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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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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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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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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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

Renminbi offers a rollercoaster ride

Posted on 31 March 2016 by

Chinese one-hundred yuan banknotes are arranged for a photograph in Seoul, South Korea, on Monday, Dec. 21, 2015. The offshore yuan climbed the most in a week on optimism that China's leaders are focusing on boosting growth in the world's second-largest economy. Photographer: SeongJoon Cho/Bloomberg©Bloomberg

At a Hong Kong hedge fund event in early January, the host bank went around the table asking those present for their favourite trade idea. Almost to an investor, the answer was “short renminbi”. Yet the offshore version of the Chinese currency is finishing up its best quarter against the dollar in more than three years.

Time to add a new line to the lexicon of sage market advice alongside “don’t fight the Fed”: “don’t push the People’s Bank of China”. The renminbi’s rollercoaster ride, which involved direct intervention, fresh bank capital requirements, heavy reserve drawdowns and unexpected lurches in both directions has left the offshore version 1.49 per cent stronger over the quarter and its onshore cousin, 0.4 per cent firmer.

    The battle has left both sides bloodied — yet unbowed. In response to their losses, speculators appear to be reducing their bets, although not closing out entirely. Instead, they are altering the structure. On Thursday the cost of borrowing offshore renminbi overnight went negative for the first time ever. That implies it is essentially free to bet on short-term renminbi weakness because most bears have thrown in the towel and no longer want to do it. Another interpretation could be that those with short positions are taking a longer term view: they still believe the renminbi will weaken, just not as quickly as previously thought.

    China, meanwhile, burnt through some $128bn of foreign exchange reserves in the first two months but shows no signs of easing its campaign to deter speculators, nor its interest in finding different ways of doing that. In the past two weeks, for example, the volatility of its “fix” — the midpoint it sets daily around which the onshore rate trades — has reached its highest on record and it has become less predictable, too. Analysts at Société Générale have concluded the trade-weighted dollar is actually a better predictor of the fix than the basket of currencies the PBoC says it follows. The net result for the market is confusion and wariness.

    Shorting the renminbi hasn’t been the most painful trade this year — just ask Valeant investors. But the currency’s moves will have left many trading reassessing whether they can ever push the PBoC and profit.

    Co-op Bank on hunt chief executive

    Posted on 31 March 2016 by

    An automobile passes a Co-Operative Bank Plc branch, a unit of Co-Operative Group Ltd., at night in Manchester, U.K., on Sunday, Dec. 14, 2014. Co-Op Bank Chief Executive Officer Niall Booker earlier this month said it "would come as no surprise" if the bank didn't meet the Bank of England's minimum capital requirements when the results of the stress test are released on Dec. 16, which models how banks would fare in another financial crisis. Photographer: Paul Thomas/Bloomberg©Bloomberg

    The Co-operative Bank is to reveal on Friday that its search for a new chief executive is under way as Niall Booker prepares to leave the recovering lender.

    According to people familiar with the process, a number of senior bankers have already been approached for the role, including Stephen Jones, the former chief finance officer at Santander UK.

      Dennis Holt, who was appointed chairman in 2014, is expected to confirm at the group’s full-year results that it has kicked off the process to find a replacement for Mr Booker, whose contract at the bank expires at the end of this year.

      Under Mr Booker’s tenure, which stretches back to May 2013, the Co-operative Bank was pulled from the brink of collapse after a £1.5bn capital shortfall was uncovered and pushed through a big restructure.

      A group of hedge fund investors took a majority share in the lender in 2013, leaving the Co-operative Group with only a 20 per cent stake, in a last-ditch deal to bridge the gap and save taxpayers from shouldering a bailout.

      As part of Mr Booker’s recovery strategy the bank last year sold £3bn of higher risk mortgages within its Optimum portfolio to relieve its capital reserves. The deals, which effectively halved the portfolio, came after the Co-op was the only lender in 2014 to fail the Bank of England’s key test of capital strength.

      At its peak in 2011, two years after the Co-op acquired the Britannia building society, the bank’s risk-weighted assets were more than £20bn. The Co-op Bank said after the stress test failure that it would accelerate the sale of £5.5bn of risky assets — mainly residential mortgages susceptible to economic stress — by the end of 2018.

      In a further move to revive the bank the core technology underpinning banking services has been simplified. The lender wrote-off nearly £150m in 2013 after ditching a planned systems overhaul.

