Wall St banks sign up to new platform to underpin bond revenues
Monday 18 June 2018
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EM crisis clashes with Fed hawkishness
Emerging markets currency crash has left Fed chairman Powell unmoved
GAVYN DAVIES
Now that last week’ s announcements by the“ big three” central banks are out of the way, some macro traders expect a relief rally in risk assets, including emerging market currencies and bond spreads that have been in crisis mode since April.
Optimists think they now know the worst of the news from the US Federal Reserve, for 2018 at least, while both the European Central Bank and the Bank of Japan will remain dovish until core inflation rises in these economies.
So is the worst over for EM assets? It did not seem that way as Argentina and Turkey continued to plummet in the strong dollar environment on Friday. And the Fed is turning more hawkish as it wakes up to the effects of the US fiscal stimulus. What caused the EM sell-off? It is hard to explain the timing of the EM meltdown with any precision. The newsflow about US president Donald Trump’ s intended protection against China and Nafta intensified in April, which cannot have helped. However, protection is not a sufficient explanation, since the Asian economies that will probably be hit hardest by US trade controls have performed much better than other EM assets since then.
Another explanation is that idiosyncratic bad news was released in several big economies in April, notably Turkey, Brazil and Argentina, undermining confidence in their bonds and currencies. But that does not explain why other countries with stronger fundamentals, such as South Africa, became almost equally embroiled in the debacle.
Instead, the change in the market’ s assessment of Fed policy and the consequent rise in the dollar has surely been central. It is clear from the important work of Silvia Miranda-Agrippino and Hélène Rey that a rising dollar, following an unexpected tightening in
Large US banks are poised to hand over more capital to investors than they are generating from their businesses for the first time since the 2008 crisis, lowering their defences against another catastrophic shock to the financial system.
Shareholders in 22 of the country’ s biggest listed banks are in line for a record haul of almost $ 170bn in dividends and stock buybacks over the coming year, according to Barclays research, about a quarter more than in 2017.
Federal Reserve regulators are preparing to release first round results this week from their annual stress tests, which govern banking dividends and stock buybacks.
The expected rise in payouts shows how the industry is bouncing back from years of depressed returns. Not only are banks generating billions of dollars in additional profits from lower taxes and higher interest rates, but the Fed is allowing them to return more of their earnings to shareholders.
Analysts at Goldman Sachs,
US monetary policy, is bad for all risk assets, especially those in the EMs.
The dollar started to rise in April after prolonged weakness. There are two( admittedly debatable) reasons for this: the realisation that US fiscal stimulus is likely to have large and persistent effects on demand and supply in the country’ s economy; and the failure of eurozone activity data to bounce back after the first quarter, causing weakness in the euro. There are obvious problems with both these suggestions, especially in terms of exact timing, but together they can explain the reversal in the dollar and the decline in EM asset prices.
One more factor was crucial. Unlike in previous EM financial crises( such as 2013 and 2015-16), the Chinese economy was robust in April 2018, People’ s Bank of China monetary policy was easing and there were no reasons to fear a deliberate devaluation of the renminbi. With China in good shape, Asian EMs have emerged almost unscathed from the recent episode. See Robin Brooks on Twitter:
Will the EM sell-off get worse from here?
If the latest outbreak of trade hostility between the US and China gets a lot worse, Asian EM assets might get dragged into the crisis. But the most probable cause of further prolonged EM weakness stems, as usual, from US fiscal and monetary policy.
Reserve Bank of India governor Urjit Patel caused a stir when he warned in the Financial Times on June 3 that a global dollar shortage could develop as the financing of the US budget deficit absorbed foreign savings.
On top of this, he claimed that the planned shrinkage of the Fed’ s balance sheet would suck further dollar liquidity out of the global financial system, leaving EM economies scrambling to roll over their dollar debt as capital flows back into the US Treasuries market. This has already started, causing recent EM strains.
US banks poised for $ 170bn in shareholder payouts
Large banks set to distribute more than annual profits
ALISTAIR GRAY AND BEN MCLANNAHAN
Credit Suisse and Keefe, Bruyette & Woods predict the average bank will get the go-ahead to hand over more capital than profits produced over the next four quarters.
While some individual banks have been able to do so in prior years, the industry overall has not paid out more than its earnings since 2007, according to Barclays.
The distribution plans give ammunition to critics who argue that banks should instead be required to strengthen capital buffers to prevent future taxpayer bailouts.
The payouts were“ outrageous”, said Anat Admati, finance professor at Stanford University. She argued that too-big-to-fail banks should not be allowed to make them“ until we are sure they do not pose a danger to society any more”.
Regulators say that after years of building loss-absorbing cushions, banks have become better able to withstand a meltdown of the kind that rocked global financial markets in 2008.
Officials are expected to allow higher payouts this year because they have become more comfortable with banks’ improved capital positions— not because they have relaxed the stress tests.
ESG offers the chance to raise the moral purpose of investing © AFP
ERIC PLATT
Goldman Sachs and three other banks have signed on to a new bond platform under development by Bank of America, Citigroup and JPMorgan, as Wall Street clubs together to maintain its influence on the lucrative market for debt issuance.
