No Swiss banker will forget January 15. The SNB sparked a sudden currency appreciation — or “Frankenschock” — by abandoning market intervention to cap the Swiss franc’s value against the euro at SFr1.20. On the day, the currency leapt almost 40 per cent against the euro and dollar.

        The SNB instead sought to weaken the currency by increasing the cost of holding francs, slashing the interest rate on “sight deposits” at the central bank to minus 0.75 per cent.

        The effects rippled through global financial markets. In domestic Swiss banks, there was confusion. “Different banks reacted at different times. There was a lot of volatility in the mortgage market,” recalls Fredy Hasenmaile, head of real estate research at Credit Suisse. IT systems and banking teams took time to adjust.

        Chart: Swiss 10-year fixed rate mortgage

        Initially, Swiss mortgage rates looked like they would fall. One banker recalls a client being quoted just a fixed rate of 0.66 per cent on a 10-year mortgage in the days immediately after the January 15 move. But then the pattern changed.

        Crucially, Swiss banks decided not to pass on negative interest rates to ordinary retail depositors or savers. The fear was that if customers were charged for short-term deposits they would withdraw their money as cash and store in safe boxes — or under the mattress. “If we introduced negative rates for client deposits, we could probably close the shop,” says Mr Brügger at Raiffeisen. “It would create a huge noise with clients. They would never understand.”

        Retail deposits are the most important source of funds for Swiss mortgages, a market dominated by UBS, Credit Suisse, ZKB and Raiffeisen. So if retail deposit rates could not fall further, mortgage rates could not either.

        At the same time, the costs of financing mortgages rose because of the effect negative interest rates had on capital markets. Banks had to pay a higher price to use market instruments to hedge the maturity mismatch between short-term retail deposits and long-term housing loans. As a result of increased hedging costs, mortgage rates rose.

        “The market response to negative interest rates was highly logical because of the value of retail deposits,” says Tom Naratil, finance director at UBS. “The bigger question for us was: would the other banks follow us or would they look to pick up market share?”

        Chart: Top Swiss banks

        In the event, the trend in mortgage rates was clear. After falling to a low of just 1.16 per cent on January 21, the interest rate on a typical 10-year fixed rate mortgage rose above 2 per cent during the summer before dipping more recently, according to Credit Suisse data.

        The rise was welcome news for those who fear the Swiss housing market is overheating — although rates remain exceptionally low by historic standards. But the calm could prove fragile.

        If the SNB expanded its use of negative interest rates, some think mortgage rates would simply rise further. “The big change in mindset occurred with January’s move,” says Mr Naratil at UBS.

        Others are not so sure — and lessons for other countries with different bank market traditions are unclear. At some point, Swiss banks might have no choice but to pass on negative interest rates to retail clients, whatever the consequences. Then, Swiss mortgage rates would logically fall. Discussions could even resume on whether mortgages with negative rates were possible — with banks paying borrowers.

        But Swiss bankers agree predictions are dangerous. Mr Bardenhewer at ZKB says: “It is very difficult to predict what happens at these moments — decisions of the various market participants depend a lot on emotions and psychology.”

        Banks likely to pass BoE stress tests

        Posted on 30 November 2015 by

        Britain’s seven biggest lenders are expected to pass their annual stress tests set by the Bank of England, but analysts are already forecasting they will face a higher hurdle next year.

        This is the second time the BoE has carried out tests on the banking sector to check that the UK’s main lenders have enough capital to withstand a crisis scenario designed by central bank officials.

          Last year’s test focused on the impact of a UK housing market collapse but this year’s will assess lenders’ ability to withstand a severe emerging markets crisis. The results will be announced on Tuesday morning.

          The test will model a drop in Chinese economic growth from about 7 per cent to 1.7 per cent, causing property prices to crash in China and Hong Kong. It will also examine the impact of a financial market crisis, including the default of several securities trading counterparties.

          This year’s test still models tough conditions in the UK economy, which contracts by as much as 2.3 per cent, while residential property prices drop a fifth and there is a prolonged period of deflation and zero interest rates.