      Operational risk is significant as the bank continues to simplify and bolster its technology systems, which cost more than £100m in the first half of last year alone. Cost-reduction and technology improvements, including digitising services, are part of the plan for the future of the bank.

      The Co-op’s technology systems came under strain a few years ago. A report in 2014 by Sir Christopher Kelly found that the bank’s technology platform was “unstable, expensive to maintain, complex to adapt and ill-equipped to support its business requirements”.

      Former Co-op Bank chiefs fined and banned

      LONDON, UNITED KINGDOM - APRIL 11: A branch of the Co-operative Bank on April 11, 2014 in London, England. The group's troubles continue as the Co-Op Bank announces a £1.3 billion loss for 2013. (Photo by Peter Macdiarmid/Getty Images)

      Prudential Regulation Authority says the pair posed an ‘unacceptable threat’ to the lender’s safety

      This acted as one of the driving forces behind its failed attempt to acquire more than 600 branches from Lloyds Banking Group in 2013.

      In spite of the turnround so far, the Co-operative Bank still faces a number challenges, analysts said.

      Mr Booker warned last summer, after the bank posted a pre-tax loss of £204m for the half year, that it would not likely be profitable until 2017 as a result of the restructuring and costs involved.

      Competition in the form of new so-called challenger banks is mounting and a number of customers are leaving the group. The bank said at the end of last year that it had suffered from a high number of mortgage redemptions during the third quarter as homeowners with fixed-rate deals switched lenders when their deals came to an end.

      Mr Booker, whose past experience includes senior management roles at HSBC in Asia and North America, could be one of the potential candidates under consideration for the chairman’s role at HSBC, according to one person familiar with the situation.

      HSBC began the process in March of finding a replacement for Douglas Flint as chairman of Europe’s biggest bank by next year.

      Additional reporting by Martin Arnold.

      Gold snapped up by central banks

      Posted on 31 March 2016 by

      gold bars©Dreamstime

      Heightened geopolitical tension and a push for diversification in reserve assets led to central banks’ net purchases of gold reaching 483 tonnes in 2015, the second highest annual total since the end of the gold standard.

      Russia was the top buyer of gold for the fourth consecutive year, raising its ownership by 206 tonnes as it looks to diversify away from the US dollar due to tensions with the West, according to the latest report from Thomson Reuters GFMS, the gold consultancy.

      China, whose currency will be added to the IMF’s reserve currency basket this year, announced the first increase in gold holdings since 2009 in the middle of the year, buying 104 tonnes in the second half of the year to 1,742 tonnes.

      “Russia and China are real standouts,” said Ross Strachan, precious metal demand manager at GFMS.

      The central bank purchases last year came as jewellery and industrial demand weakened, while retail physical purchases rose slightly amid a 10 per cent decline in gold prices to $1,060.91 a troy ounce.

        In sharp contrast, the yellow metal has been among the best performing commodities in the first three months of 2016, thanks to worries about China’s hard landing and central banks announcing fresh stimulus measures.

        The net purchases of gold by central banks came in 2010 after two decades where they were net sellers of gold. A key driver was an increase in purchases from developing countries, and net purchases jumped in 2012 to 544 tonnes.

        However, economic turmoil in some emerging markets has led to gold sales by the central banks. Countries reliant on oil revenue struggling for dollar funding turned to selling their gold. Although still low by historical standards, gross sales in 2015 rose by 43 per cent to 77 tonnes.

        Venezuela was responsible for the largest sale of gold by end-June of 44 tonnes, swapping part of its gold reserves for $1bn in a complex transaction.

        Colombia sold 6.9 tonnes, equivalent to two-thirds of its total gold holdings. The gold sale, which marked the first adjustment to the country’s gold holdings since October 2011, took place as gold spot prices fell below $1,100 a troy ounce for the first time in five years, according to the GFMS report.

        El Salvador sold 5.4 tonnes of gold, while Germany sold 3 tonnes as part of its official coin programme, with Canada and Mexico both selling 1.3 tonnes.

        MSCI revives talks on EM index

        Posted on 31 March 2016 by

        An investor walks past a screen showing stock prices at a securities company in Hangzhou, in China's eastern Zhejiang province on February 25, 2016. Shanghai stocks closed down more than six percent on February 25, slammed by worries over China's slowing economy and tight liquidity, dealers said. CHINA OUT AFP PHOTO / AFP / AFP (Photo credit should read AFP/AFP/Getty Images)©AFP

        The leading provider of emerging stock market indices has revived talks on adding mainland Chinese shares to its benchmark despite concerns following last year’s stock market swings.

