Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

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

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Banks

Financial system more vulnerable after Trump victory, says BoE

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

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Property

Zoopla wins back customers from online property rival

Zoopla chief executive Alex Chesterman has branded rival OnTheMarket “a failed experiment”, and said that his property site was winning back customers at a record rate. OnTheMarket was set up last year, aiming to compete with Zoopla and Rightmove, the UK’s two biggest property portals. It allowed estate agents to list their properties more cheaply […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Banks

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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Archive | November, 2016

Euro suffers worst month against the pound since financial crisis

Posted on 30 November 2016 by

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 this month, with the tables turning on the euro after it had strengthened sharply against the pound in the wake of the Brexit vote in June.

Eurozone investors have been spooked by the prospect of reformist Italian prime minister Matteo Renzi resigning from office should he lose a key vote on constitutional reforms on Sunday. Polls indicate Mr Renzi’s ‘Yes’ side will lose out, sparking his resignation and throwing into turmoil crucial plans to clean up the banking system in the eurozone’s third largest economy.

The euro has also shed 5.5 per cent against the dollar since Donald Trump’s election this month, and is trading at $1.0648 at publication time.

This Sunday also marks a re-run of Austria’s presidential election, where the independent, pro-European Alex Van der Bellen is facing eurosceptic, right-wing candidate Norbert Hofer. Polls show the result is too close to call, but a victory for Mr Hofer would mark the first major triumph for an anti-EU candidate in Europe following Mr Trump’s election.

“[Mr Hofer] has repeated his EU criticism saying the EU is in a deep crisis and he would push for an ‘Öxit’ if national parliaments are deprived of power by a more centrally organized EU or if Turkey becomes a member of the EU”, says Heiko Peters at Deutsche Bank.

The prospect of France’s presidential elections are also weighing on the euro, with the race set to be fought out between a ring-wing former prime minister and the far-right, nationalist Marine Le Pen.

“Whatever the final result, chances are Ms Le Pen will have the most votes after a first round in which the main candidates on both the left and right wings are diluted by outliers” said Kit Juckes at Societe Generale.

“I can’t see how the euro stages more than short-covering bounces before then”.

Charts courtesy of Bloomberg

Nomura rounds up markets’ biggest misses in 2016

Posted on 30 November 2016 by

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 Bonney, was overestimating US growth and inflation prospects. The consensus in January was for economic growth of 2.5 per cent and average inflation of 1.8 per cent, in contrast with actual growth of around 1.5 per cent and inflation at 1.3 per cent.

The Fed was expected to raise interest rates three times by the end of the year, while we’re still waiting for a first bump up of the year next month.

That caution was encouraged in part by the most obvious failure on the part of markets this year: as Nomura delicately put it, “political events didn’t unfold in the way analysts thought”. June’s Brexit vote and Donald Trump’s presidential election victory both shook markets, with the pound and Mexican peso respectively 17 and 24 per cent weaker than forecast at the start of the year.

On the flip side, China “didn’t implode”, and Brazil was more stable than expected. Investors’ forecasts for smaller G10 economies were also off, with Australia, New Zealand and Sweden performing better than expected (except Sweden’s currency) and Norway and Canada both disappointing.

After all those misses, Nomura considered a 20 per cent revision to oil price forecasts relatively successful. Brent crude has remained close to the $46 forecast at the end of February, if not the $57 expected at the start of the year.

An accurate dollar forecast also comes with a caveat: while predictions were “almost spot on”, it wasn’t necessarily for the right reasons, driven by the weakness of sterling and a late post-Trump surge (which, as discussed, investors weren’t entirely expecting).

If, after that, you still have any faith in the market’s forecasts (or just want to know what to avoid), Nomura says the current consensus for next year sees faster growth in the US, weakness in emerging markets and outperformance from the Scandinavian currencies. Most ominously, they also appear to think major political risks are “behind us”. Luckily there are no major political events coming up…

Sales in Rocket Internet’s portfolio companies rise 30%

Posted on 30 November 2016 by

Revenues at Rocket Internet rose strongly at its portfolio companies in the first nine months of the year as the German tech group said it was making strides on the “path towards profitability”.

Sales at its main companies increased 30.6 per cent to €1.58bn while losses narrowed.