          Last year the Co-operative Bank was the only failure, but it has been excluded this year because it is in the middle of a drastic restructuring.

          “I wouldn’t expect any of the firms to fail this year’s test, but the question will be how close do they come to doing so,” said Steven Hall, partner at KPMG.

          Last year both Lloyds Banking Group and Royal Bank of Scotland — the two big banks bailed out by the government during the financial crisis — came close to falling below the minimum 4.5 per cent capital level under stressed conditions.

          But both Lloyds and RBS have strengthened their balance sheets significantly in the past year. And this time, Mr Hall said he expected the test to be more strenuous for Standard Chartered and HSBC, because of their big emerging market exposures. He added that Barclays would also face a tough test because of its investment banking activities.

          Nationwide, the UK’s biggest building society, and the UK arm of Spain’s Santander, are expected to have an easier ride because they are mostly domestically focused retail banks.

          To pass, lenders must maintain a common equity tier one ratio — a key measure of capital against risk-weighed assets — of at least 4.5 per cent in stressed conditions.

          For the first time, they must also have a leverage ratio — measuring capital against total assets — of at least 3 per cent in stressed conditions.

          Analysts at Citigroup said the new leverage ratio test would be toughest for Barclays because it had one of the lowest capital levels on that measure at the end of last year. This represents a big challenge for Jes Staley, the incoming Barclays chief executive, who starts his new job on Tuesday.

          The other bank likely to be most in the spotlight is StanChart, which some analysts expect to fail the test based on its accounts at the end of 2014, but to be given a waiver thanks to a £3.3bn share issue it announced last month.

          The test is expected to become even tougher next year. The BoE is expected to include extra requirements that raise the minimum pass marks significantly, according to analysts at Citi.

          Mr Hall at KPMG said the UK stress tests were still not as much of a milestone event as the more established US exercise carried out by the Federal Reserve, which regularly blocks banks that fail from paying dividends.

          “We are not yet at the same level of systemic importance as in the US, but it is becoming a key part of the fabric of the banks’ relationship with the BoE and they spend millions of pounds preparing for this each year,” he said.

          Vonovia shareholders to fund takeover bid

          Posted on 30 November 2015 by

          Vonovia is a significant landlord in Dortmund

          Vonovia is a significant landlord in Dortmund

          Vonovia’s shareholders have backed the German property group’s effort to mount a €14bn hostile takeover of its closest rival, Deutsche Wohnen by approving the capital increase needed to fund the bid.

          The move paves the way for the biggest merger battle in Germany’s residential property market, which has been caught up in a wave of consolidation over the past two years.

            Vonovia has emerged from the frenzy of dealmaking as the largest listed landlord. It made an unsolicited bid for Deutsche Wohnen, the second largest listed group, in October.

            Deutsche Wohnen’s management swiftly rejected the bid as “unattractive and inadequate” and has since been trying to persuade investors that it should remain an independent company. In a move that some interpreted as a bid to scupper the takeover, Deutsche Wohnen agreed late on Friday to buy a €1.2bn portfolio of apartments from the Augsburg-based property group, Patrizia Immobilien.

            However, on Monday at a meeting in Düsseldorf, 78 per cent of Vonovia’s shareholders voted in favour of a capital increase that will give the group the firepower to go ahead with the deal. Vonovia needed the backing of at least 75 per cent of its shareholders to continue with its bid.

            Vonovia had said when it unveiled its bid for Deutsche Wohnen that it might choose not to go ahead with the deal if Deutsche Wohnen were to buy “material assets” in the meantime.

            But Rolf Buch, Vonovia’s chief executive, said on Monday that, having “thoroughly assessed” the impact of the Patrizia transaction, Vonovia was happy to continue with its bid as planned. Vonovia management has touted the deal as a way to boost its exposure to the fast-growing Berlin property market, where the majority of Deutsche Wohnen’s apartments are located

            Deutsche Wohnen investors will now have to decide early next year whether to accept the offer of seven Vonovia shares and €83.14 in cash for every 11 Deutsche Wohnen shares they hold.