        MSCI chose not to include Shanghai and Shenzhen listed companies — known as “A shares” — to its Emerging Markets index last summer after investors expressed worries about their ability to buy and sell mainland shares.

          At the time MSCI said it would remove China from its annual review process. On Thursday, however, they issued a new “inclusion roadmap”, a consultation paper to be sent to clients for feedback, ahead of a decision in June.

          “The reopening of the consultation follows the recently implemented changes by the Chinese authorities aimed at enhancing the accessibility of the China A shares market for international institutional investors,” MSCI said.

          The new inclusion proposal would give mainland-listed Chinese shares a 1.1 per cent weighting in the global EM index, which is tracked by $1.5tn of assets.

          Inclusion in the MSCI EM index would enhance China’s reputation in global stock markets and require funds that track the index passively to buy the shares regardless of their feelings towards the stocks.

          Global investment firms expressed surprise that MSCI would reconsider its position so soon after last year’s stock slide prompted heavy-handed intervention by China including the suspension of two-thirds of listed stocks from trading.

          Devan Kaloo, head of emerging market equities at Aberdeen Asset Management, said: “The events of 2015 have scared off a lot of foreign investors and raised questions about the efficacy of the regulator in China. The country is likely to be included in the index, but it may take some time.”

          MSCI noted lingering worries and said: “International institutional investors continue to be concerned by the significant liquidity risks that may result from potential renewed voluntary suspensions in trading on the local stock exchanges of mainland Chinese companies.”

          Marco Mencini, head of EM equity at Pioneer Investments, said the events of last year should not cost China access to the leading index of EM stock markets.

          “I’m surprised by those who think A share inclusion should not happen. It’s unrealistic when you consider the size of the market. Disclosure is improving and China is opening up its system. It is paving the way to become part of the global financial system. The inclusion is a matter of if not when.”

          The MSCI index already has exposure to corporate China, through a mix of Hong Kong and US listings. Shanghai stocks can be traded easily through a link with the Hong Kong exchange, although issues remain, such as daily trading limits and a lack of clarity over beneficial ownership.

          Access to Shenzhen stocks is still restricted to a quota system, following the delay in launch a cross-border trading scheme slated for late last year.

          V-shaped recovery defines Q1 markets

          Posted on 31 March 2016 by



          The first quarter of 2016 will enter the history books as a classic V-shaped recovery. After a tumultuous first six weeks for many markets, with main equity indices plumbing multiyear lows, share prices have rebounded impressively.

            Concerns over the global economy have abated, with sentiment towards equities buoyed by supportive central bank policy from Japan, Europe and the US Federal Reserve. Playing a crucial role has been a pronounced rebound in commodity prices, spurring substantial rallies in the share prices of miners, energy and resources companies.

            So as April beckons, the S&P 500 stands about 1 per cent higher for the year, with its 10.5 per cent drop by mid-February a distant memory. Among the 10 major sectors, financials and healthcare still remain lower by more than 5 per cent.

            Chart: Stock markets

            While the broad US benchmark is positive for the year, European and Japanese stocks are lagging.

            Despite further easing from the European Central Bank this month, the Euro Stoxx 50 index remains down 6.6 per cent year-to-date, but that marks a sharp rebound after the benchmark tumbled 18 per cent to a 2½ -year low in mid-February. European banks — rocked by concerns over their profitability in an environment of negative interest rates — remain the continent’s biggest losers.

            Japan’s Topix and China’s Shanghai Composite indices are both off their lows, though they remain down 12.3 per cent and 15.2 per cent respectively.


            Government and corporate bonds performed well, with monetary policy dominating the markets. That helped push up prices and for government debt sold by Japan and European countries, forcing yields even further into negative territory.

            In Europe, the quarter was marked by the advent of the first non-government bond to be sold at a negative yield. German bank Berlin Hyp’s covered bond indicated that the phenomenon of negative yielding bonds was spreading beyond the world of government debt.

            ECB asset purchases were expanded in March to include corporate bonds for the first time. While this boosted prices in the short term, it also raised concerns over potential distortions that might arise.