Rocket said the adjusted margin for earnings before interest, tax, depreciation and amortisation improved from minus 34.4 per cent in 2015 to minus 17.5 per cent this year. The company’s share price rose nearly 2 per cent to €18.20 in morning trading.

One of the leading lights of the thriving Berlin tech scene, Rocket Internet has built up a stable of ecommerce companies active in areas from food delivery to fashion and home furnishings. It has stakes in HelloFresh, a Berlin-based group that provides boxes of fresh food to subscribers to cook at home, as well as furniture retailers Home 24 and Westwing and ecommerce start-up Global Fashion Group.

But its shares have slumped since its flotation in 2014 amid doubts about whether any of the companies it invests in will ever make a profit, and questions over the way it values its stakes in the start-ups.

Oliver Samwer, co-founder, said Rocket was “continuing to see improvement in profitability” in selected companies in its portfolio, though he acknowledged a fall in revenues and earnings in the third quarter, due to traditionally weak trading in July and August.

Mr Samwer reiterated a pledge that at least three of Rocket’s companies would turn profitable by the end of 2017.

Rocket also reported a consolidated loss for the first nine months of the year of €642m compared with a loss of €59.5m in 2015. That reflected an earlier reduction in the valuation of Global Fashion Group, one of its ecommerce companies, by two-thirds to €1bn following a funding round earlier this year.

It said it continued to be “very well funded”, with €1.6bn in available cash at Rocket and €1.1bn at its portfolio companies as of the end of October.

Mark O’Donnell, an analyst at JPMorgan, said Rocket’s nine-month revenues were more than “5 per cent better than we expected”.

He said HelloFresh had shown the “biggest positive surprise in terms of profitability”, with a loss of €66m — better than JPMorgan’s estimate of €79m.

But the €77m loss at Jumia, an online retailer active in Nigeria, came in larger than Mr O’Donnell’s forecast of €50m.

Europe’s share of investment bank fees falls to all-time low

Posted on 30 November 2016 by

Europe’s share of global investment banking fees has fallen to an all-time low, compounding years of decline that have hit the region’s biggest banks.

Thomson Reuters’ data shows that Europe, the Middle East and Asia (EMEA) accounts for just 24 per cent of the global fees for M&A deals, syndicated loans and underwriting paid so far this year. That’s the lowest since Thomson Reuters began collecting the data in 2000 and just a shade ahead of the 23 per cent of fees generated in Asia so far in 2016.

Asia is set to be the standout winner of 2016, with fees rising 5 per cent year on year to their highest level since 2000, fuelled by a 20 per cent rise in fees in China. Americas fees were down 17 per cent in the year to date, but still accounted for 45 per cent of the global tally.

RBS share drop accelerates on stress test flop

Posted on 30 November 2016 by

Stressed.

Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests.

RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s equity tier one ratio — a measure of capital to risk-weighted assets that is the main benchmark of banking strength — fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. This came in below a 6.6 per cent hurdle rate and a 7.3 per cent “systemic reference point” set by the bank.

Following the results, RBS has submitted plans to bolster its capital position by at least £2bn – a move that was welcomed by BoE Mark Carney this morning.

Read more: BoE stress tests – all you need to know

Eurozone inflation climbs to highest since April 2014

Posted on 30 November 2016 by

A welcome dose of good news before next week’s big European Central Bank meeting.

Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of last year’s energy price falls.

This month’s figures have however been dampened by core inflation – which strips out volatile elements such as energy prices and food – remaining stuck at 0.8 per cent for the fourth consecutive month. The figures are a first flash estimate from Eurostat.

Core inflation is closely watched by policymakers at the ECB who have been battling with persistently low inflation for over two years. Faced with weak price pressures, the central bank is widely expected to extend its landmark €80bn a month bond-purchase at the ECB’s December policy decision next Thursday. (More on that here.)

ECB president Mario Draghi said today he expects inflation to reach its target of below but near 2 per cent by around 2018-2019.

“We’re still years away from a return to normal”, said Peter Vanden Houte, chief eurozone economist at ING, who says low inflation has likely bottomed out this year.

Eurostat said energy prices fell 1.1 per cent this month, compared to November 2015, while food, alcohol and tobacco prices climbed 0.7 per cent and industrial goods prices inched up by 0.3 per cent.