            Some big Deutsche Wohnen shareholders have said they are open to the idea of combining with Vonovia, while others have said they would prefer a better offer.

            Vonovia said earlier this month that it does not intend to improve its offer. It needs the backing of investors owning 50 per cent of Deutsche Wohnen’s shares plus one share in order to succeed.

            Shares in Vonovia were down 2 per cent at €29.65, while shares in Deutsche Wohnen were up 0.8 per cent at €25.99 in afternoon trading in Frankfurt.

            Fed limits emergency lending powers

            Posted on 30 November 2015 by

            An eagle sculpture stands on the facade of the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Tuesday, Sept. 15, 2015. While economists are almost equally divided on whether Federal Reserve chair Janet Yellen will raise U.S. interest rates this week, the bond market suggests policy makers will wait. Photographer: Andrew Harrer/Bloomberg©Bloomberg

            The Federal Reserve’s authority to provide emergency loans to financial institutions during a crisis will be curbed following criticism from lawmakers who said its powers should be reined in.

            The Fed board approved new limits on Monday in updated rules on emergency lending, a practice that sparked controversy during the panic of the last financial crisis when it was used to help institutions short of liquidity.

              The Dodd-Frank post-crisis reforms introduced restrictions to prevent the bailout of single struggling entities, but some lawmakers said the Fed’s initial 2013 implementation plan defied the law’s intent.

              The revised rules sought to address some of the concerns by stating that any future crisis lending programme would need to serve at least five institutions.

              A Fed official said the goal of the rules was to ensure the US central bank could help good businesses in bad times by providing liquidity to the market and that they were not about keeping institutions out of bankruptcy.

              Debate continues to rage on whether the US has ended some banks’ “too big to fail” status. Some members of Congress worry that the promise of emergency support encourages excessive risk taking.

              The new rules also say that to avoid helping insolvent institutions, the Fed will not make loans to any borrowers that had failed to pay “undisputed debts” in the previous 90 days.

              In a statement the Fed said: “These additional limitations are consistent with and provide further support to the revisions made by the Dodd-Frank Act that a programme should not be for the purpose of aiding specific companies to avoid bankruptcy or resolution.”

              A bipartisan group of senators led by Elizabeth Warren, a liberal firebrand from Massachusetts, and David Vitter, a staunch conservative from Louisiana, had alarmed the Fed by proposing new legislation to trim its lending powers.

              The revisions to the new rules were an effort to defuse tensions with Congress and head off that possibility.

              Janet Yellen, the Fed chair, said: “We have received helpful and constructive comments from many sources on a rule to implement these Dodd-Frank Act provisions. In response to these comments, we have made significant changes to the proposed rule to ensure that our rule will be applied in a manner that aligns with the intent of the Congress and the Dodd-Frank Act.”

              The Big Read

              Central banks: Peak independence

              After a post-crisis surge in central bankers’ power, some politicians want to rein in their role

              Read more

              Mr Vitter was only partially satisfied. “American taxpayers should never be on the hook to bail out financial institutions who make unwise and risky bets,” he said. “Today’s announcement is the first real acknowledgment from the Fed that it needed to do more to curtail its own bailout authority. However, more needs to be done and I’ll continue pushing strong, responsible reforms protecting the tax dollars of hard-working Americans.”

              Jeb Hensarling, the Republican chair of the House financial services committee, said: “Five years after Dodd-Frank became law, ‘too big to fail’ is unfortunately alive and well and this rule from the Federal Reserve doesn’t change that. Indeed, by leaving the door wide open to future taxpayer-funded bailouts, this final rule compounds the moral hazard problem that lies at the core of ‘too big to fail’.”

              Last year a group of 15 lawmakers wrote to Ms Yellen to register their objections to the Fed’s proposed rule implementing the revised Dodd-Frank lending law.

              The Fed has stressed that all of its emergency loans — which reached an aggregate outstanding balance of $1.5tn at their zenith — were repaid in full.

              The Fed’s emergency lending powers derive from section 13(3) of the Federal Reserve Act.

