Wednesday 4th May 2016
NEWS TICKER: MARKET ROUNDUP —Markets tanked today (almost everywhere bar the PRC) as economic data from China and an 18% lunge in profits at HSBC sapped market confidence. The bank reported an adjusted profit before tax of $5.4bn for the first quarter, down 18% on the same period last year. Citing challenging market conditions, the bank reported first quarter(Q1) pretax profit before adjustments of $6.1bn, down from $7.1bn in the first three months of 2015 but beating analysts’ forecasts of a pretax profit of $4.3bn, according to Reuters. In Hong Kong this morning the bank’s shares were up on the news, as expectations had been for much worse. Earnings per share came in at 20 cents, down from 26 cents per share in the same period last year. HSBC held its first-quarter dividend in line at 10 cents per share. In London HSBC fell 3.5p to 449p as the bank said it put in a "resilient" performance in difficult market conditions, with the entire investment banking sector suffering after stock markets tumbled at the start of 2016 amid an oil price rout. However, as we reported earlier today indexes across Europe paid the price of lower than expected manufacturing data from the Caixin/Markit Manufacturing Purchasing Managers' index (PMI), rather than Chinese bourses. The DAX fell 1.5% lower and the CAC40 dropped 1.1%. Commodity stocks were also on the back foot despite the price of oil rising 0.4% to 45.99 US dollars a barrel. Glencore ended the day down 7.5p to 155.5p, Rio Tinto fell 96.5p to 2205p and BHP Billiton slipped 34.8p to 897.4p – AQUISITION—M&A maven Cavendish Corporate Finance has advised bfinance on the investment in the company by private equity funds managed by Baird Capital. Current bfinance CEO David Vafai will continue to lead the consultancy in this next, exciting phase of its growth. He will be joined on the board by Andrew Ferguson, managing director at Baird Capital, and CFO Mark Brownlie, as directors. Also joining the board as chairman is Tim Trotter, who founded public relations group Ludgate, co-founded Citywire, the information service for the global fund management industry and is a non-executive chairman at a number of financial services and asset management related blue-chip companies. The deal with Baird follows a strong period of successes for bfinance. Recent high-profile mandates for bfinance include advising on a $1bn alternative beta strategy programme for a U.S. corporate pension plan, a USD 1.2bn private equity search for Swedish State pension fund AP7, and multiple searches across asset classes on behalf of Australian superannuation funds. The deal marks a strong start to the year for Cavendish. It follows shortly after the sale of Periproducts to Venture Life Plc, the sale of Gloucester Rugby club to new owner Martin St Quinton, the sale of B2B creative marketing agency Twogether to Next 15 Plc and the debt raise for Pets Corner following a highly successful 2015 during which the company completed over 20 deals –AIIB/ADB— In a shift in strategy the Asian Infrastructure Investment Bank has signed a financing memorandum of understanding (MoU) with the Asian Development Bank, the second partnership signed in the space of a few month by the challenger development bank. AIIB, set up to counter the ‘hegemony’ of Western dominated aid institutions, has been struggling to dispel its image as a rival to existing NGOs. The bank secured a similar arrangement with the World Bank during the International Monetary Fund-World Bank spring meetings in Washington last month. This MoU sets the stage for the banks to share funding costs for projects. The ADB said it is already in talks with the AIIB around ventures in the road and water sectors, the first of which is expected to be a 64-kilometre highway connecting two cities in Pakistan’s Punjab Province. - ASIAN TRADING SESSION - The Nikkei and Topix indexes took the brunt of risk off sentiment today as investors gave a distinct thumb down to last week’s decision by the Bank of Japan not to cut rates further. The Nikkei225 fell 7.41%, while the Topix went down 7.25% in a somewhat bloody trading session. Continuing with the pattern set down for most of this year, the yen by contrast continues to appreciate, touching at one point 105.81 again the dollar, the yen’s highest point for almost two years. The Bank of Japan in response rattled a few sabres, threatening to intervene should the yen appreciate further; but investors continued to test the yen’s upper limit. Yann Quelenn, market analyst at Swissquote noted this morning: “The yen has climbed 13% against the dollar since the start of the year and there a strong support lies at 105.23, which is now clearly on target.” The other story in the Asian session was the surprise move by the Reserve Bank of Australia to cut The Reserve Bank of Australia on Tuesday cut the cash rate to a record low of 1.75 per cent in a bid to head off falling prices and an economic downturn. Market commentators now expect a second cut before the end of the year, although some say the June quarter inflation figure, out in August, will determine the RBA's next move. The latest cut puts Australia firmly into the group of countries with an