Marketmind: Back to The Blues

Markets are in a somber mood on Thursday.

There is little let up on the Chinese property sector front with investors wondering how much damage the Chinese economy might suffer from a potential default of embattled property giant China Evergrande Group – now possibly just days away.

Evergrande shares suffered a double-digit tumble after it scrapped a deal to sell a stake in its property group, though it also secured an extension on a defaulted bond, according to media reports.

Adding to the woes is resurgence of COVID-19 and ensuing curbs. Russia is suffering record deaths and has reported some COVID-19 infections with a new coronavirus variant believed to be even more contagious than the Delta one.

Poland is facing an explosion of cases that may require drastic action, according to its health minister, while Latvia starts its lockdown today until mid-November to slow a spike in infections.

Futures point to more pain ahead for U.S. stocks later in the day.

But a batch of fresh earnings results might sooth some frayed nerves.

Unilever and Hermes sales beat estimates, Truck maker Volvo profit beats forecast, but companies do flag lingering chip woes.

Barclays Q3 beats expectations on strong investment bank performance, while Anglo American Q3 production inches higher.

Earnings highlights in the U.S. to come today are Intel, AT&T and Danaher.

In emerging markets, Turkey’s central bank will take centre stage. Policy makers are expected to deliver another interest rate cut despite stubbornly high inflation after President Tayyip Erdogan’s midnight reshuffle of the monetary policy committee.

Key developments that should provide more direction to markets on Thursday:

-EU starts two day summit

-NATO defense ministers meet

-U.S. initial jobless claims/Philly Fed index/existing home sales

-U.S. 5-year TIPS auction

-Fed speakers: San Francisco President Mary Daly

-Emerging markets: Turkey, Ukraine central banks

-U.S. earnings: AT&T, Blackstone, Dow, American airlines, Southwest airlines, Alaska Air, Intel Whirlpool Mattell

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Karin Strohecker)

UK Shares Rise on Travel, Banking Boost; Retail Sales Data Ease Taper Fears

The blue-chip FTSE 100 index rose 0.3%, with banking shares gaining after a series of brokerage upgrades and price target hikes.

Asia-focused banks HSBC Holdings and Standard Chartered jumped 1.8% and 0.5%, respectively, after Barclays raised price targets on the stocks. RBC also upgraded HSBC to “outperform” from “sector perform”.

However, gains on the FTSE 100 were capped by miners Rio Tinto and Anglo American, which slipped 2.7% and 3.6% after Morgan Stanley cut its price targets on the stocks.

The domestically focused mid-cap FTSE 250 index advanced 0.5%.

British retail sales dropped 0.9% on the month in August versus a Reuters poll for a rise of 0.5%, after data earlier this week pointed towards a sharp recovery in the jobs market and a spike in inflation.

Investor focus will now be on the outcome of Bank of England’s (BoE) policy meeting next week.

“Next week’s policy decision should reaffirm that some tightening will be needed over the next few years to keep inflation (and the economy) in check. But we don’t expect the BoE to conclude that there is a sufficient case yet for near-term rate hikes,” Deutsche Bank economist Sanjay Raja said.

Airlines Wizz Air, Ryanair Holdings and British Airways owner IAG, and holiday company TUI AG rose between 1.2% and 4.7%, as Britain was set to consider easing its COVID-19 rules for international travel.

“The hope will be that a shift in the rules is the precursor to people jetting off for autumn and winter getaways,” said Russ Mould, investment director at AJ Bell.

Wickes Group jumped 5.6% to the top of FTSE 250 index after Deutsche upgraded the DIY retailer to “buy” from “hold”.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Devik Jain in Bengaluru; Editing by Uttaresh.V and Shounak Dasgupta)

FTSE 100 Drops 1% as Commodity, Financial Stocks Weigh

The blue-chip index fell 1.1% and was on course for its worst daily performance in three weeks. Life insurers and banks dragged the most, dropping 2% and 1.3%, respectively.

Miners slumped 1.4%, tracking iron-ore prices, while BP and Royal Dutch Shell shed 1.4% each.

The domestically focused mid-cap FTSE 250 index declined 0.5%.

Globally, investors treaded lightly as a resurgence in COVID-19 cases fuelled concerns about slowing global growth amid talk of major economies easing crisis-era stimulus measures.