              Swiss 10-year bond yield at record low

              Posted on 30 November 2015 by

              A Swiss national flag flies near residential properties in Lugano, Switzerland©Bloomberg

              Swiss 10-year bond yields slipped deeper into negative territory on Monday, underscoring market nervousness at the impact of European Central Bank policy on other key markets.

              The benchmark yield registered a record low of minus 0.41 per cent, eclipsing the previous low of minus 0.39 per cent set last week.

                Investors have priced in a further expansion of the ECB’s quantitative easing programme at its Thursday policy meeting, and that may force the Swiss National Bank to act swiftly to prevent further appreciation of the Swiss franc.

                Market attention has been grabbed by reports that the ECB was considering further deposit rate cuts, and the implications that would have for the Swiss economy and the currency known as the Swissie.

                Having shocked the market at the start of the year by abandoning its SFr1.20 cap to the euro, the SNB faces another major decision as the year ends.

                The SNB’s meeting on December 10 is part of a crucial month of central bank policymaking, sandwiched between Thursday’s ECB meeting and the Federal Reserve’s gathering on December 16, which is set to raise US interest rates for the first time in nearly a decade.

                The SNB worries about the overvalued level of its currency, but its monetary tools are constrained by already having interest rates at minus 0.75 per cent on sight deposits, the world’s lowest cost of borrowing.

                The Swiss franc has risen 8 per cent since mid-October, hurting exporters. An index of economic sentiment came in well below consensus and below its long-term average for the first time in seven months and the franc fell 0.1 per cent in Monday trading.

                Peter Rosenstreich of currency broker Swissquote said the Swiss economy was struggling with the franc’s sharp appreciation.

                “The SNB is now caught between a rock and a hard place,” he said. “With the CHF strengthening and inflation and growth indicators pointing to further deterioration, the central bank will be forced to act.”

                He said the likely SNB response to the ECB would be deeper interest rates cuts along with tighter exemption thresholds, verbal intervention and direct FX intervention.

                According to Morgan Stanley strategists, cutting rates further would be an easier policy strategy than FX intervention.

                “Our bearish CHF story hasn’t changed. The economic outlook will likely remain weak, still recovering from the CHF strength shock, and the deflationary pressures will likely keep the SNB accommodative,” they said.

                BoE Funding for Lending Scheme extended

                Posted on 30 November 2015 by

                The Bank of England holds a quarter of the UK’s outstanding debt following the introduction of its quantitative easing programme©Bloomberg

                The Bank of England which uses sorting machines supplied by De La Rue

                A scheme to finance bank loans for small businesses with cheap government money has been extended by two years with an extra boost for new “challenger banks”, the Bank of England and the Treasury have announced.

                Monday’s move signals that while the BoE is increasingly nervous about a potential credit bubble in mortgage and consumer finance markets, it is still concerned about banks’ reluctance to lend to small businesses.

                  The Funding for Lending Scheme, launched by the Treasury and the BoE in 2012, has provided about £60bn in low-cost funding to banks to support loans to British companies and households.

                  Its scope has already been narrowed several times, initially to exclude household loans, such as mortgages, and most recently to only support loans to small and medium-sized enterprises.

                  The BoE and Treasury said in a joint statement that the scheme, which had been due to lapse at the end of January 2016, would now be steadily phased out over two years before expiring on January 31 2018.

                  In a concession to smaller lenders that have been authorised or changed hands recently, they will be given greater access to the scheme. This follows loud complaints from some challenger banks about the impact of a recent tax increase for the sector.

                  From the end of this year, most existing members of the scheme will not be allowed to generate new borrowing allowances, although they will be able to draw on existing ones.

                  However, a separate part of the programme will be opened for new banks to generate and draw against new allowances for the full two-year extension. This will apply to banks that have been authorised or changed hands since April 2013 and that have less than £50m of total loans at the end of this year.

                  Paul Lynam, chief executive of Secure Trust bank, said the extension of Funding for Lending was “encouraging” as it “evidences a tangible willingness by government to work with the challengers”.

                  He said: “All we seek is a level playing field, so it’s good to see recognition that one does not currently exist.”

