BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Banks

The City’s lack of political spidey sense is a serious issue

Posted on November 27, 2016

Well, at least we know it wasn’t a blip. Investors and analysts really are lousy at political predictions. Just useless. And now that they’ve been fooled twice in the past six months, they want to be better prepared for any more banana skins. This sets the scene for some potentially disruptive market moves, particularly focused on Europe.

To recap, the first big recent slip-up came from the UK’s EU referendum in June. Sure, nerves were elevated in the run-up to the vote, and the derivatives markets showed that some were taking out protection against a hit to sterling.

But the vote to leave was still a shock for financial-market types, judging from the scale of the currency’s devaluation and the tone of their voices on June 24. Investors and bankers, sitting in their City bubble, just didn’t see this one coming. All those fancy trips that banks organise for clients to meet policymakers in sunny foreign lands clamouring for money? Maybe arrange some for the UK’s former industrial heartlands up the M6 motorway.

Not to be outdone, the very same investors then ploughed into the US election convinced that Donald Trump would take a beating. “Nah, Hillary has got this,” was the line from several hedge fund types on the afternoon of November 8. “I feel sick,” was the change of tune in the early hours of November 9. The rest is history.

This lack of political spidey senses in the City is a serious long-term issue, given that the thing that matters in markets right now is politics, precisely at the time when most banks have decided political analysts are a luxury they can live without.

Of course, some City types voted for Brexit, and some with deep pockets even financed the campaign to leave the EU, just as some sharp-suited Wall Streeters voted for Mr Trump. But regardless, the wealthy, cosmopolitan City culture is precisely what voters are balking at. The City doesn’t really “get” the voting public, and voters want that most nebulous of things: change. (Not of their underwear, however, it must be noted. In all seriousness, YouGov, the pollster, has calculated that those who voted for Ukip, the rightwing party that was the leading advocate of Brexit, are the least frequent changers of their pants or knickers in the country. Seventy-nine per cent of those who voted Ukip at the 2015 general election wash their undercrackers after just one wear, YouGov said, set against roughly 86 per cent of those who voted for other big parties. Make of that what you will. But we digress …)

So now, fund managers are flicking through their calendars for the next few months, and drawing big red circles around every popular vote.

The Italian referendum on political reform in December is first in line, followed by the French presidential election next spring. The assumption is no longer ‘oh, it will be fine’. It is ‘let’s prepare for the worst that can happen’. In this case, that worst thing is, eventually, an existential crisis for the eurozone and the EU.

The nerves are already showing. Investors now demand the greatest premium for holding Italian government debt rather than German debt since 2013, just in case of a result that leads to the departure of Prime Minister Matteo Renzi. Similarly, the gap between Germany and France is the widest since 2014, just in case far-right leader Marine Le Pen has a shot at the top job, regardless of what the opinion polls say.

The European Central Bank is not blind to the surge in political risks. In its latest financial stability report, it noted that European politicians could easily be tempted to appease the public with a withdrawal from fiscal and structural reform. “In a worst-case scenario [that could] reignite pressures on more vulnerable sovereigns,” the central bank says. Another eurozone crisis, anyone? What a thought.

Similarly, the euro could be in for a kicking. Selling it against the newly resurgent dollar is a top pick among the investment banks right now. Deutsche Bank, for one, has warned that its forecast for the euro to drop to $0.95 against the dollar next year — a prediction made before the election of Donald Trump — may now be looking insufficiently aggressive. The bank may cut that target soon, it warned.

Katie Martin is the head of fastFT