            Bank bonds have also been in the spotlight in the first quarter. Riskier bank capital bonds that convert to shares or are written down entirely when the institution runs into trouble, fell dramatically in February, with Deutsche Bank eventually intervening to buy back its own senior debt to stabilise markets. The bonds have now recovered most of their losses — the “coco” index is down only 1.8 per cent year to date.

            While these instruments fell alongside equities, the weakness came as markets woke up to new rules for failing banks, which are designed to put bondholders rather than taxpayers on the hook.


            Dollar and sterling weakness, yen strength and a resurgence in emerging markets have been the standout FX trends of the past three months.

            As with bonds, monetary policy loomed over the markets and caution over the policy outlook from the Fed weighed on the dollar, defying investors betting on the resumption of the greenback’s rally.

            That has undermined hopes in the eurozone and Japan of a weaker euro and yen to stimulate their economies. The yen was ending the quarter about 7 per cent higher on the dollar, despite the Bank of Japan’s entry into the negative interest rates club in January.

            In contrast, many emerging market currencies rebounded, led by Brazil, Russia and Malaysia.

            Higher oil prices also boosted commodity-related currencies, notably those of Canada, Norway and Australia.

            Fears of Brexit weighed on sterling, the worst performing of the main currencies this year, and are likely to keep the pound under pressure until the EU referendum which comes at the back end of the second quarter.

            GE looks to lose ‘too big to fail’ status

            Posted on 31 March 2016 by


            GE Capital has told US authorities that it wants to be struck off the list of “too-big-to-fail” financial institutions, having cut its balance sheet in half and radically scaled back its links to other companies.

              The Financial Stability Oversight Council in Washington drew up the list in the wake of the crisis as a means to impose tougher capital, compliance and reporting standards on companies it designated as a “globally significant financial institution”.

              GE Capital was put on the list three years ago, on the basis of its size and breadth of businesses and its dependence on financial markets for funding.

              Last April GE Capital announced an intent to shed that status, and has since offloaded tens of billions of dollars of assets as part of a plan by its parent General Electric to return to its industrial roots.

              In a summary of its rescission request published on Thursday, GE Capital set out what it described as a “complete transformation” since the end of 2012. It noted that its total assets had shrunk from $549bn to $265bn, and it had reduced its dependence on short-term funding to a mere 6 per cent of liabilities, from 21 per cent.

              As a result, it said, it is “smaller, simpler and less interconnected with the US financial system,” and “does not pose any conceivable threat to US financial stability”.

              The request comes a day after MetLife, the biggest insurer in the US, won a court battle with the US government, which it had accused of acting “arbitrarily and capriciously” in designating it as a Sifi in 2014. A district court agreed on Wednesday that the government had acted unlawfully, in a ruling that sent ripples through Washington and Wall Street.

              The other two non-bank Sifis are Prudential Financial and American International Group, the insurance companies.


              MetLife: the earnesty of being unimportant

              A woman walks past the entrance to the MetLife Inc. headquarters building in New York, U.S., on Sunday, July 26, 2015. MetLife, the largest U.S. life insurer, is expected to release second-quarter earnings results after the close of U.S. financial markets on July 29. Photographer: Craig Warga/Bloomberg

              Regulators are struggling to oversee big non-banks

              Under basic rules governing the FSOC, the body in charge of designating Sifis, re-evaluations are carried out each July. But non-bank financial companies such as GE Capital are allowed to request interim re-evaluations in the event of an “extraordinary change that materially decreases the threat” they pose to US financial stability.

              Keith Sherin, chairman and chief executive of GE Capital, had argued that the “dramatic” shrinkage under way should qualify the firm for a lighter regulatory regime. He said last October that the company would apply for relief by the end of the first quarter this year.

              “We believe GE Capital no longer meets the criteria to be designated as a Sifi and we look forward to working cooperatively and constructively with the FSOC through the rescission process,” he said on Thursday.

              However, the timing of such a process remains uncertain, as GE Capital would be the first to be de-designated since the FSOC was created under the 2010 Dodd-Frank Act.

              GE Capital’s determination to shrink has been a boon for Wells Fargo, the biggest US bank by market capitalisation, which has snapped up several of the company’s assets. Last October’s agreement to buy a specialty finance portfolio worth about $30bn was the fourth between the two sides since April, following deals to buy a railcar leasing business, a $9bn portfolio of Mexican and Australian mortgages, and about $30bn of real estate assets, made jointly with Blackstone.

              GE Capital said on Thursday that it aimed to reduce its balance sheet by another 25 per cent, to $199bn in assets, by the end of this year. Of that, it said, less than $50bn will be in the US.