ultra-loose monetary programme, or should that be a noose around falling interest rates and bond yields. Reserve Bank governor Glenn Stevens said the decision was based on last week's surprisingly weak inflation figures. "Inflation has been quite low for some time and recent data were unexpectedly low," he said in a statement. The AUDUSD fell to 0.7572 from 0.7720 on the news, though the ASX All Ordinaries rose 1.94% on the day, with the S&P/ASX100 rising 2.24%. The index is now up 6.8% on the month, though up only 1.32% over the year. Aside from China and Australian indexes, boards across the region ran red for most of the session. The S&P BSE Senses was down 1.75%. The Kospi100 was also off by 1.50%, while in Singapore the Straits Times took a beating, losing 4.39% today, bringing it down 0.26% over the month and down 2.58% over the year. The Hang Seng also had a tough day, falling 3.68% today, though it is up by 0.87% over the month and down 5.65% over the year. In China, the Shanghai Composite was up 1.13% in trading today, though it is still down 0.56% over the month and down 15.44% over the year. The Shenzhen Composite had a better day, up 3.29%, and is up 1.45% over the month, but still down 16.45% on an annualised basis. The upbeat market sentiment was interesting, given that the Caixin Manufacturing PMI weakened to 49.4 in May from 49.7 in April, softer than market expectations and marking a 14th month of contraction; data that usually would have sent investors to the hills. Go figure. The data indicated that softness in labour markets and exports continue. Meantime, the central bank set the USDCNY mid-point at 6.4565. There is still mixed data emanating from China. Bank of America Merrill Lynch’s latest China: An Equity Strategist’s Diary research report highlights the nugget that YTD 241 non-government bond issuances have been cancelled or postponed, 120 of which were deferred in April, compared with 315 across the whole of last year. Some 709 bonds worth a total of RMB1.04trn came to market in last month (an 85% success rate). However, says the bank, if the bond market corrects sharply, sectors that rely most on the credit markets to support their day-to-day activities (including developers, banks, brokers, industrials and utilities) could suffer disproportionately as their reliance on credit has grown significantly during the past six months. Among the 120 bond issues affected in April, 70% were from industrials (50 bonds), financials (18) and materials (17). The bank also says a perceived implicit government guarantee on bonds and other moral hazards in the shadow banking sector, including wealth management products, is largely behind the mispricing in corporate credit. With the country’s overall default risk perceived to be low, bonds have become a cheap source of long-term financing for corporations compared to other traditional credit products. At the end of April, an AA+ rated five-year bond yielded 4.3% while the benchmark rate for a one-year to five-year loan was 4.75%. A five-year AA- rated bond offered 6.6%. The overnight repo rate annualised was 2%; seven-day repo, 2.5%; six-month discounted bill, 3%; and the one-year benchmark loan rate came in at 4.35%. Alternative sources of finance cost between 12% and 15% for P2P; 8% for a two-year trust; 19% for private lending in Wenzhou; and 18% to 20% for offline wealth management companies. BAML says a sharp uptick in the number of corporate defaults, coupled with the increasing number of cancelled or postponed bond issuances, shows that the market is starting to reprice risk although this process could last until the end this year. The peak maturing period is April/May with between RMB80bn and RMB790bn of bonds maturing over the period. From June onwards maturities fall to around RMB600bn a month for the rest of the year—SAUDI ARABIA—In another move to liberalise the Saudi Arabian capital markets, the Capital Market Authority (CMA) has approved a request by the Saudi bourse to relax settlement cycles for investors, making the country’s inclusion in the MSCI Emerging Markets Index more likely from next year. It has also announced an overhaul of foreign ownership regulations for listed companies, as it seeks to encourage participation by international institutional investors in a wide ranging programme of privatisations. The CMA announced today that it was widening the definition of Qualified Financial Investors (QFI) to include financial institutions such as sovereign wealth funds and university endowments as well as banks. The regulator says the minimum value of assets under management for QFIs will be reduced to SAR3.75bn (about $700m), compared with the current level of SAR18.75bn ($3.5bn). From the end of June 2017, QFIs will be able to own up to 49% of a company’s capital, “unless company’s bylaws or any other regulation provides for foreign ownership to be limited to a lower percentage". Individual QFIs will be able to own up to 10% of a company’s share capital, compared with the current level of 5%. Foreign investment is now an important element in the government’s wide-ranging economic diversification program, which will also involve partial privatisation of some of the