Wells Fargo, BNP Paribas and Deutsche Bank are also joining the initiative, which aims to improve the technology used in the sale of bonds. Underwriting debt is a relatively stable source of billions in annual revenues that could come under threat from tech start-ups and financial data companies investing in the market.
Bank of America, Citigroup and JPMorgan have for months been working together to improve what is often a disjointed and labour-intensive process for getting pricing and other information to potential bond investors. With the addition of the four new banks, six of the top 10 debt underwriters are now involved in the consortium.
“ We get calls literally daily from
ANDRES SCHIPANI AND SCHEHERAZADE DANESHKHU other market participants seeking to be involved in this project,” said Peter Aherne, the head of North American capital markets at Citi.“ We’ ve agreed it is far better for our technology to be on the desks of our clients than to have another provider’ s.”
Financial institutions generated a record $ 23bn in fees underwriting debt last year, a high water mark spurred by low interest rates and a surge in borrowing by companies, according to Dealogic. Those fees have slipped in 2018 as debt sales have slowed and competition has intensified. The top 10 debt underwriters this year captured 48.6 per cent of the commissions generated on bond sales, the second lowest level over the past nine years and down from 55.2 per cent in 2010.
More than 30 banks have signed on to a competing bond syndication platform from Ipreo, which was initially backed by 11 firms including Goldman and BNP, as well as HSBC, UBS and Société Générale.
The new platform in development by JPMorgan, Citi and BofA— the top
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Wall St banks sign up to new platform to underpin bond revenues
Top debt underwriters aim to improve pricing technology and maintain market influence
three debt underwriters— should reduce the strain on their workforces. Financial groups have cut payrolls since the financial crisis to rein in costs. While trading of corporate and sovereign bonds has become increasingly electronified, the initial sale of debt remains a cumbersome process.
In an interview with the Financial Times, executives at the three founding banks on the project said the new venture would be housed in a thirdparty entity and it would be owned by the financial institutions that use the platform. The exact ownership structure has not yet been decided.
The platform will be used to announce new bond sales, communicate pricing information with investors, share credit ratings, prospectuses, term sheets and other documentation, process investor orders and ultimately allocate bonds to would-be buyers.
“ It should deliver cost savings and greater productivity for dealers and creates more efficiency on the investor side,” said Bob LoBue, co-head of JPMorgan’ s global fixed income syndicate.“
Brazil trucker strike hits suppliers of consumer staples
Multinationals count the cost after 10-day protest disrupted supply chains
Multinationals operating in Brazil are counting the cost to their revenues following a nationwide trucker’ s strike that brought the country to a near standstill, disrupting supplies and hitting Latin America’ s largest economy.
Unilever, producer of Dove soap to Magnum ice cream, was the first to quantify the damage when it warned last week that revenues in its second quarter, ending June 30, would be reduced by € 150m. Brazil accounts for 6 per cent of the Anglo-Dutch group’ s sales.
Others are expected to follow. Analysts at Goldman Sachs said:“ The challenges Unilever has faced in Brazil are unlikely to be entirely company-specific and we believe a similar headwind to other [ European ] consumer staples companies with a meaningful exposure to Brazil is likely to include AB InBev, Ontex, Heineken and Danone.”
Budweiser brewer AB InBev, which makes 16 per cent of its sales in Brazil, declined to comment. Rival Heineken said on Friday that although the strike had caused“ major disruption” to supply chains, the blow was cushioned by having a few weeks’ supply in the system. Stocks ran out in a few places but“ we have also seen volumes picking up after the strike ended,” Heineken said.
Coca-Cola said only that the strike, which lasted 10 days between late May and early June, had“ impacted” on its Brazilian operations.
Bernstein Research predicted that among US companies operating in Brazil, cosmetics group Avon, Colgate- Palmolive, Kimberly-Clark, Procter & Gamble and PepsiCo, among others, were likely to be hardest hit.
Verônica Brito, who manages a grocery store in central São Paulo, said that during the strike, the shop was short on perishables, such as dairy products— an almost empty shelf usually packed with milk and cream cheese was testimony to that.“ Some people started to get worried about the lack of goods but we managed to stay afloat,” she said.
Although things have now returned to normal, Viva Lácteos, the association of Brazilian dairy producers, an industry group that represents local and global companies, including Mondelez, Danone, and Nestlé, estimates the sector lost about R $ 1.3bn($ 349m) following the discarding of 360m litres of milk.
João Carlos Basilio, executive president of ABIHPEC, the body that brings together the makers of personal care and hygiene products in Brazil, including Unilever, Colgate-Palmolive, Avon and Procter & Gamble, said that before the strike the industry expected sales of more than R $ 118bn in 2018.
“ Now, it is likely that we won’ t have real growth,” he said.
The strike could cost Brazil’ s ailing economy more than R $ 15.9bn, shaving 0.2 per cent off gross domestic product this year, according to the government.
Meanwhile, the strike is also likely to have hit the Brazil-based meatpacker JBS and its peer BRF, the world’ s biggest poultry exporter. The Brazilian animal protein association, ABPA, said the sector lost R $ 3.15bn after 167 chicken and pork abattoirs halted operations while lorry drivers blocked roads and highways.