              Gilts prove robust despite Brexit fears

              Posted on 31 March 2016 by

              James Ferguson illustration©James Ferguson

              In the week in which David Cameron set the date for the referendum on whether Britain should remain in the EU, Britain’s debt market recorded a surprising victory.

              After a worrying run of poorly covered government bonds issues, a sale of inflation-linked gilts attracted orders worth £10.5bn, nearly four times the amount sold.

                The message from investors came over loud and clear: global credit markets don’t care about Brexit. As the June 23 vote draws closer, this trend has amplified.

                While sterling is bearing the brunt of heightened anxiety over a British exit, falling 2 per cent against the US dollar this year, gilts have continued their winning streak.

                Returns on benchmark 10-year bonds are on course for the best start to the year in two decades with yields down 53 basis points so far.

                With one-third of the developed world bond market trading in negative territory, central banks in Europe and Japan cutting interest rates and buying unprecedented volumes of government debt, and fears of ultra-low growth and inflation around the world propelling investors into haven assets, gilts are tracing the same path as bonds across developed markets.

                Fears of global recession and the need to escape negative yields far outweigh any regional political squabbles.

                Even if the UK does vote to leave Europe the outcome could still be positive for gilts, suggest investors including Pimco and M&G.

                The ensuing uncertainty and expected drop in economic activity would probably push back any talk of a rate rise by the Bank of England, making fixed income assets such as gilts extra appealing.

                Instead, investors in global debt markets are turning to examine the potential fallout across the channel. If Britain votes to leave, UK bonds are unlikely to suffer, they say. But bonds in the eurozone will.

                Mike Riddell, bond fund manager at Allianz, said: “All of the focus so far has been on the UK but the more relevant question for us is what perception international investors will have of the eurozone if the UK votes to leave.


                “They will see it as a failure of project Europe and that means more risk in financial markets. I would not expect to see a dramatic change to gilt prices. European bond markets will be far more affected.”

                In depth

                Brexit: In or Out

                The FT’s guide to the UK’s EU referendum

                Moody’s, the credit rating agency, has warned that Brexit will be credit-negative for the EU, heightening the risk of copycat referendums and further exits across Europe.

                While a Leave result could prompt other EU members to hold similar votes, a Remain outcome may put pressure on the EU from countries seeking the kind of concessions the UK prime minister negotiated in February.

                “There will be more effect in European credit markets,” said Ewen Cameron Watt, chief investment strategist at BlackRock, the world’s largest asset manager. “In the event of a Leave vote separatist movements across Europe will get a bump. Catalan spreads have already started to widen. We may see a spike in Danish bonds too.”

                Last year Denmark rejected greater integration with the EU and politicians talking openly about arranging their own renegotiations with Brussels.

                Eastern economies such as Poland and Hungary, and Scandinavian countries in the west are expected to feel the greatest pressure of anti-EU campaigns in the event of Brexit.

                If they do, bond investors who favour their debt because of the country’s relationship with stronger economies and more liquid markets elsewhere in Europe may be inclined to sell, widening the spread in bond yields across the region.

                UK’s cooling economy will lead to £2bn increase in gilt sales

                epa04874304 A general front view of the Bank of England in London, Britain, 06 August 2015. Bank of England Governor Mark Carney is to deliver the banks Inflation report on 06 August. EPA/ANDY RAIN

                Government tries to balance the books by raising more debt

                The yield on five-year bonds issued by Catalonia has already jumped to the highest level since the end of 2013 while Standard & Poor’s has moved to cut the separatist Spanish region’s credit rating further into junk.

                Nicola Mai, European sovereign analyst at Pimco, said: “European credit ratings face greater risk of downgrades than the UK in the event of Brexit. The ramifications for Europe are serious and would likely widen peripheral spreads.”

                In currency markets, a growing number of foreign exchange commentators say they are becoming more focused on potential risk to the euro.

                David Owen at Jefferies International says Brexit would disrupt trade and investment on both sides of the channel, compounding fears about the EU as a political project.

                Shortly after the EU referendum come elections in Spain and next year in France and Germany. The confluence of events mean it might not be long before political uncertainty resurfaces in markets.

