Marketmind: Halloween Scare on Markets

A look at the day ahead from Saikat Chatterjee.

Currency volatility too is close to 2021 lows. One explanation is that the strength of trailing third quarter earnings are propping up stock markets.

That may not wash for much longer though. Results from tech heavyweights Apple and Amazon missed market expectations, pushing their shares lower in after-hours.

That’s weighing on Asian stocks on Friday, putting MSCI’s ex-Japan index on track to snap three weeks of gains. U.S. stock futures are set to open in the red.

Euro zone bond yields are continuing to rise after European Central Bank President Christine Lagarde failed to dissipate bets on end-2022 interest rate hikes. Italian bond yields endured their biggest daily rise in over a year and are rising further on Friday.

Her prediction for inflation to remain below target in the medium-term hasn’t pushed German inflation-linked 10-year bond yield much away from the record low hit on Wednesday.

What it may boil down to is, in the words of Citi strategist Matt King, a “credibility gap” between inflation and real yields, already at its most stretched the 1970s.

This chasm poses a conundrum for policymakers. In Australia for instance, officials seem to have lost control of the yield target which key to the central bank’s stimulus policy. Instead, bonds saw their biggest selloff in decades and markets are howling for rate hikes as soon as April.

Things seem to have calmed a touch as the weekend approaches; the dollar is weaker, Bitcoin advanced 1% and China’s stricken Evergrande has made an interest payment for an offshore bond, making it the second time in a week it narrowly averts default.

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

Daimler AG reported a higher Q3 net profit on despite a 25% cut in production and expects to hit profit targets.

Ether, the world’s second largest cryptocurrency, hit an all-time high above $4,400

Data corner: Preliminary Q3 GDP readings from eurozone, Germany, France, Italy

Corporate earnings; ExxonMobil, Chevron, Natwest Group, BNP Paribas

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

(For graphic on Aussie bonds – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnoalopq/Aussie%20bonds.JPG)

(Reporting by Saikat Chatterjee; editing by Sujata Rao)

Britain Unveils Plan to Return NatWest to Majority Private Control

The finance ministry said it had instructed Morgan Stanley to sell NatWest shares on its behalf in a scheme starting on Aug. 12 and running until Aug. 11, 2022.

NatWest shares have rallied 23% since the start of the year, supported by the recovery from the pandemic. But they are still far below the 502-pence level of the 2008 taxpayer rescue, making further substantial losses on the bailout likely.

At 11:20 GMT, NatWest shares were trading at 196.80 pence, down 1% from the previous day’s close.

The British state currently owns around 54.7% of NatWest after spending 45 billion pounds ($61.87 billion) bailing out the lender 13 years ago.

The government said it planned to sell up to 15% of the total volume of NatWest shares being traded on the market over the duration of the plan.

That would roughly equate to around 2 billion pounds, or 8.8% of shares, based on the last three month of trading volume, analysts at Credit Suisse estimated in a note.

Morgan Stanley will only sell shares at or above a price per share that the government has determined “delivers value for money for the taxpayer”.

“This move will be welcomed by investors and should improve liquidity in the stock as well as reinforcing the government’s desire to reduce/exit its shareholding, even if the plan weighs on the share price over the next 12 months,” said Ronan Dunphy, banking analyst at Goodbody.

“If the market is judged to be able to digest the sell down without an uncomfortable price reaction, we wouldn’t be surprised to see (the government) seek to reduce its shareholding further.”

NatWest CEO Alison Rose welcomed the government’s plan and said it showed the bank was on a better footing.

The plan to sell shares on the open market also opens the door to NatWest buying back up to 10% of its shares.

Details of the share sale come after the government sold 1.1 billion pounds worth of NatWest shares through a one-off stock offering in May.

NatWest also bought a similar chunk of stock directly from the government in March, but is prevented from launching another directed buyback for 12 months under company rules restricting it to buying around 5% of its stock through this route.

The government said it may also sell NatWest shares through other means such as accelerated bookbuilds or directing share buybacks.

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

($1 = 0.7273 pounds)

(Reporting by Rachel Armstrong and Iain Withers; Editing by Karin Strohecker, Himani Sarkar and Bernadette Baum)

Natwest Sells Irish Commercial Lending Business to AIB

By Simon Jessop

The deal will see AIB take over around 4.2 billion euros ($5.01 billion) in gross performing commercial lending and associated undrawn exposures of around 2.8 billion euros from Natwest’s Ulster Bank.