The European Central Bank’s policy decision, due later in the day, was on the radar for cues on whether the bank would take a step towards reducing its emergency economic support for the bloc.

“The potential taper talk doesn’t necessarily please investors, as the COVID situation remains uncertain and European businesses need the ECB’s support to go through what might be another dark winter,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“I believe that the divergent opinions at the heart of the ECB won’t let the bank make any sharp move in the close future.”

Domestically, Bank of England governor Andrew Bailey said policymakers were split evenly last month on whether basic conditions for a rate hike were met by the British economy’s recovery.

easyJet fell 9.7% after the British airline said it rejected a takeover offer and would raise $1.7 billion from shareholders to fund its pandemic recovery and expand operations.

Genus slid 9.5% as Peel Hunt downgraded the livestock genetics firm’s stock to “hold” from “buy” after it missed annual profit estimates.

On the other hand, Hays jumped 3% to top the FTSE 250 index after Barclays upgraded the recruitment agency’s stock to “overweight” from “equalweight”.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Devik Jain in Bengaluru; Editing by Saumyadeb Chakrabarty and Devika Syamnath)

Barclays Pays Out More Than $1 Billion to Investors as Profits Rebound

By Lawrence White and Iain Withers

The British bank, which reported a near-quadrupling in first-half prvofits, said it would pay an interim dividend of 2 pence per share, equivalent to around 340 million pounds in total, after the Bank of England in July scrapped payout curbs.

Barclays will also buy back 500 million pounds of its own shares, as it forecast bad loan charges would remain below historical levels due to the improved economic outlook and low default rates on unsecured lending.

CEO Jes Staley, the subject of long-running succession speculation, told reporters he planned to stay a “couple more years” but would at some point look at succession plans.

The bank said that the full impact of the wind-down of government support measures on customer finances was not yet known.

“No one has really lived through the unwind of these schemes, and therefore we don’t entirely known how many furloughed people will get jobs or not get jobs,” Finance Director Tushar Morzaria told Reuters.

Barclays shares were up 3% at 1130 GMT.

The bank reported profit before tax of 5 billion pounds ($6.94 billion) for the six months to June 30, well above the consensus forecast of 4.1 billion pounds from analysts polled by the bank and up from 1.3 billion a year ago.

The results were boosted by the British lender releasing 742 million pounds in cash set aside for bad debt charges that have yet to materialise, as government support measures prop up the economy.

“Barclays undertaking a further share buyback and upping its half-year dividend marks another step on the road to recovery for the UK’s major banks and financial sector, at large, from the dark days of dividend suspensions,” said John Moore, senior investment manager at Brewin Dolphin.

The British bank’s positive set of results matched a similar forecast-beating first half for German rival Deutsche Bank, which also saw results boosted by lower provisions.

TRADING FRENZY

Barclays’ investment bank continued its strong run, as volatile markets during the pandemic led to frenzied trading, while companies have raised record amounts through blank-cheque investment funds and stock listings.

Equities income rose 38% and investment banking fees from advising on deals rose 27% in the first half of the year, Barclays said.

Its fixed income, currencies and commodities (FICC) business meanwhile fell 37% against a strong first half a year earlier.

The bank said its costs rose 10%, mainly from 300 million pounds of expenses associated with cutting its real estate footprint and higher bonuses due to its improved performance.

Analysts said that while Barclays’ results were strong, it would need to rein in those costs and put forward a convincing plan to improve revenue in the longer term.

“The key question as with other banks, is the outlook on the growth of their loan book and net interest income,” said Sudeepto Mukherjee, financial services consultant at Publicis Sapient.

“Barclays shares have been under pressure in the last few months and we have not seen them capture significant share from the buoyant mortgages market in the UK,” he said.

($1 = 0.7206 pounds)

(Reporting by Lawrence White and Iain Withers; editing by John O’Donnell, Jason Neely and Jane Merriman)

Bank of England to Ease Rule for Small Lenders to Boost Competition

Banks are required to issue MREL, or minimum requirement for own funds and eligible liabilities, which is a form of debt that can be written down to absorb losses and avoid repeating the 137 billion pound ($188.6 billion) taxpayer bailout of lenders in Britain during the financial crisis more than a decade ago.