                MetLife ruling vindicates lonely fight

                Posted on 31 March 2016 by

                A woman walks past the entrance to the MetLife Inc. headquarters building in New York, U.S., on Sunday, July 26, 2015. MetLife, the largest U.S. life insurer, is expected to release second-quarter earnings results after the close of U.S. financial markets on July 29. Photographer: Craig Warga/Bloomberg©Bloomberg

                US finance chiefs have often grumbled about the tough rules imposed as part of the Dodd-Frank reform package enacted after the 2008 crisis.

                But most of them have gone along with the various strictures, for fear of reigniting the anti-Wall Street feeling that swept the country after the collapse of Lehman Brothers.

                  Not Steven Kandarian, chief executive of the insurer MetLife. He argued that the Obama administration had gone too far when it identified his company as a potential threat to the financial system that needed extra supervision.

                  While rivals Prudential and AIG acquiesced to their designation as “systemically important” financial institutions, MetLife, the US’s largest insurer by assets, went to court.

                  This week a federal judge sent ripples through Washington and Wall Street by ruling that Mr Kandarian was right.

                  US District Judge Rosemary Collyer rescinded MetLife’s Sifi designation giving it reprieve from the regulatory consequences of being considered “too big to fail”, including the threat of higher capital requirements.

                  “MetLife got the raspberry [when it decided] to sue,” said one person close to the company. “Some people said we were crazy. There’s a lot of satisfaction.”

                  The government is expected to appeal because Judge Collyer’s decision undermines an important part of Dodd-Frank and threatens one of President Barack Obama’s signature achievements.

                  It could also make it easier for other financial groups to shed their Sifi designation. GE Capital, which was already hoping to shrink down out of the category, filed its formal application on Thursday.

                  The court has yet to publish its full judgment but a document it issued this week indicated the ruling would weaken the Financial Stability Oversight Council, a group of regulatory chiefs that was set up to monitor systemic risk and spot looming threats that are not already covered by existing regulators.

                  MetLife argued — and Judge Collyer appears to have agreed — that the FSOC, which includes representatives of the Treasury, the Securities and Exchange Commission and the Federal Reserve, mishandled the Sifi decision.

                  The council made unsubstantiated assumptions, failed to take into account the costs of Sifi designation on the company and ultimately reached an “arbitrary and capricious” decision, the insurer argued.

                  “It’s a profound embarrassment to the FSOC,” said Karen Shaw Petrou, managing partner at the Washington-based consultancy Federal Financial Analytics.

                  The ruling “seems to validate management’s decision to pursue this lawsuit, which we had previously questioned”, said analysts at UBS in a note to clients.

                  Not surprisingly, some of the staunchest Republican opponents of Dodd-Frank in Congress immediately praised the ruling.

                  “FSOC’s perfect storm of secrecy and intimidation has created a shadow regulatory system that concentrates power in Washington at the expense of hardworking Americans,” said Representative Scott Garrett. “I’m pleased to see the judicial branch took a stand for the Constitution with their decision.”

                  Hillary Clinton’s presidential campaign was just as quick to criticise it.

                  “When Treasury, the SEC, the Fed, and other top financial regulators all agree an institution poses systemic risks to our economy, it’s deeply concerning when a lower court judge unilaterally rejects their decision,” a Clinton spokesman said. 

                  Now MetLife’s insurance rivals are facing questions about their apparent reluctance to confront the regulators in the courts.

                  The legal decision will put pressure on American International Group — whose near collapse in 2008 sent shockwaves through the financial system — and Prudential Financial to explain why they did not challenge their designation as Sifis.

                  “They chose not to fight it — they took the view not to antagonise regulators,” said one insurance consultant. “Now they’re going to have explain why they’re not doing the same thing [as MetLife].”

                  As measured by total assets, MetLife is larger than AIG and Prudential. Its life insurance business is significantly bigger than AIG, which also sells property and casualty cover. Life policies are generally considered to pose greater systemic risks than general insurance.

                  AIG declined to comment. Prudential said: “We continuously review developments that impact our company, and we are evaluating what is in the best interests of the company and our shareholders.”

                  Steven 'Steve' Kandarian, chief executive officer of MetLife Inc., speaks during the Institute Of International Finance (IIF) spring meeting in London, U.K., on Wednesday, June 4, 2014. U.K. services grew faster than economists forecast in May and confidence about the outlook prompted companies to boost hiring. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Steven Kandarian©Bloomberg

                  Steven ‘Steve’ Kandarian, chief executive officer of MetLife Inc

                  The MetLife decision will have much less impact on banks because the Sifi rules are already much clearer for them. The Dodd Frank law specifically states that any bank with assets of $50bn or more will be considered systemically important.