                  The extension was criticised in some quarters. Rhydian Lewis, chief executive and co-founder of peer-to-peer lender RateSetter, claimed the scheme was keeping interest rates artificially low for savers and squeezing out competition to banks from alternative lenders that do not have access to the cheap funds.

                  “The longer the FLS tap is left on, the greater the risk of artificially depressing the price of finance for FLS participants, squeezing out competitors that offer open-market, commercial rates,” said Mr Lewis.

                  The biggest beneficiary of the scheme so far has been Lloyds Banking Group, in which the government owns close to 10 per cent. Lloyds had £24bn of aggregate financing through the scheme outstanding at the end of June — far more than any rival.

                  After declining steadily since the financial crisis in 2008, net lending to UK SMEs has rebounded modestly this year, increasing by £2.1bn in the year to October.

                  George Osborne, chancellor, said in a letter to Mark Carney, governor of the BoE: “In remaining open for two more years, the FLS will continue to support improvements in SME credit conditions. But as conditions have normalised further, it is right that we begin to wind down the scheme.”

                  Mr Carney said in a letter to the chancellor: “Sources indicate that both the cost and availability of credit for SMEs is better than a year ago, and net lending to SMEs has increased. Nevertheless, conditions still remain relatively tight.”

                  The British Bankers’ Association said UK banks “want to help smaller businesses do what they do best — drive economic growth and create jobs”.

                  Dollar bulls usher in pivotal policy week

                  Posted on 30 November 2015 by

                  U.S. one-hundred dollar bills are arranged for a photograph in Hong Kong, China, on Monday, July 20, 2015. The yuan has proven to be among the more resilient emerging-market currencies this year, having fallen less than 0.1 percent versus the dollar as China cut interest rates and the U.S. prepared to raise. Photographer: Xaume Olleros/Bloomberg©Bloomberg

                  The dollar climbed to new peaks against major currencies on Monday as investors closed the books on November and prepared for a pivotal week that is set to shape market activity well into 2016.

                  Investors are increasingly embracing the prospect of monetary divergence across the Atlantic. As the European Central Bank and the US Federal Reserve are seen taking policy in opposing directions, investors are betting on a weaker euro, firmer US dollar, lower metals prices, emerging market volatility and robust eurozone equities.

                  Investors now face a crucial period that begins on Thursday when the ECB’s policy meeting is expected to follow through on president Mario Draghi’s recent promise that the central bank would “do what we must” in order to reach its inflation target of 2 per cent.

                    Marc Chandler of Brown Brothers Harriman was calling it “among the most important” weeks of the year. “Rarely is there such a confluence of events in a short period that will have far-reaching implications for investors that are known ahead of time and have been discussed so extensively.’’

                    Barclays strategists are forecasting “a volatile month” for market participants. They believe there is a risk that the euro-dollar exchange rate would be squeezed higher if the ECB did not live up to market expectations.

                    But this may be shortlived, they added, as traders expect a robust US jobs data report on Friday to convince the Federal Reserve to raise interest rates at its December 16 meeting.

                    Interest rate futures reflected odds of 79 per cent that the central bank will shift overnight borrowing costs higher in December, and expectations have climbed steadily during November. The euro has fallen 4 per cent below $1.06 for the first time in seven months in anticipation of a long-awaited policy divergence.

                    Investors have taken the weaker euro as a signal to plough money into European equities, with companies seen benefiting from stronger foreign revenues as the single currency declines.

                    The Xetra Dax 30 has risen 4.8 per cent this month, easily ahead of other regional shares markets. In dollar terms, however, the German market is only up 0.8 per cent for November, slightly ahead of the S&P 500’s rise of 0.5 per cent.

                    The dollar index remained above a key threshold of 100 on Monday and shy of this year’s peak seen in March, while Sterling briefly fell below $1.50 on Monday for the first time since April.

                    Kit Juckes, markets strategist at Société Générale, said a dollar correction would come after the Fed meeting.

                    “For now, the bullish bias survives, though with so much news to come, a reactive and choppy market seems inevitable,” he said.