country’s key state owned firms. Over the last few weeks Saudi has signalled its intention to list a 5% stake in Saudi Aramco, a move that could raise in excess of $100bn. The opening of the Saudi stock exchange, the GCC’s largest, to QFIs in June of last year was hailed as a milestone at the time, but has so far failed to attract large scale foreign investment into Saudi equities. Licensed QFIs to date include Blackrock, Ashmore Group, Citigroup and HSBC. However, up to now the firms, in combination own less than 0.1% of the Tawadul’s market capitalisation—STOCK EXCHANGE NEWS—Börse Stuttgart reports turnover in excess of €6.7bn in April 2016. The trading volume was almost on a par with the previous month. Securitised derivatives accounted for the largest share of the turnover. The trading volume in this asset class was more than €2.7bn. Leverage products contributed more than €1.4bn to the total turnover, while the trading volume of investment products was more than €1.2bn. At more than €1.4bn, turnover from equity trading at Börse Stuttgart was around 9% higher than in the previous month. German equities accounted for more than €1.1bn of the total turnover – an increase of more than 7% in comparison with March - while international equities contributed about €299m. Trading in debt instruments generated turnover of around €1.6bn in April, with trading volumes almost as high as in the previous month. Corporate bonds accounted for the largest share of the turnover, with approximately €918m.The order book turnover in exchange-traded products (ETPs) was more than €916m in April. Trading in investment fund units generated turnover of €8m —ASSET MANAGEMENT —Aberdeen Asset Management says pre-tax profits have fallen to £98.8m in the six months to March 31st, down from £185.4m over the same period a year earlier after investors have backed off from emerging markets. The asset management has been affected by changes in end investor asset allocation choices as fund outflows over the period amounted to £38.2bn (£16.7bn on a net basis says the asset management maven); however, the pace of outflows has slowed, compared with the previous six months, when investors withdrew £41.7bn (£22.6bn in net basis). Aberdeen has £292.8bn worth of assets under management, down from £330.6bn a year ago, although it marked an improvement on the £283.7bn at its financial year-end. Despite the challenges, Aberdeen has been active in turning around its fortunes, promising to cut annual costs by £70m by 2017 and has diversified its business proposition by a series of acquisitions, including the takeover of hedge-fund manager Arden, risk-graded portfolio provider Parmenion, and fund-of-funds investment manager—CORPORATE NEWS—Advance Utilico Emerging Markets Ltd says it has has extended its £50m senior secured multi-currency revolving credit facility with Scotiabank for a further two years to April 2018. Shares in Utilico are down 0.1% to 176.75 pence—SPANISH ELECTIONS – Looks like Spain is heading for another hung government. News agency The Spain Report says the latest poll of polls data from Electograph shows only minor changes compared to the results of the last general election on December 20th last year. The order of the parties remains the same: PP, PSOE, Podemos, Ciudadanos and United Left. No party is currently forecast to be close to an overall majority, of 176 out of 350 seats in Congress. Over the past four months, polls have at times suggested a slight shift towards a right-wing PP-Ciudadanos coalition and, in the latest round, the possibility that a joint Podemos-United Left electoral list might overtake the Spanish Socialist Party (PSOE) as the reference for the Spanish left, says the news agency—POLITICAL RISK—maven Red24 advises professionals to avoid visiting Kabul. The firm reports that yesterday, the US Embassy, issued a statement warning of an increased threat of attacks in the Taleban’s spring offensive (Operation Omari) against Afghanistan's government and its Western-backed allies, including the US, on April 12th. Crowded public areas, police and military interests, foreign embassies, foreign guest houses, hotels and government buildings/sites have been listed as probable targets; no information was provided regarding the timing of any planned attacks. Red24 says Taleban attacks in Afghanistan generally increase during the spring and summer months, which generally extend until September, when warmer weather allows militants greater access through usually snowed-in mountain passes from their traditional strongholds along the mountainous Afghanistan-Pakistan border. “Given the extreme and ongoing threat of terrorism in Afghanistan, such warnings by government authorities are taken seriously and regularly result in additional security force deployments. The warning is particularly pertinent given the attacks carried out in the capital on 19 April, following the launch of the offensive, in which at least 24 people were killed as a result of a car bomb attack, in the vicinity of several government ministries and the US Embassy in the Pul-e-Mahmood Khan and Shahr-E-Naw areas. Further incidents are expected to persist,” says the firm in an alert issued today.