                  That cut-off has been hugely unpopular with some of the midsized institutions that were captured by the designation. But their only hope of escape is a change in the law, and enduring partisan acrimony in Congress makes that unlikely.

                  Last year, the Republican chairman the Senate banking committee proposed raising the bank threshold by 10 times to assets of $500bn — an idea that Democrats rejected as unconscionable.

                  So far, large asset managers such as Fidelity and BlackRock have gotten off relatively lightly in the systemic debate. They headed off an early move by regulators to designate specific companies as systemic threats, and instead persuading FSOC and global bodies to focus on risks emanating from particular markets and activities.

                  Marcus Stanley of Americans for Financial Reform, a group that wants tougher regulation of Wall Street, decried the judge’s decision. The threshold for systemic risk designation in Dodd-Frank is only that distress at a company “could” pose a risk to financial stability, he argued. 

                  “MetLife is a company with approximately $900bn in assets, and it is deeply intertwined with the broader capital markets. Economic assessments of Metlife’s financial risk consistently find that the company ranks high,” he said.

                  The Treasury Department has so far stopped short of committing to an appeal, although it said: “We are confident that FSOC’s determination was lawful and will continue to defend the Council’s designations process vigorously.”

                  Several lawyers said they would need to see the court’s full legal opinion before being able to assess the government’s chances of success at a higher court.

                  Investors appear to remain cautious. Shares in MetLife rallied 5 per cent on Wednesday while AIG and Prudential were up 2 per cent. The stocks outperformed the market handily. Yet the rally was contained — partly because of the knowledge an appeal could drag for months or years.

                  China bad banks swell as defaults spread

                  Posted on 31 March 2016 by

                  Logos of China Huarong Asset Management Co are seen during a finance expo in Beijing, in this October 30, 2014 file photo. State-owned China Huarong Asset Management Co has raised HK$17.8 billion ($2.3 billion) through an initial public offering in Hong Kong after pricing the deal near the bottom of a marketing range, IFR reported late on October 22, 2015. Picture taken October 30, 2014. REUTERS/China Daily CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA - RTS5QJL©Reuters

                  As China’s economy slows and defaults rise, bad loan managers are quietly buying toxic debt so it does not poison the broader financial system. Yet questions remain about whether these bad banks are savvy investors in distressed assets or conduits for a backdoor bailout of state banks.

                  Investors widely suspect that the banks’ practice of “extend and pretend” explains why the country’s official non-performing loan ratio remains modest at 1.67 per cent. While this practice is probably part of the explanation, lenders have also kept non-performing loans under control by accelerating sell-offs of soured debt.

                    Total assets at the big four state-owned asset management companies, the main buyers of such debt, surged from Rmb345bn ($53bn) to Rmb1.73tn ($268bn) between 2011 and 2014. Most is concentrated in industries such as steel, coal and real estate that have borne the brunt of China’s economic slowdown.

                    However, in a statement to China’s parliament, Lai Xiaomin, chairman of Huarong Asset Management, has warned that due to the slowing economy “the speed of distressed asset disposal is declining and the difficulty is increasing”.

                    Mr Lai asked for low-interest loans from the central bank and fresh equity capital from the finance ministry to reduce the pressure on the AMCs to sell off their distressed assets at unfavourable prices.

                    Yet the plan raises questions about whether the AMCs are returning to their roots as a channel for injecting government money into state banks.

                    Huarong is the largest by assets of four state-owned AMCs that Beijing established in 1997 to recapitalise the big four state-owned commercial banks. The AMCs purchased Rmb3.5tn in bad loans on government orders through 2008. With much of that debt purchased at face value, these transactions cleansed the balance sheet of the banks but left the AMCs with guaranteed losses.

                    Nearly two decades later, Huarong and Cinda, Great Wall and China Orient, its cousins, have disposed of their legacy assets and insist they have transformed themselves into profit-driven entities that buy assets at market prices, using their experience to recover value.

                    They have also diversified their assets beyond bank loans. Of Huarong’s total bad-debt portfolio at the end of June, 60 per cent was purchased from non-financial companies, mainly corporate receivables. Overdue receivables have risen sharply in recent years as cash flows tighten and companies delay payments to suppliers. They are also buying from non-bank financiers such as trusts.