The eurozone-wide figures follow on from a flash estimate of German inflation, which remained unchanged at 0.7 per cent this month, matched by France.

Chart courtesy of Bloomberg

Dollar rises as markets turn eyes to Opec

Posted on 30 November 2016 by

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members.

Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in New York, leaving the Wall Street barometer less than 0.3 per cent shy of its record high hit last week.

Hot topic
Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna.
The crude market has been volatile this week — rising 2 per cent on Monday and falling around 4 per cent on Tuesday — on the fluctuating hopes that big producers will agree to curb output and help correct the state of oversupply in the market.

The new session sees Brent crude, the international benchmark, up 1.2 per cent to $46.92 a barrel, while West Texas Intermediate is adding 1.2 per cent to $45.76 as traders await news of any developments out of the Austrian capital.

The oil price’s ability to influence sentiment in the broader market has diminished since the start of the year, when Brent’s plunge below $30 a barrel caused shares in explorers and producers to tank and rattled banking stocks on worries about bad loans to the energy sector.

But there is a concern among some investors that the oil/stock market correlation could tighten again if Opec’s failure to reach a credible deal causes prices to fall back sharply.

The CBOE Crude Oil Volatility Index, a gauge of stress in the energy market, is up from 38.0 at the start of the month to 55.1, its highest since March, when Brent crude was trading around $40.

What to watch

The ADP private sector jobs report for November is due for release at 13:15 GMT. Analysts expect a net 165,000 new positions to have been created, according to Reuters consensus forecasts.

The ADP is the precursor to the all-important monthly non-farm payrolls data coming up on Friday. Both reports would have to be pretty weak to stop the Federal Reserve from raising borrowing costs next month.

Futures markets are placing a 100 per cent probability on the central bank increasing interest rates by 25 basis points on December 14.

Indeed, the two sets of jobs data probably provide a greater risk if they are stronger than expected, for that may cause the markets to raise bets on a faster pace of Fed tightening.

Equities
The pan-European Stoxx 600 index is down 0.2 per cent as miners lead the declines.

The UK’s FTSE 100 is off 0.1 per cent as Royal Bank of Scotland
retreats after being singled out for struggling in the latest banking system stress tests.

Italy’s FTSE MIB index is recovering 0.2 per cent ahead of the constitutional referendum this weekend. Asian trading was muted and mixed. Japan’s Topix benchmark closed barely changed and Australia’s S&P/ASX 200 fell 0.3 per cent, weighed down by materials and energy stocks after the drop in commodity prices later on Tuesday.

Greater China markets exemplified the muddled mood, with Hong Kong’s Hang Seng gaining 0.3 per cent in response to Wall Street’s overnight advance, but the Shanghai Composite shed 1 per cent as resources stocks fell on fears that the central bank’s attempts to support the renminbi by reducing liquidity in the financial system would hit trading in commodity assets.

Forex
The US dollar index is up 0.2 per cent to 101.16, just below last week’s near 14-year peak of 102.05, as the buck continues to be supported by Tuesday’s economic data, which included annualised third quarter GDP growth of 3.2 per cent and US consumer confidence hitting a nine-year high in November.

The yen is 0.3 per cent weaker at ¥112.63 per dollar and the euro is off 0.1 per cent to $1.0632 even though German retail sales enjoyed a bumper October, data showed.

Sterling is off 0.1 per cent to $1.2473 after Bank of England governor Mark Carney said the UK’s economic outlook faced “continued uncertainty” as Brexit jostling drags on.

The New Zealand dollar was a notable gainer among Asian currencies, up 0.3 per cent against the greenback to $0.7142 after the country’s finance minister said it seemed interest rates there had “hit a floor”, although he did not see a situation in which rates would rise sharply.

Fixed income
Monetary policy divergence is driving the yields between US and eurozone benchmark bonds further apart.

The US 10-year Treasury yield, which moves opposite to the bond price, is up 1 basis point to 2.31 per cent as the Fed rate hike looms.

The equivalent maturity German Bund is slipping 2bp to 0.21 per cent after European Central Bank president Mario Draghi said monetary policymakers will make a decision on the third leg of quantitative easing in early December.

Commodities
A stronger dollar and the market’s broadly cautious tone is weighing on many commodity prices.

Further downward pressure comes from a sell-off in China-traded futures after the concerns about Beijing tightening liquidity caused investors to close bullish bets.

