• City traders expect the Bank of England to reduce borrowing costs again from 0.25% before the end of the year while the financial markets are not predicting a return to the previous 0.50% level until 2021.
• The Bank of England intervened to cushion the impact of the Brexit vote, with its first cut in Bank Rate since 2009 and sanctioned another £60 billion tranche of conventional quantitative easing (QE).
• The Bank of England also announced a £100 billion Term Funding Scheme (TFS) to encourage banks to lend which is expected to reduce their costs of funding by an estimated £500 million in total.
• The downward revision to the Bank of England’s growth forecast for next year from 2.3% to 0.8% was the largest adjustment since it became independent in 1997.
• Analysts believe the time is right for a big increase in infrastructure spending by the UK Government to take advantage of already very low government borrowing costs, rather than cutting taxes.
• According to the latest BDO monthly survey, business confidence has fallen by less than expected after Brexit decision while shoppers have largely shrugged off the outcome.
• U.S. employment rose more than expected in July, bolstering expectations of faster economic growth and raising the probability of a Federal Reserve (Fed) interest rate increase this year.
• The Italian bank, Monte dei Paschi di Siena, is working on a high-stakes rescue plan which involves the creation of a special purpose vehicle to remove bad loans from the bank’s books.
• Both the The ITRAXX Europe Senior Financials 5-year CDS index and the FTSE 350 Bank Index improved again over the week as many financial markets are now in a quiet period over the summer holidays.
City traders expect the Bank of England (BoE) to reduce borrowing costs again from 0.25% before the end of the year while the financial markets are not predicting a return to the previous 0.50% level until 2021. Depositors face five more years of record-low returns, with investors betting that the BoE will not undo last week’s interest rate cut before the end of the decade.
As expected the BoE intervened last week to cushion the impact of the Brexit vote, with its first cut in Bank Rate since 2009 (to 0.25%) and sanctioned another £60 billion tranche of conventional quantitative easing (QE) bringing the total to £435 billion. The BoE also announced a £100 billion Term Funding Scheme (TFS) to encourage banks to lend and £10 billion of corporate bond buying. The TFS is expected to reduce banks’ costs by an estimated £500 million, offsetting the lower returns they will earn on customer loans.
The downward revision to the BoE’s growth forecast for next year from 2.3% to 0.8% was the largest forecast adjustment since it became independent in 1997 and the policy actions taken by the Monetary Policy Committee (MPC) are intended to offer reassurance to the markets that the economy can be guided through these short-term difficulties without falling into outright recession.
Against this backdrop many analysts believe the time is right for a big increase in infrastructure spending by the UK Government to take advantage of already very low government borrowing costs, rather than cutting taxes. Analysts argue that increasing infrastructure spending is easier to defend at a time of high levels of government borrowing than cutting taxes because the beneficial impact on growth – and therefore government revenues – is larger. But analysts caution that infrastructure is the slow-moving tortoise of economic policy, while monetary policy is the hare.
According to the latest BDO monthly survey, business confidence has fallen by less than expected after the Brexit decision while shoppers have largely shrugged off the outcome. The accountancy firm reported that its business confidence trend figures for July found only minor falls in optimism, based on growth prospects six months out and on output that measures companies’ experience of orders for three months ahead. The findings are backed by data from the high street, where Visa UK’s monthly index showed that consumer spending rose 1.6% year-on-year in July, with hotels, restaurants and bars leading the way, up 8.9%.
U.S. employment rose more than expected in July for the second month in a row and wages picked up, bolstering expectations of faster economic growth and raising the probability of a Federal Reserve (Fed) interest rate increase this year. Non-farm payrolls rose by 255,000 jobs in July after an upwardly revised 292,000 increase in June. The Fed raised interest rates for the first rise in nearly a decade last December but since then has held rates steady amid concerns over persistently low U.S. inflation and a global economic growth slowdown. Given lingering global uncertainties and the upcoming U.S. presidential election, most economists expect another interest rate increase only in December, but financial markets are less sure with Fed futures contracts pricing in only a 46% chance of a rate hike by the end of this year.
Monte dei Paschi di Siena has engaged JP Morgan to assist with a high-stakes rescue plan which involves the creation of a special purpose vehicle (SPV) to remove Monte dei Paschi’s bad loans from the bank’s books and may require a €6.0 billion syndicated bridge loan to provide financing to the SPV to begin buying up the debt. The bank emerged as the worst performer in the recent European stress tests which predicted its capital would be wiped out if there was a severe economic downturn. The bank intends to resolve its capital shortfall and restore its financial health by splitting into a good and bad bank. The plan envisages the sale of €9.2 billion in bad loans and a €5.0 billion capital increase. Analysts caution that any failure of the world’s oldest bank would damage the entire Italian banking system and could spark contagion across Europe. Prime Minister, Matteo Renzi’s government is believed by many analysts to be applying strong pressure to Italian and international investment banks to make the rescue plan work. Analysts further believe that the Italian Government does not want to mount its own rescue because European Union rules would mean imposing losses on bondholders and depositors above €100,000.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||8th August 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.39||1.39||0.0%|
|Allied Irish Banks||66||67||-1.5%||6.50||6.50||0.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||16.42||14.86||+10.5%|
|Aust and NZ Banking Group Ltd||75||78||-3.8%||25.25||25.84||-2.3%|
|Banco Bilbao Vizcaya Argentaria S.A.||124||129||-3.9%||5.09||5.23||-2.7%|
|Parent: Barclays plc|
|Barclays Bank plc||105||117||-10.3%||1.52||1.55||-1.9%|
|BNP Paribas S.A.||73||77||-5.2%||43.85||44.36||-1.1%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.71||12.58||+1.0%|
|Credit Agricole S.A.||74||76||-2.6%||7.97||7.92||+0.6%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||135||135||0.0%||21.36||21.26||+0.5%|
|Deutsche Bank AG||202||209||-3.3%||11.80||12.03||-1.9%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||80||84||-4.8%||5.30||4.95||+7.1%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||62||61||+1.6%||10.30||10.00||+3.0%|
|Intesa Sanpaolo S.p.A.||122||134||-9.0%||1.90||1.97||-3.6%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.60||4.44||+3.6%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||90||97||-7.2%||0.53||0.53||0.0%|
|Metro Bank plc||n/a||n/a||n/a||21.72||20.71||+4.9%|
|Nationwide Building Society||90||98||-8.2%||n/a||n/a||n/a|
|Nordea Bank AB||64||64||0.0%||76||76||0.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||118||126||-6.3%||1.78||1.92||-7.3%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||86||86||0.0%||3.70||3.79||-2.4%|
|Shawbrook Group plc||n/a||n/a||n/a||1.90||1.88||+1.1%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||117||122||-4.1%||6.39||6.05||+5.6%|
|Svenska Handelsbanken AB||62||62||0.0%||105||103||+1.9%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3337||3214||+3.8%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||86||89||-3.4%||n/a||n/a||n/a|