                    China’s state-owned zombie economy

                    Shanghai Waigaoqiao shipyard

                    Reforming a sector burdened by debt and overcapacity is critical to restoring growth in the economy

                    Huarong sells bonds and borrows mainly in the interbank money market to fund its bad-asset purchases. But deprived of the government funding on which they once relied, Mr Lai said it is difficult to meet his funding needs. 

                    “Things have changed from [the government] giving rice to cook meals to [us] searching for rice to fill the pot,” he said.

                    “My capital sources are limited and regulatory requirements are high so there’s a lot of pressure.”

                    Huarong raised $2.3bn last October in a Hong Kong initial public offering that set a record for the proportion of shares bought by cornerstone investors. Analysts said the reliance on state-owned cornerstones was a sign that ordinary investors were nervous about the deal.

                    Lack of transparency has fuelled a lingering suspicion that the AMCs are instruments of a stealth bailout, with politicians pressing the four AMCs to buy assets at inflated prices. Mr Lai said such deals are a thing of the past.

                    In depth

                    China tremors

                    China roiled global markets last summer as its authoritarian leaders tried to stop a huge stock bubble from bursting and its slowing economy from stalling

                    “Now everything we do is market-driven. From funding costs to negotiations over [asset] prices — the government doesn’t interfere,” said Mr Lau. “One-shot business deals mandated from above — that’s from 17 years ago. We don’t do that any more.”

                    The FT reported in 2014 that Huarong was the mysterious white knight that bailed out Credit Equals Gold 1, a high-yield wealth management product that had been sold by Industrial Bank of China, China’s largest lender. The deal, in which Huarong bought the underlying assets at a modest discount to face value, was struck just days before a potential default that could have spread contagion through China’s financial system.

                    The question is whether incidents such as this are anomalies or indicative of the way Huarong and the other AMCs typically operate. Analysts mostly believe the bad banks are profit-driven, but they acknowledge that the AMCs can be pressed into national service when circumstances demand.

                    Zhan Di, an analyst at Everbright Securities in Hong Kong, said: “Whether they’re are completely market-driven and transparent I can’t really say. But they’re definitely headed in that direction. It’s the inevitable trend.”

                    Twitter: @gabewildau

                    Additional reporting by Ma Nan in Shanghai

                    Eurozone prices continue to fall

                    Posted on 31 March 2016 by

                    Customers inspect tomatoes at an Aldi Stores Ltd. food stores in Sydney, Australia, on Thursday, June 25, 2015. Australia's biggest supermarkets are losing favor with debt investors as a challenge from German discounter Aldi intensifies competition. Photographer: Brendon Thorne/Bloomberg©Bloomberg

                    Prices across the eurozone fell for the second month in a row in the year to March, as the slump in oil costs continues to weigh on inflation across the world.

                    Headline inflation in the eurozone edged up to minus 0.1 per cent, from minus 0.2 per cent in the year to February, according to Eurostat, the European Commission’s statistics bureau. The core rate, which excludes changes in the cost of more volatile items such as food and energy products, rose from 0.8 per cent to 1 per cent.

                      While the headline figure remains way below the European Central Bank’s target of just under 2 per cent, the rise in both measures will bring comfort to officials as they attempt to restore inflation towards their target.

                      There were also encouraging signs in the cost of services provided by businesses. They rose by 1.3 per cent, up from 0.9 per cent. The rise suggests domestic demand within the single currency area is holding up, despite the slowdown in other parts of the global economy. The pick-up could also be down to the early Easter break, however, warned economists.

                      The ECB’s governing council unleashed a fresh round of stimulus earlier this month, cutting rates to another record low and adding another €20bn a month of bond purchases to its landmark quantitative easing programme in an attempt to restore inflation to the central bank’s target of just below 2 per cent.

                      Oil prices remain the main drag on prices: energy costs fell by 8.7 per cent in the year to March, a sharper pace than in February when they fell by 8.1 per cent.

                      Inflation is expected to remain weak in the months ahead and is likely to stay below the ECB’s target until at least 2018, according to the central bank. The latest forecasts produced by the central bank’s economists show inflation hitting 0.1 per cent this year, before rising to 1.3 per cent in 2017 and 1.6 per cent in 2018.

                      “Country data already released suggest that [the rise in services inflation. have partly reflected the early timing of Easter raising inflation in some leisure sectors,” said Jonathan Loynes, chief European economist at Capital Economics, a consultancy. “As such, the increase could be reversed in April.”