• The prospect of another interest rate cut in the near-term appears to be receding amid signs that the economy has so far weathering the fallout from the vote to leave the European Union.
• Investors are predicting that there is a one-in-three chance of an interest rate cut next month having previously regarded such a step as a near certainty.
• Official figures indicate that the UK’s services sector has defied gloomy expectations after the Brexit vote with services output rising by 0.4% in July which was an improvement on growth of 0.3% in June.
• The ONS revised upwards its estimates for GDP growth in the second quarter to 0.7% from 0.6% previously. However this remains below growth of 0.8% in the first quarter.
• The latest CBI growth survey indicates that UK companies are anticipating a surge in output in the final quarter of the year despite a predicted slowdown in the three months to September.
• Concerns over the size of its capital buffers sent Deutsche Bank shares to a 33-year low last week before partly recovering on rumours that the DoJ fine may be substantially less than the initial $14.0bn claim.
• Deutsche Bank may have to raise at least €5 billion in fresh capital as a result of the imminent fines as it doesn’t appear to have the capacity to replenish its capital base from retained profits.
• Negative interest rates have slashed European banks’ lending margins and regulatory reforms designed to strengthen the banking system have vastly reduced earnings potential on trading activities.
• The ITRAXX Europe Senior Financials 5-year CDS index rose by 5.2% to 102bps from 97bps, as the spreads of major banks rose by up to 13% as the fallout continues from the DoJ shock settlement claim.
• Despite the Deutsche Bank situation, the FTSE 350 Bank Index fell only slightly over the week by 0.5% as investors pin their hopes on rumours that the final claim will be substantially lower.
The prospect of another interest rate cut in the near-term appears to be receding amid signs that the economy has so far weathering the fallout from the vote to leave the European Union (EU). A plethora of data over the past two months has shown that the economy is faring better than many economists had predicted. Investors are now predicting that there is a one-in-three chance of an interest rate cut next month having previously regarded such a step as a near certainty. November is seen as the most likely time for further stimulus measures, as it coincides with fresh quarterly growth and inflation forecasts from the Bank of England (BoE).
Official figures from the Office of National Statistics (ONS) indicate that the UK’s important services sector has defied gloomy expectations to continue growing after the Brexit vote with services output rising by 0.4% in July which was an improvement on growth of 0.3% in June. Despite some very weak indicators appearing in the immediate aftermath of the referendum, the figures suggest that the services sector (which accounts for three-quarters of the UK economy) did in fact grow strongly in July. The ONS also revised up its estimates for Gross Domestic Product (GDP) growth in the second quarter to 0.7% from 0.6% previously. However this remains below growth of 0.8% in the first quarter.
This more optimistic view is supported by the latest growth survey from the Confederation of British Industry (CBI). The survey also indicates that the UK economy appears to have largely defied expectations of an immediate slump after the Brexit vote with UK companies anticipating a surge in output in the final quarter of the year despite a predicted slowdown in the three months to September. However the CBI again warns that uncertainty over the UK’s future relationship with the EU is likely to continue to depress optimism and investment plans which would undercut productivity gains and economic growth in the longer term.
The troubles at Deutsche Bank continue to mount with concerns over the size of its capital buffers sending its shares to a 33-year low last week before partly recovering on rumours that the Department of Justice (DoJ) fine may be substantially less than the initial claim for $14 billion (£10.8 billion) for mis-selling toxic products linked to US sub-prime mortgages.
Analysts expect Deutsche Bank to have to raise at least €5 billion in fresh capital as a result of the imminent fines as it does not appear to have the capacity to replenish its capital base from retained profits. Some analysts caution that shareholders may be unwilling to provide further support in these difficult times and that the German government may be forced to reluctantly step in to fill the void. It is generally accepted that Deutsche Bank (which operates in more than 70 countries and has a loan book of €1.8 trillion) is too integral to the European and German economies to be allowed to fail.
The difficulties at Deutsche Bank have exposed the glaring weaknesses at the heart of the European financial sector. Negative interest rates have slashed the margins European banks can earn by lending money to customers and regulatory reforms designed to strengthen the banking system have vastly reduced earnings potential on bond, share and currency trading activities. In a few weeks, European regulators will require the EU’s top 32 banks to issue loss-absorbing debt so they can better absorb a downturn. Estimates of the amount of debt to be sold vary between €376 billion (£327 billion) and €3 trillion (£2.6 trillion) – so it’s too early to tell just how high a mountain the regulators are creating for a sector that is not in the best of health to climb.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||3rd October 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||18.42||18.60||-1.0%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.68||1.75||-4.0%|
|Allied Irish Banks||60||59||+1.7%||6.00||6.00||0.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.00||15.10||-0.7%|
|Aust and NZ Banking Group Ltd||67||68||-1.5%||27.63||27.59||+0.1%|
|Banco Bilbao Vizcaya Argentaria S.A.||130||120||+8.3%||5.38||5.49||-2.0%|
|Parent: Barclays plc|
|Barclays Bank plc||101||94||+7.4%||1.68||1.71||-1.8%|
|BNP Paribas S.A.||77||71||+8.5%||45.77||46.96||-2.5%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.57||14.29||-5.0%|
|Credit Agricole S.A.||75||70||+7.1%||8.78||8.88||-1.1%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||138||131||+5.3%||21.62||21.28||+1.6%|
|Deutsche Bank AG||226||221||+2.3%||11.57||11.41||+1.4%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||75||68||+10.3%||5.79||5.74||+0.9%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||65||62||+4.8%||10.99||11.06||-0.6%|
|Intesa Sanpaolo S.p.A.||149||143||+4.2%||1.97||2.00||-1.5%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.66||4.75||-1.9%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||88||81||+8.6%||0.55||0.56||-1.8%|
|Metro Bank plc||n/a||n/a||n/a||27.47||27.83||-1.3%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||70||68||+2.9%||85||85||0.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||131||116||+12.9%||1.79||1.83||-2.2%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||3.95||3.96||-0.3%|
|Shawbrook Group plc||n/a||n/a||n/a||2.33||2.49||-6.4%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||118||110||+7.3%||6.28||6.39||-1.7%|
|Svenska Handelsbanken AB||65||61||+6.6%||118||118||0.0%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3572||3591||-0.5%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||102||97||+5.2%||n/a||n/a||n/a|