Looks like an interesting period ahead as the UK Prime Minister, Theresa May, has today announced in a keynote speech that the UK is seeking a ‘clean’ Brexit that will see the country leave the single market (and the European economic area) but has promised to create a ‘strong new partnership’ with the European Union (EU). The Prime Minister has made it clear that the UK intends to pull out of the single market (and seek to replace the European customs union with reciprocal arrangements in certain sectors) in order to regain full control of immigration and end the jurisdiction of the European Court of Justice. The announcement was widely predicted and a further fall in the foreign exchange value of sterling appears to have been averted – for now at least – by the promise of a vote on the final deal in both Houses of Parliament. Now that the decision has been taken the Prime Minister has called for the two sides of the Brexit debate to be reconciled and the country to come together.
On Friday Donald Trump will be inaugurated as U.S. President and while there is understandable concerns about whether this event could damage the global economy, analysts believe that it could prove positive for the UK economy since President-elect Trump appears to have put the UK at the front of the queue for a trade deal which could help offset any trade downturn as we leave the EU.
Meanwhile the latest forward-looking Purchasing Managers’ Index (PMI) survey data continues to indicate a strong economic growth pattern for the UK economy with the consensus among analysts that collectively the surveys point to gross domestic product (GDP) growth of 0.5% for the final quarter of 2016 (i.e. 2.0% annualised).
This optimism has been echoed by the International Monetary Fund (IMF) which has raised its forecast for the UK’s economic growth this year following a better than expected economic performance since the Brexit vote. The IMF says it now expects the UK to grow by 1.5% this year compared with the 1.1% it was previously forecasting. It also predicted that the global economy will grow by 3.4% in 2017 and by 3.6% in 2018 which is unchanged from its previous forecast. However the IMF has cautioned that the possibility of more trade barriers could undermine the forecasts.
Ever since the Brexit decision was taken, UK-based financial firms have been concerned that they would lose their ‘passporting’ rights that allows them to sell their products across Europe. Many analysts now appear to be of the view that trying to preserve the status quo is probably unrealistic and so it would be much better to try for a sensible and attainable arrangement with the EU – known as ‘equivalence’. This is an EU legal concept that grants non-member countries with similar regulatory standards access to European financial markets. Although not ideal – as it would mean that the EU could change its financial rules any time and force the UK to change its regulations or face exclusion from the market – analysts believe that securing a deal based on ‘equivalence’ would probably be enough for London to retain its status as a global financial centre.
The Basel Committee on Banking Supervision (BCBS) has postponed a meeting where senior figures were due to agree the global framework for banks’ risk-weighted capital ratios. Reports suggest that a further 2 months could now elapse while further debate takes place over the new rules which European banks claim would unfairly penalise them and which has sparked a lobbying battle with their U.S. peers. Completion of the Basel III capital adequacy regime has been held up by a dispute between bankers and regulators over how lenders calculate the riskiness of assets and the amount of capital they are required to hold. Many European banks use internal risk models which U.S. regulators argue have allowed them to underestimate capital needs. In response European banks claim that reducing their ability to use their own risk models would force them to raise more capital which would contravene an international commitment that bank capital requirements would not increase significantly.
During the month, both Barclays Bank plc and the Royal Bank of Scotland plc agreed to pay more than $1.0bn in fines to the U.S. Department of Justice (DoJ) for currency manipulation after a U.S. judge rubber-stamped the deal. Barclays Bank will pay $650m and the Royal bank of Scotland $395m as part of a $2.5bn agreement with the DoJ which includes a $925m contribution from Citigroup Inc and $550m contribution from JP Morgan Chase & Co.
In addition, Moody’s has upgraded the ‘Bank Rating’ of Barclays Bank plc by one notch to reflect the fact that customer depositors face a much lower loss-given failure as a result of the parent’s issuance to date of loss-absorbing capital and on expectations of future issuance in the near term. Also, Standard & Poor’s has upgraded both Bank of America N.A. and Citibank N.A. by one notch to reflect their robust trading performance, strong balance sheets and the general improvement in the U.S. economy.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||17th January 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||22.55||21.64||+4.2%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.18||2.26||-3.5%|
|Allied Irish Banks||63||66||-4.5%||5.20||5.06||+2.8%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.50||14.35||+1.0%|
|Aust and NZ Banking Group Ltd||67||71||-5.6%||30.67||29.92||+2.5%|
|Banco Bilbao Vizcaya Argentaria S.A.||127||127||0.0%||6.24||6.41||-2.7%|
|Parent: Barclays plc|
|Barclays Bank plc||80||82||-2.4%||2.35||2.34||+0.4%|
|BNP Paribas SA||87||87||0.0%||62.16||60.23||+3.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||14.50||14.00||+3.6%|
|Credit Agricole SA||77||77||0.0%||12.59||11.52||+9.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||119||133||-10.5%||16.12||15.60||+3.3%|
|Deutsche Bank AG||165||202||-18.3%||18.15||17.47||+3.9%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||71||70||+1.4%||6.78||6.75||+0.4%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||67||65||+3.1%||13.78||13.64||+1.0%|
|Intesa Sanpaolo S.p.A.||134||140||-4.3%||2.47||2.37||+4.2%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.67||5.34||+6.2%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||72||71||+1.4%||0.66||0.62||+6.5%|
|Metro Bank plc||n/a||n/a||n/a||31.27||32.74||-4.5%|
|Nationwide Building Society||80||85||-5.9%||n/a||n/a||n/a|
|Nordea Bank AB||65||67||-3.0%||101||102||-1.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||118||118||0.0%||2.21||2.18||+1.4%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||81||82||-1.2%||5.15||4.88||+5.5%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||2.55||2.55||0.0%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||117||119||-1.7%||7.19||6.59||+9.1%|
|Svenska Handelsbanken AB||56||58||-3.4%||126||134||-6.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4309||4219||+2.1%|
|SNR FIN ITRAX CDS 5-YEARS||90||97||-7.2%||n/a||n/a||n/a|