Coking coal and rebar futures dropped by the most on record, according to Reuters, while lead, zinc, and rubber also fell sharply.
Gold is steady at $1,188 an ounce.

RBS emerges as biggest failure in BoE stress test

Posted on 30 November 2016 by

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 modelled by the Bank of England, but they were judged to have sufficient capital-raising plans already in place.

The outright failure of RBS – partly caused by heavy litigation costs still hanging over the bank – underlines how it is still struggling to regain a stable footing eight years after being bailed out by the taxpayer in the financial crisis.

RBS presented its revised capital plan to the BoE overnight after the bank, which is 73 per cent owned by the state, suffered the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014.

Overall, the BoE said the results showed the banking system had continued to increase its overall levels of capital and came out of the stressed scenario with stronger balance sheets than in previous years.

RBS, however, was the only bank to fall below the minimum hurdle rate even after “assumed management actions” but before the presumed benefit of converting its loss-absorbing hybrid debt know as alternative tier one (AT1) securities.

In the stressed scenario, RBS’s common equity tier one ratio – a measure of capital to risk-weighted assets that is the main benchmark of banking strength – fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. That is below its 6.6 per cent hurdle rate and its 7.3 per cent “systemic reference point” – a second, more stretching target set for systemically important banks.

“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the BoE said. “Based on RBS’s own asssessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incoroporate further capital strengthening actions and this revised plan has been accepted by the PRA board.”

The BoE said Barclays and StanChart also fell below their hurdle rates before management actions and conversion of AT1 securities. But in Barclays case the regulator was confident that its capital plan – including selling much of its African subsidiary – would be enough to fix its shortfall. In StanChart’s case, it said the bank had recently issued AT1 securities that would resolve its shortfall.

Lloyds Banking Group, HSBC, Nationwide and Santander UK all passed the stress test, which the BoE said hit riskier corporate loans harder than residential mortgage books.

The BoE toughened the tests from the previous two years and introduced higher individual targets for each bank – including an extra hurdle rate for the most systemically important lenders – instead of a standard hurdle rate.

This year the test modelled the impact of a sharp contraction in Chinese and Hong Kong growth, with an overall 1.9 per cent contraction of the global economy, combined with the knock-on effect of emerging market currencies depreciating against the US dollar. It also examined the consequences of a 31 per cent in UK house prices over a five-year timeframe.

In a statement following the stress tests, StanChart said it had a “strong and liquid balance sheet”, with the overall results demonstrating the lender’s “resilience to a severe global stress scenario”.

RBS emerges as biggest failure in tough UK bank stress tests

Posted on 30 November 2016 by

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 modelled by the Bank of England, but they were judged to have sufficient capital-raising plans already in place.

The outright failure of RBS — partly caused by heavy litigation costs still hanging over the bank — underlines how it is still struggling to regain a stable footing eight years after being bailed out by the taxpayer in the financial crisis.

It is also a blow to UK government, which wants to start selling down its 73 per cent stake in the bank, and shareholders, who had hoped for the resumption of dividend payments.

RBS had its revised capital plan accepted overnight by the BoE after it suffered the second-highest ever percentage fall in capital under the stressed scenario after the Co-operative Bank in 2014.

RBS shares opened down 2.3 per cent after the news on Wednesday morning.

Overall, the BoE said the results showed the banking system had continued to increase its overall levels of capital and came out of the stressed scenario with stronger balance sheets than in previous years.

RBS, however, was the only bank to fall below the minimum hurdle rate even after “assumed management actions” but before the presumed benefit of converting its loss-absorbing hybrid debt know as alternative tier one (AT1) securities.

In the stressed scenario, RBS’s common equity tier one ratio — a measure of capital to risk-weighted assets that is the main benchmark of banking strength — fell from 15.5 per cent to 5.9 per cent after management actions but before AT1 conversion. That is below its 6.6 per cent hurdle rate and its 7.3 per cent “systemic reference point” — a second, more stretching target set for systemically important banks.

“The stress test demonstrates that RBS remains susceptible to financial and economic stress,” the BoE said. “Based on RBS’s own assessment of its resilience identified during the stress-testing process, RBS has already updated its capital plan to incorporate further capital strengthening actions and this revised plan has been accepted by the PRA board.”