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The eurozone crisis may last 20 years

Friday, 24 August 2012 Written by 
The eurozone crisis may last 20 years Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis. For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis. http://www.ftseglobalmarkets.com/

Financial markets should not be complacent when considering the timeframe of the eurozone’s recovery. Indeed, there are many conditions that need to be met before the region can officially exit the crisis.

For instance, a complete reindustrialisation of countries with a deficit is needed, as well as the implementation of long-term developments, including rebalancing countries’ balance sheets, eliminating fiscal deficits, ensuring structural external deficits disappear, and creating jobs to replace those lost at the beginning of the credit crisis.

A further option, largely rejected across the region, would be to apply elements of federalism to the region in place of wiping external deficits, where the eurozone will act as a ‘transfer union’ that allows for monetary transfers from surplus countries to deficit countries.

During the lengthy process of ensuring all of these conditions are met, there will be a risk of major and long-lasting economic, financial, social and political instability. For the financial markets, this points to a depressed level for asset prices due to the high levels of risk volatility.



The financial markets sometimes believe that the eurozone crisis will be solved rapidly

Admittedly, there has been progress – albeit rather limited – towards solving the eurozone crisis. For instance, the European Central Bank implemented Very Long-Term Refinancing Operations (VLTRO) in late 2011, and the European summit in June 2012 resulted in positive decisions for banking supervision and recapitalisation. There is promise too with the likely implementation of the European Security Mechanism.

These actions have all led to a major, although temporary, improvement in financial markets. However, financial market participants should understand that the eurozone crisis will be very long, given the developments that are needed to end it:

The long-term developments required to end the eurozone crisis

1. Rebalancing of balance sheets

In the eurozone as a whole - and especially in some countries such as Spain, Greece, Ireland, and The Netherlands - an imbalance has appeared in the balance sheets of private economic agents between liabilities (due to a very high private-sector debt ratio) and assets (due to the bursting of the real estate bubble and the fall in real estate prices).

As long as this balance sheet mismatch lasts, the private sector has to deleverage and therefore reduce its spending, which leads to sluggish growth. Also, private borrowers’ solvency will remain poor, which means that there is no end in sight for the banks’ problems. 

2. Restoration of full employment

In the aftermath of the Lehman bankruptcy in 2009, there were heavy factory job losses due to the fall in global trade. Afterwards, the bursting of the real estate bubble triggered a decline in construction employment too.

Currently, many countries (e.g. France, Italy, Spain, Greece, Ireland, and Portugal) have a very high level of unemployment. This has generated a depressive cycle, because high unemployment leads to a decline in labour's bargaining power and a fall in real wages.

The crisis will not end before economies have pulled out of this depressive cycle, i.e. when job losses have been offset by new jobs. But this process has not yet even started, and would require several measures to be adopted in order to do so. These would include attracting new activities to these countries and reindustrialising them. This is not happening, however, and is reflected in the on-going decline of industrial production capacity.

3. Elimination of fiscal deficits

The sovereign debt crisis has occurred because of excessive fiscal deficits in many countries. Governments obviously need to eliminate these fiscal deficits in order to permanently drive down long-term interest rates.

But today we can see a very worrying development: the fiscal deficits are not shrinking – on the contrary, they are increasing because of  sluggish activity.

4. If there is no federalism, the structural external deficits must disappear

Some countries (e.g. Spain, Greece, Portugal, and France) have structural external deficits because of the small size of their exporting sectors, especially in industry. This situation is not sustainable, since these countries are accumulating a continuously growing external debt, and will end up becoming insolvent.

There are then only two solutions to this unsustainable situation, both of which will take a very long time: federalism, or reindustrialisation of countries with a deficit.

We should not expect a rapid end to the crisis in the eurozone

For the time-being, we are seeing major problems when it comes to implementing these long-term developments, and federalism is still off the table.

But for the eurozone crisis to end, all of the mentioned conditions must be met.

The economic, financial, social and political uncertainty will therefore be pronounced in the eurozone for a long time to come – we would estimate about 20 years. 

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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