                    Global mutual fund flows during the latter part of the month have reflected expectations of monetary policy divergence according to EPFR, noting the fourth week of November saw equity funds record collective inflows of $1.43bn. EPFR said commitments to US equity funds reached their highest level in four weeks, with redemptions from emerging markets at a three-week low.

                    US credit tightens ahead of Fed shift

                    Posted on 30 November 2015 by

                    Janet Yellen listens during a House Financial Services Committee hearing in Washington, DC©Bloomberg

                    Janet Yellen, chairwoman of the Federal Reserve

                    Dear future historians: Janet Yellen did not cause the late-2010s recession.

                    If a Federal Reserve interest rate rise in December is followed in short order by an economic slowdown, the temptation will be to blame the central bank and its chair for a premature tightening of monetary policy. But there are a growing number of red flags that suggest the US credit cycle has already turned, with consequences for the real economy next year, even before the Fed makes its move.

                      Smart money investors have positioned themselves for a rise in corporate defaults, a pullback in lending, and contagion across asset classes. The question is whether this is the start of a self-reinforcing downward spiral.

                      The answer depends in part on the complex chain that links the deepest recesses of the credit markets to the real economy.

                      A booming leveraged-loan market has fuelled the mergers and acquisitions mania of the past few years, boosting the stock market and the economic feelgood factor in the process — but it is in sharp reverse.

                      A majority of leveraged loans find their way into investment vehicles called collateralised loan obligations (CLOs); so investors who buy the riskiest parts of a CLO — the so-called equity tranche, which takes the first losses if the loans start to default — are therefore pivotal players in the availability of corporate credit and in underwriting standards. They have been pulling in their horns most of this year.

                      It is not just that defaults are expected to rise from current historically low rates. Loans do not have to stop paying to cause problems for CLO equity holders; credit agency downgrades have an impact, too, since there are limits on how many of the riskiest kinds of loans CLOs can hold. Some CLOs, such as a recent vehicle created by Guggenheim Securities, are building in higher limits on ultra-high risk, CCC-rated loans, to give them a cushion. Downgrades are already on the rise.

                      With CLO investors expressing so much more caution, CLO issuance is down, and the effect is already visible in the disappointing performance of the loan market. An S&P/LSTA index that showed the average loan selling for almost 98 cents on the dollar in the secondary market May now sits below 93 cents.

                      As recently reported by the Financial Times, banks are having trouble finding buyers for loans they have already promised for the financing of some recent takeovers. With losses looming, they will have to be more cautious in the future. This threatens to do more to raise the cost of financing M&A deals than any little move the Fed might make, acting as a drag on activity next year.

                      Chart - leveraged loan prices

                      Of course the loan market is not the only place that corporate America can go to raise money, but there are signs that other sources of credit may also be getting harder to come by. Spreads on high-yield bonds have widened, particularly for the riskiest borrowers, and trading has become more skittish, as befits a market with more retail investor involvement than ever before. Anomalies have also opened up in the pricing of credit default swaps and high-yield indices, suggesting some market stress.

                      In a “run-for-the-hills” investment note that Ellington Management, run by credit maven Mike Vranos, circulated to its clients this month, the hedge fund said that investors were underestimating the probable losses in high yield because in previous cycles falling interest rates have limited the damage.

                      Chart - leveraged loan prices

                      Meanwhile, there has been a modest but clear change in the tone of the Federal Reserve Board’s regular surveys of US banks’ loan officers. Last month, among the modest number of banks that indicated they had changed their commercial lending standards, reports of tightening were more frequent than reports of easing, especially for large and middle-market borrowers.

                      The backdrop to these changes is a US economy where risks seem to be rising, whether they be from an global slowdown led by emerging markets or from the shrivelling of the domestic shale oil industry. Revenues from S&P 500 companies were down 4 per cent on average in the third quarter while earnings, buoyed for so long by the availability of credit to finance share buybacks, are also contracting.

                      It is too early to predict a downward spiral where caution begets more caution and deleveraging begets more deleveraging, but the emerging dynamics in credit markets are worrisome. Credit seems to be tightening, Fed or no Fed.

                      stephen.foley@ft.com