Political tensions have risen to the fore this month while economic factors have taken a back seat. The actions of President Trump in bombing Syria in reaction to the alleged chemical attack by President Assad on his own people, dropping the ‘mother of all bombs’ on the Islamic State mountain stronghold in Afghanistan and ratcheting up his hostile rhetoric with North Korea (as well as the deployment of a naval task force off the Korean peninsula) has created severe market uncertainty. This has been compounded by the realisation that the French presidential elections (that start later this month) are too close to call and could result in a Eurosceptic president being elected which could cause major problems for the European Union.
However from an economic viewpoint things are more encouraging with the latest batch of economic indicators for both the UK and the European Union showing signs that growth in general is improving. In particular the latest Markit/CIPS purchasing managers’ index (PMI) for UK services indicated that activity in the UK’s dominant services sector rose at a faster than expected pace in March. The index rose to 55.0 compared with the February figure of 53.3. Respondents were also optimistic about the year ahead with signs that the fall in the value of sterling since the Brexit vote had led to new sales inquiries from abroad and demand from overseas clients.
The Office for National Statistics (ONS) has reported that UK consumer price inflation (CPI) held steady in March at 2.3%, partly due to the later timing of this year’s Easter holidays which pushed down airfares and also due to a dip in global oil prices. However analysts warn that the squeeze on UK consumers is likely to resume soon. Inflation has accelerated in recent months pushed up by a weakening of the pound since last year’s decision by voters to leave the European Union and by the rise in oil prices.
Meanwhile the Markit/CIPS Eurozone PMI Composite Output Index rose in March to a near-six year high of 56.4, up from 56.0 in February, with manufacturing output growing at its fastest rate since April 2011 and services sector output growing at its fastest rate since May 2011. Analysts believe that the Eurozone is poised to enjoy its strongest quarter of economic growth in nearly six years despite the uncertainty created by the upcoming political elections in France and then Germany.
During the month, the independent rating agencies either upgraded or improved their outlook predictions for some major European banks to reflect significant increases to their additional loss-absorbing capacity (ALAC) buffers through senior debt issuance – particularly qualifying Tier 2 capital – after the implementation of their respective country’s resolution and recovery regimes (i.e. “bail-in” regulations).
Meanwhile the UK’s biggest banks have been instructed to prepare for a wide range of challenges as part of the latest stress tests from the Bank of England (BoE). The seven major lenders taking part are Barclays, HSBC, Lloyds, RBS, Santander UK, Standard Chartered and Nationwide. Among other things, the banks will need to prove that they can manage any sudden slowdown in foreign interest in UK assets and a potential increase in funding costs for borrowers as the BoE recognises that the UK’s large current account deficit is vulnerable to a reduction in foreign investor appetite for UK assets.
The BoE has also warned that European Union-based banks operating in the UK may have to be vetted by the bank if the system of passporting were to break down after Brexit and if there was no commitment to minimum common standards. If passporting rights were not to apply after Brexit then many firms that are either physically based in the UK, or providing services within the single market, would come directly under Prudential Regulation Authority (PRA) supervision for the first time. This would give the PRA the right to determine whether the business operates as a branch or a subsidiary which has huge capital implications for regulated firms.
Markets have reacted negatively to reports that Jes Staley, Chief Executive, Barclays plc, is to lose his annual bonus after the UK Financial Conduct Authority (FCA) and the PRA announced that they have opened an investigation into his conduct during a whistleblowing case where he sought to discover the identity of the whistleblower. The share price has fallen by 8.2% while the 5-year CDS spread price has risen by 17.4% over the month in reaction to the news.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||17th April 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||21.98||23.77||-7.5%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.28||2.23||+2.2%|
|Allied Irish Banks||55||62||-11.3%||5.05||5.10||-1.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.90||14.50||+2.8%|
|Aust and NZ Banking Group Ltd||57||56||+1.8%||31.90||31.95||-0.2%|
|Banco Bilbao Vizcaya Argentaria S.A.||114||115||-0.9%||6.86||6.89||-0.4%|
|Parent: Barclays plc|
|Barclays Bank plc||81||69||+17.4%||2.13||2.32||-8.2%|
|BNP Paribas S.A.||96||87||+10.3%||58.30||61.86||-5.8%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||16.16||15.36||+5.2%|
|Credit Agricole S.A.||93||77||+20.8%||11.91||12.65||-5.8%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||106||108||-1.9%||14.40||15.58||-7.6%|
|Deutsche Bank AG||130||127||+2.4%||15.13||18.26||-17.1%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||66||59||+11.9%||6.44||6.67||-3.4%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||63||64||-1.6%||13.81||14.62||-5.5%|
|Intesa Sanpaolo S.p.A.||154||141||+9.2%||2.44||2.43||+0.4%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.50||5.95||-7.6%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||69||59||+16.9%||0.63||0.69||-8.7%|
|Metro Bank plc||n/a||n/a||n/a||33.75||34.52||-2.2%|
|Nordea Bank AB||43||46||-6.5%||101||109||-7.3%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||98||86||+14.0%||2.28||2.45||-6.9%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||78||77||+1.3%||5.49||5.49||0.0%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||3.37||3.10||+8.7%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||81||80||+1.3%||7.10||7.41||-4.2%|
|Svenska Handelsbanken AB||43||43||0.0%||121||127||-4.7%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4101||4319||-5.0%|
|SNR FIN ITRAX CDS 5-YEARS||94||87||+7.8%||n/a||n/a||n/a|