Daily Insight
Group Economics Macro & Financial Markets Research
05 July 2016
BoE: risks starting to crystallise BoE warning - BoE Governor Mark Carney warned that some of the risks surrounding the Macro & Financial Markets Research Team
referendum had 'begun to crystallise' on Tuesday. Speaking at the Financial Stability Report
Nick.kounis@nl.abnamro.com
Press Conference, he pointed to the historically large current account deficit, which was
Tel: +31 20 343 5616
vulnerable to shifts in capital flows. He noted that portfolio flows into UK debt and equity
nick.kounis@nl.abnamro.com
have slowed, while capital flows into commercial real estate had halved in the first quarter and sterling had fallen sharply. In addition, Mr Carney pointed to 'growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity' and that the tougher economic outlook could increase the number of financially vulnerable households. On the other hand, he noted that the fall in sterling and gilt yields would cushion the blow, while markets had managed well and not added to the stress. In reaction to the increased risks the BoE was reducing capital requirements for banks, which would increase 'banks’ capacity to lend to UK businesses and households by up to £150 billion'. He added that 'when combined with the already strong balance sheets of UK banks, (the) action means that UK households and business who want to seize viable opportunities in a post referendum world can be confident they will be supported by the financial system'. The Governor's last comment about those that 'want to seize' is telling. Lending growth in the coming time will probably be limited due to weak loan demand, rather than problems on the credit supply side. (Nick Kounis) European banks - The Financial Policy Committee of the BoE announced that it would reduce the countercyclical capital buffer on banks’ UK exposures from 0.5% to 0% with immediate effect. According to the FPC, this would reduce regulatory capital buffers by GBP 5.7bn. The UK banks that will benefit are the TLAC eligible ones (GSIBs), namely HSBC, Barclays, RBS and Standard Chartered. HSBC will benefit the most, as the bank's TLAC shortfall for 2019, was the largest of all UK banks. Meanwhile, the Italian government's efforts - up to now in vain - to prop up its ailing banking sector are continuing. Bloomberg reported that the Italian government was looking into making a capital injection into Banca Monte dei Paschi di Siena. The amount mentioned in the report is EUR 3bn, which seems to be rather modest given the bank's high level of non-provisioned NPLs (non-performing loans) as well as its starting level of capital. The Italian government has been battling the European Commission and the German government to allow it to intervene to help its banks and circumvent state aid rules. It seems that the government is trying to use an exception to the rule, which allows temporary state aid if regulatory stress tests uncover a shortfall. It seems likely to us that the Italian banking sector will need a lot more capital. (Tomas Kinmonth)
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Daily Insight - BoE: risks starting to crystallise - 05 July 2016
FX - After a period of stabilisation, sterling came under renewed pressure again on Tuesday. Investors sold sterling ahead of the BoE publishing its Financial Stability Report and on the expected measures to cushion the 'Brexit shock'. Mr Carney's downbeat comments on the economic outlook and hints that the central bank would roll out further easing measures subsequently also weighed on sterling. In addition, the UK's woes were underlined by three asset managers freezing their real estate investment funds as investors pulled out money on the back of the deteriorating outlook for commercial real estate prices. We expect further downside in sterling as financial markets have yet to anticipate the full impact of Brexit on the UK economy and its ability to continue to attract the flows necessary to finance its large current account deficit. We expect GBP/USD to fall to 1.20 before the end of this year and EUR/GBP to rally to 0.92. Investor sentiment on financial markets was in general more downbeat and this gave support to the yen and to gold prices. Meanwhile, emerging market currencies and currencies of commodity exporting countries declined as investors turned more cautious. The turn in sentiment reflected worries about the weak global economic outlook, which could be further challenged by upcoming weakness in the UK and to a lesser extent the rest of Europe on the back of the UK's decision to leave the EU. (Georgette Boele). Government bonds - Global government bonds saw a powerful rally in this environment, with yields continued their collapse, recording new all-time record lows. At time of writing, Germany's 10y Bund yield had fallen to -0.172%. France's 9-year bond yield fell below zero for the first time. Meanwhile, the 10y US Treasury had seen a low of 1.37% and 30y Treasury had earlier touched 2.1395%. There was also a record low recorded for the 10y Australian government bond yield, while Switzerland's yield curve is now below the zero mark all the way out to 50 years. The sharp fall in yields reflects a continuation of a number of market themes, which have only intensified since the UK referendum. Lower expectations for economic growth and declining inflation expectations are an important factor. In addition, there has been a related expectation for an easier monetary policy stance globally than previously expected, with the BoE and ECB set to launch and step up asset purchases, respectively, and the Fed set to keep interest rates on hold for a long period. Scarcity of high quality government bonds is also a factor contributing to the fall in yields, given the weak supply outlook and central banks set to increase their purchases. Finally, the turn in investor sentiment also spurred safe haven demand. Indeed, peripheral government bonds saw spread widening. We see further downside for 10y Bund (year-end target -20bp) and gilt (target 0.5%) yields on the back of additional ECB and BoE QE. US 10y Treasuries are now roughly at our year-end target (1.4%). We expect the Fed to keep rates on hold until 2017, but further falls in US yields would probably need to see markets pricing in a Fed U-turn back to an easing stance. (Nick Kounis)
3
Daily Insight - BoE: risks starting to crystallise - 05 July 2016
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics.The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or n i directly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").