Natwest said it expects to make a small gain on the disposal. As part of the deal, 280 employees will transfer to AIB.

Natwest said in February that it was to wind down its Irish arm as Chief Executive Alison Rose slashes underperforming parts of the state-owned lender after it swung to a loss in 2020.

AIB said in a separate statement that it would pay 4.1 billion euros for the loans, equivalent to 97.63% of par value, using its existing cash pile. After receiving regulatory approval, it plans to migrate the loans over 12-18 months.

AIB said the deal would be accretive to earnings from 2023 and provide net interest income of around 100 million euros a year. Additional annual costs after the deal would come in around 30 million euros a year.

While the deal would cut AIB’s core tier 1 ratio – a measure of financial strength – by around 145 basis points, it said its CET1 ratio remains above its 14% target, at 15.8% at the end of the first quarter.

“AIB’s landmark acquisition of Ulster Bank’s 4.2 billion euro corporate and commercial loan book will further underpin the bank’s ambitious growth plans and position us to support the business community and Ireland’s economic recovery as we emerge from the pandemic,” said AIB Chief Executive Colin Hunt.

($1 = 0.8386 euros)

(Additional reporting by Conor Humphries;Editing by Rachel Armstrong)

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)

 

Only 13% of Natwest Staff to Return to Office Full-time

By Lawrence White

A NatWest spokeswoman told Reuters that 55% of staff will adopt a hybrid working model, mixing home and office working, while 32% will adopt a ‘remote-first’ model with a minimum of two days a month in the office and the remainder sticking with the ‘office-first’ model.

“For some of you, it will be clear which category your role fits within. For others, it may be less clear – and may depend on other factors,” Chief Executive Alison Rose had told staff in a speech subsequently posted on the bank’s website on Tuesday.

The changes will take place after consultation with employees’ managers and in a phased manner, Rose said.

The update from NatWest offers one of the clearest signs yet from a major British bank of how employees’ working lives will change as many of the home-working arrangements required during the pandemic are adopted permanently.

Despite the shift to more remote working NatWest has no immediate plans to close more offices, the spokeswoman said, in contrast with some British banks.

HSBC aims to cut its office footprint by 40% over the long term, the bank said in February, and is moving about 1,200 call centre staff in Britain to permanent home working, Reuters reported in April.

NatWest has so far only closed its Regents House office in London and is keeping its real estate under review, the spokeswoman said.

The bank has spent the past year converting its offices to suit the new working patterns, with more space for collaboration and drop-in workers, she added.

(Reporting by Lawrence WhiteEditing by Jan Harvey and David Goodman)

Britain Lowers NatWest Stake with $1.5 Billion Share Sale

UK Government Investments (UKGI), the state-owned company that controls the shares, said the they were priced at 190 pence, 4% below Monday’s closing price of 197 pence.

NatWest has been majority state-owned following a 45 billion-pound bailout in 2008 during the financial crisis. The sale crystallises a further hefty loss of around 1.8 billion for taxpayers, with shares well below the 502 pence bailout level.

The move edges the bank closer to private ownership, reducing the government’s holding from 60% previously.

The government’s last sale of stock to outside investors was in 2018, although NatWest directly bought back 1.1 billion pound of shares last month to reduce the state’s holding from 62%.

NatWest shares fell around 4% in early trading to around the latest sale price. They are also below the 2018 sale price of 271 pence a share.

The government said it continued to keep all options and timings under review for future sales.

NatWest’s stock price has more than doubled since hitting a low of 90.5 pence in September, as optimism has built about prospects for Britain’s economic recovery from the COVID-19 pandemic.

NatWest, formerly Royal Bank of Scotland, has long argued it is unrealistic to expect a profit on the bank’s rescue, which was needed to stabilise Britain’s financial system.

The bookrunners on the sale were Barclays, Citigroup, Goldman Sachs and Morgan Stanley. Rothschild & Co is acting as adviser to UKGI.

Two months ago, Britain’s financial regulator said it had started a criminal action against NatWest over allegations it failed to detect suspicious activity by a customer depositing nearly 400 million pounds over five years, mostly in cash.

($1 = 0.7084 pounds)

(Reporting by Iain Withers; Editing by Rachel Armstrong, Jason Neely and Pravin Char)