RBS said in a statement that its revised plan was made up of “an array of capital management actions”.

These included “further decreasing the cost base of the bank; further reductions in RWAs [risk-weighted assets] across the bank; further run-down and sale of other non-core loan portfolios in relation to our personal and commercial franchises; reduction in certain non-core commercial portfolios in commercial banking; and the proactive management of undrawn facilities in 2017”.

It added that “additional management actions may be required until RBS’s balance sheet is sufficiently resilient to stressed scenarios”.

Ewen Stevenson, finance director, said: “We are committed to creating a stronger, simpler and safer bank for our customers and shareholders. We have taken further important steps in 2016 to enhance our capital strength, but we recognise that we have more to do to restore the bank’s stress resilience including resolving outstanding legacy issues.”

The BoE said Barclays and StanChart also fell below their hurdle rates before management actions and conversion of AT1 securities. But in Barclays case the regulator was confident that its capital plan — including selling much of its African subsidiary — would be enough to fix its shortfall. In StanChart’s case, it said the bank had recently issued AT1 securities that would resolve its shortfall.

Lloyds Banking Group, HSBC, Nationwide and Santander UK all passed the stress test, which the BoE said hit riskier corporate loans harder than residential mortgage books.

The BoE toughened the tests from the previous two years and introduced higher individual targets for each bank — including an extra hurdle rate for the most systemically important lenders — instead of a standard hurdle rate.

BoE governor Mark Carney said on Wednesday: “We are pleased to see the banks will have resilience consistent with the ability to withstand what’s a very severe shock [modelled in the stress tests]. ‘Withstand’ means to being able to meet the demand for borrowing, for loans, for mortgages in that scenario — so growing lending in this scenario despite being hit with all this shocks. That’s what we want to see.”

He said RBS had made “a lot of progress over the last few years” in its core business of serving UK households and businesses. “Its challenge is that it still has legacy issues, misconduct costs, non-core assets and impaired assets. The orders of magnitude of their plans are much bigger than the size of the shortfall highlighted in the stress test.”

This year the test modelled the impact of a sharp contraction in Chinese and Hong Kong growth, with an overall 1.9 per cent contraction of the global economy, combined with the knock-on effect of emerging market currencies depreciating against the US dollar. It also examined the consequences of a 31 per cent fall in UK house prices over a five-year timeframe.

Steven Hall, banking partner at KPMG, said the banks’ performance was worse than expected. “All banks started this test in a better place than they have previously but this year’s test is the most severe we’ve seen. As predicted misconduct costs have weighed heavy on results.”

US politics, bond yields and Brexit all test financial stability, says BoE

Posted on 30 November 2016 by

The result of the US election earlier this month has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging.

Vulnerabilities that were already considered “elevated” by the BoE have got worse since its last report on financial stability in July in the weeks following the UK’s vote to leave the European Union, the central bank said on Wednesday in its assessment of risks to the financial system.

The election of Donald Trump as US president has pushed up yields on sovereign bonds from advanced economies, while also weighing on expectations around global trade.

“The US election has reinforced existing vulnerabilities,” the BoE’s twice-yearly Financial Stability Report reads. “Following the US election, there have been significant changes in global asset prices. Expectations of expansionary US fiscal policy have contributed to an increase in advanced economy sovereign yields, reversing much or all of their falls observed earlier in the year.”

UK banks are particularly exposed to China, Hong Kong and emerging markets — around 20 per cent of UK banks’ total assets. The report highlighted the difficulty of emerging markets servicing their debts in the new environment.

Financial firms sharply pulling out of London because of Brexit could also threaten financial stability — both that of the UK and of Europe as a whole, the BoE added.

“If any such adjustments take place in a short timeframe, there could be a greater risk of disruption to services provided to the European real economy, which could spill back to the UK economy through trade and financial linkages,” the report reads.

The BoE also flagged risks from European banks — particularly Italian ones — which are suffering from various headwinds and have questions over the viability of their business models. The report also highlighted the various unresolved misconduct investigations hanging over European banks.

But despite the challenges the BoE considers the UK system to be strong enough; it is happy with the overall level of capital in the banking system following Wednesday’s publication of its stress tests — even though Royal Bank of Scotland failed and vulnerabilities were highlighted at Barclays and Standard Chartered.