The targets were set under European Union rules, which Britain now can amend more easily after leaving the bloc last December.

“Making it easier for firms to grow into MREL responds directly to firms’ concerns about barriers to growth created by the step up in MREL requirements as firms expand their balance sheets,” Bank of England Deputy Governor Dave Ramsden said in a statement.

The central bank has authorised 27 new banks since 2013, but Lloyds, Barclays, HSBC and NatWest continue to dominate retail lending and the so-called challenger banks have said that blunt thresholds for issuing MREL create a “cliff edge” that holds them back from building market share.

The BoE proposed replacing its indicative threshold of 15 billion to 25 billion pounds with a notice period setting out when a lender can enter transition to its MREL targets if the company grows beyond 15 billion pounds in total assets.

The central bank would assess a lender’s business plan as it approaches the 15 billion pound threshold and issue a bespoke transition path.

“The banking industry must now assess the implications of the new regime in terms of ability to compete, and highlight any potential challenges to how they serve customers or change their business models as a result,” said Tom Groom, a financial services partner at consultant EY.

The proposals for an extended transition path directly respond to calls for change, the BoE’s Ramsden said.

“They are inherently flexible and agile as they allow for a further extension if unforeseen circumstances demand it,” Ramsden said.

Challenger lenders Metro Bank, TSB and Co-op Bank did not respond immediately to requests for comment.

For a look at all of today’s economic events, check out our economic calendar.

($1 = 0.7264 pounds)

(Additional reporting by Iain WithersEditing by Alison Williams and David Goodman)

Barclays Nabs UBS Banker Tan to Lead Singapore Private Bank

Barclays has been expanding its private banking business in Europe, taking advantage of its investment bank’s ties to wealthy entrepreneurs, family offices and businesses.

With the appointment of Tan, Barclays is hoping to pursue a similar strategy of providing the ultra-rich with bespoke investment services and sophisticated products in Singapore, it said in a statement.

“By further strengthening our presence here, we see this appointment as a great opportunity for us to serve (ultra high net worth individuals) and family offices, connecting them to our expertise and capabilities in one of the fastest growing wealth management locations globally,” Jean-Christophe Gerard, head of Barclays Private Bank, said in the statement.

Tan will join the British lender from the world’s largest wealth manager UBS, where she ran business for ultra high net worth individuals in Singapore.

(Reporting by Brenna Hughes Neghaiwi; editing by Jason Neely)

How Will EU Ban on 10 Banks From Bond Sales Impact Markets and Banks?

Here’s what the move means for EU debt sales, bond markets and the affected banks:

WHICH BANKS ARE AFFECTED?

Banks from all corners of the world are affected: U.S. lenders JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. as well as British peers Barclays Plc and NatWest Group Plc are on the list.

In continental Europe, Deutsche Bank AG, Natixis SA and Credit Agricole SA and UniCredit SpA are affected. Plus Japan’s Nomura Holdings Inc.. All banks declined to comment.

All on the list of 39 primary dealers responsible for managing debt sales — syndicated and auctioned — for the bloc and managing its debt trading in the secondary market.

Many are Europe’s go-to banks in the public sector bond market; seven are among the top 10 fee earners from syndicated debt sales in this market since 2020, according to Dealogic.

WHAT DID THEY DO?

The ban relates to lenders found being part of three cartels in the past three years. One saw a number of banks fined over tinkering in FX spot markets between 2007-2013. Another one found a number of banks colluded on trading strategies and pricing between 2010-2015 on public sector bonds – debt issued by government-linked institutions. A third one related to a cartel of traders at various banks in the primary and secondary market for European government bonds.

HOW BIG WILL FEE LOSSES BE?

Sitting out from syndications, where investment banks are hired by an issuer to sell debt directly on to end investors, means losing out on lucrative fees. Banks netted 20 million euros – 0.1% of the 20 billion euros – in fees from Tuesday’s debut bond, according to Reuters calculations.

Fees vary with debt maturities; the longer the bond, the higher the fees.

An average of its fees across all maturities for the remaining 60 billion euros of this year’s long-term debt issuance would translate into a pool of another 66 million euros if all that debt were to be syndicated, Reuters calculations showed. Considering it will be divided among all banks participating, that’s a relatively small amount compared to the $224 million top earner JPMorgan alone reaped from syndicated European public sector debt sales since the start of 2020, according to Dealogic.

