As expected the U.S. Federal Open Market Committee (FOMC) raised the Federal interest rate last week to a range of between 0.50% and 0.75% and signalled a faster pace of increases in 2017 as central bankers adapted to the incoming Trump administration’s promises of tax cuts, spending and deregulation. However the prospect of a brisker monetary tightening than analysts had expected has contributed to a sell-off in shorter-dated U.S. Treasuries and stocks. Though Mr Trump’s inauguration is still a month away, it was noted that some of the FOMC participants had begun shifting their assumptions about fiscal policy. At least 5 of 17 Fed policymakers appear to have increased their interest rate outlook projections since September.
UK manufacturers appear to have ended the year on a high note after they enjoyed the largest order books in nearly two years. The latest Confederation of British Industry (CBI) industrial trends survey has reported that the overall level of orders had improved with its gauge rising to zero in the three months to December from -3% in November. This was better than the -5% balance expected by economists and the highest level in 20 months. Although uncertainty surrounding future trade relationships might continue to prevent exporters from taking full advantage of the drop in the value of sterling, survey participants are cautiously optimistic that the domestic economy’s resilience should ensure that the manufacturing sector continues to hold up well over the coming year. The CBI survey also indicated that a balance of 19% of manufacturers reported an increase in production over the past three months which was the best reading since mid-2014.
A recent Bank of England (BoE) survey indicates that the vote to leave the European Union (EU) appears to have had a limited effect on UK consumers with perceptions around job security, income and spending barely changing. The biannual poll, which was included in the BoE’s collection of economic essays released in its Quarterly Bulletin, found that consumers did not think that their borrowing habits would change because of the Brexit vote nor did most survey respondents think the ‘leave’ vote would affect the availability of credit. The survey of 6,000 people also found that the majority of those polled said that the Brexit vote had not had any impact on their personal financial position and the net balance of consumers that expected to increase spending over the coming year fell only slightly. The vote to leave the EU does not appear to have led to a large increase in uncertainty among consumers since the last survey was conducted in April.
HSBC has obtained a £6.4bn capital boost after convincing global regulators that it is a safer and smaller bank after it was removed from a list of the world’s most risky lenders in November. This regulatory decision should allow the bank to release surplus capital over the period 2018/2019 and has raised hopes among analysts that it could boost investor payouts and launch further share buybacks. HSBC’s share price has risen by an impressive 56% in the past six months with much of the uplift coming after it launched a surprise $2.5bn (£2.1bn) share buyback in October and received a $5.0bn capital boost from its Chinese business last month. Last year HSBC was in the top bracket of risky lenders. Had it remained in that position it would have had to increase its capital reserves by £6.4bn which is equivalent to 0.875% on a $904bn portfolio of risk- weighted assets. HSBC is still one of 30 lenders on the stability board’s list of global systemically important banks (G-SIBs), but has dropped from No 1 on the list to No 6.
Analysts believe that the severe technical problems associated with the attempted sale by the Royal Bank of Scotland (RBS) of 314 branches in its Williams & Glyn network could force RBS to beg 1.7m of its customers to switch accounts themselves. The taxpayer-backed bank is supposed to announce a buyer by the end of the year. RBS was ordered to sell Williams & Glyn by the European Commission as a punishment for receiving state aid in its 2008 bailout. Santander UK has now resurrected its interest while Clydesdale Bank is also considering making an offer. It is understood that RBS is still struggling to create a database of customers that can be easily be transferred to a new owner. It may be forced simply to request that customers transfer their accounts to the winning bidder via the seven-day switch service launched by the Payments Council in 2013. It remains unclear how RBS could ensure the customers follow through with the switch. Sources also believe that this approach could slash the potential sale price since Santander UK or Clydesdale Bank could argue they are at risk of losing customers who either refuse to move or opt for a rival bank instead.
Monte dei Paschi di Siena (Italy’s third biggest bank) is attempting to convince 40,000 retail investors to take part in its last-ditch rescue plan to avoid a state bailout. The bank has announced that Italian regulators have given the bank approval to extend a debt-to-equity offer to retail investors that own €2.1bn of its junior debt. If private investors in the bank were to agree then their bonds would be turned into shares. The bank warns that these retail investors could face bigger losses if they did not convert. The lender has until December 31 to raise €5.0bn in equity. The Italian government is preparing to step in with cash to bail out the bank as a last resort but that would see all investors having to share in the losses. However informed sources have indicated that if losses end up being forced on retail investors as part of a restructuring plan then the Italian government may set up a compensation fund for individuals who have lost savings. The issue that politicians would then have to deal with would be avoiding action which breached the EU’s state aid rules.
Moody’s has upgraded the long-term ‘Deposits’ rating of Barclays Bank plc to reflect their opinion that customer depositors of the Bank face a much lower loss-given failure as a result of the existing issuance and anticipated future near-term issuance of loss-absorbing capital where these senior debt holders would be the first to be affected by any ‘bail-in’ requirements. In addition Standard & Poor’s has signalled a potential rating upgrade for both Deutsche Bank AG and Commerzbank AG for similar reasons. However both rating agencies continue to apply ‘negative’ outlooks for these banks to reflect the challenging economic environment and the uncertainties surrounding legacy conduct and litigation issues.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||19th December 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||21.13||21.64||-2.4%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.23||2.26||-1.3%|
|Allied Irish Banks||65||66||-1.5%||5.03||5.06||-0.6%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.10||14.35||-1.7%|
|Aust and NZ Banking Group Ltd||70||71||-1.4%||29.81||29.92||-0.4%|
|Banco Bilbao Vizcaya Argentaria S.A.||126||127||-0.8%||6.55||6.41||+2.2%|
|Parent: Barclays plc|
|Barclays Bank plc||83||82||+1.2%||2.28||2.34||-2.6%|
|BNP Paribas S.A.||85||87||-2.3%||60.96||60.23||+1.2%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||14.40||14.00||+2.9%|
|Credit Agricole S.A.||76||77||-1.3%||11.90||11.52||+3.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||128||133||-3.8%||15.73||15.60||+0.8%|
|Deutsche Bank AG||197||202||-2.5%||18.33||17.47||+4.9%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||70||70||0.0%||6.67||6.75||-1.2%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||65||65||0.0%||13.60||13.64||-0.3%|
|Intesa Sanpaolo S.p.A.||140||140||0.0%||2.41||2.37||+1.7%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.34||5.34||0.0%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||70||71||-1.4%||0.64||0.62||+3.2%|
|Metro Bank plc||n/a||n/a||n/a||32.64||32.74||-0.3%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||67||67||0.0%||103.5||102||+1.5%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||117||118||-0.8%||2.27||2.18||+4.1%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||5.03||4.88||+3.1%|
|Shawbrook Group plc||n/a||n/a||n/a||2.70||2.55||+5.9%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||117||119||-1.7%||6.85||6.59||+3.9%|
|Svenska Handelsbanken AB||58||58||0.0%||131||134||-2.2%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4215||4219||-0.1%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||94||97||-2.6%||n/a||n/a||n/a|