The EU also pays smaller fees for its recovery fund debt than European sovereigns. However, it currently issues all its debt through syndications and will rely on them much more heavily than sovereigns even after auctions start in September, meaning it is a fee source banks won’t want to miss out on.

Exclusion also means smaller lenders could see their fee share increase. Graphic: EU syndication fees: https://fingfx.thomsonreuters.com/gfx/mkt/azgvooddjvd/4Xyrm-eu-syndication-fees-for-recovery-fund-bonds.png

HOW LONG WILL THE BAN LAST?

No timeline has been given. EU Budget Commissioner Johannes Hahn said the commission would work through information provided by banks on how they addressed the issues “as fast as possible”.

Sources told Reuters some banks already submitted information, with the remaining ones expected to follow soon. This could mean some of the banned banks could get the green light to rejoin bond sales, the sources said.

A senior debt banker at a primary dealer not banned said he expects at least a few of the banks to be re-admitted by September, when EU auctions begin.

WILL IT HIT LIQUIDITY?

ECB bond buying has zapped some liquidity in the bloc’s fixed income markets. Liquidity matters to investors, making it easier and cheaper to transact.

Syndication fees are a key factor that motivate banks to participate in auctions that are much less lucrative but crucial to maintain liquidity.

European governments have lost primary dealers in recent years as banks have judged the business to be less profitable.

And having less major banks left to underwrite its syndications could also pose risks for the EU.

(Reporting by Yoruk Bahceli, Abhinav Ramnarayan, Dhara Ranasinghe and Iain Withers in London, John O’Donnell in Frankfurt and Foo Yun Chee in Brussels; writing by Karin Strohecker; Editing by Chizu Nomiyama)

 

As Interest Rates Hit Bottom, Debt Does Matter, Says Barclays

By Sujata Rao

Barclays’ annual Equity Gilt study, released on Tuesday, contradicts the debt-doesn’t-matter thesis, championed by several high-profile economists, prescribing countries should spend big to lift economies from the COVID-19 funk — a reversal of the long-held wisdom that high indebtedness is risky.

While acknowledging that the interest rate decline since the 2008 crisis had cushioned countries against rising debt, the study warned the cycle was turning, as interest rates hit the so-called effective lower bound, the point beyond which policy easing does more harm than good.

Pointing out risks to emerging markets in particular, Barclays said “limits on debt expansion do exist and are being bumped up against in the post-COVID-19 world, creating a high likelihood of macro-credit events in the coming decade”.

“Rates are unlikely to fall further, but global growth rates likely will. This will stress repayment capacity, particularly for low-growth high-rate EM economies,” it added.

Barclays said its approach differed from that of many economists, including the International Monetary Fund, in that first, it took into account total economy debt rather than just public debt, and second, it treated local and foreign currency debt burdens as equally important.

Its analysis shows that countries with the greatest savings shortfalls were most unsustainable and it highlighted Brazil with a shortfall of around 8% of annual GDP.

An estimated 1% potential growth rate “implies Brazilians would have to forego any new consumption or investment for eight years to return to sustainability…Without a radical change in Brazil’s potential growth rate, the pain of necessary adjustment for the country will be dramatic”, Barclays wrote.

However, with Brazil facing elections in 2022 there are concerns of an acceleration in spending growth that could further undermine the country’s standing.

Barclays also highlighted the example of Turkey, where low public indebtedness is offset by high levels of private sector debt, with the risk that these debts could ultimately migrate to the sovereign balance sheet.

Overall, the note said, a key difference between sustainable and unsustainable developing countries was that the latter already had real — or inflation-adjusted — interest rates at the upper end of the range seen between 2005 and 2017 while the opposite was true for the sustainable group.

Ratings agency Fitch forecasts global government debt will reach $95 trillion by 2022, a record 40% increase in nominal terms compared with the pre-COVID-19 level of 2019.

Meanwhile, total global debt stood at $289 trillion at the end of the first quarter, the Institute of International Finance said in a report earlier in May.

(Reporting by Sujata Rao, additional reporting by Marc Jones, editing by Ed Osmond)