Aurelia Butler

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.UK banks were lambasted last year for failing to pass on interest rate rises to savers. Now that the Bank of England rate cycle appears to have peaked they seem to be making amends by engaging in a mortgage rate price battle. In theory, such largesse means profit margins will be squeezed. But lower funding costs could make up the difference. This week, both HSBC and Lloyds Bank-owned Halifax cut remortgage rates by as much as one percentage point. Average two- and five-year UK mortgage rates exceed 5 per cent but competitive new products are being priced at 4 per cent or below. Mortgage rates are being reduced in line with falling UK bond yields, swap rates and the expectation of policy rates cuts by the end of this year. For banks, intense mortgage competition can be expensive. Tightening mortgage spreads contributed to disappointing net interest margins at NatWest and Barclays last year. Typical spreads of 50 to 60 basis points at the end of last year barely covered costs.The UK housing market has weathered the rate hiking storm far better than some forecasts expected. Still, activity slowed, prices dipped and approvals for new mortgages fell by about a quarter last year. Volumes are now expected to rise. About 1.5mn fixed-rate mortgage deals are set to expire this year. Greater competition in the mortgage market will be helpful to borrowers. Arrears and possessions are already at historically low levels. This benign situation is expected to continue. But even for banks, lower mortgage rates do not necessarily mean profit pain. Two and five swap rates used to price mortgages have fallen sharply in recent months and are down almost 150 basis points since the summer. Eye-catching reductions in mortgage rate repricings are not as generous. Falling rates will not automatically put extra pressure on NIMs. Lex is the FT’s flagship daily investment column. If you are a subscriber and would like to receive alerts when Lex articles are published, just click the button “Add to myFT”, which appears at the top of this page above the headline More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Shipping giant AP Møller-Maersk will reroute ships from the Red Sea around Africa “for the foreseeable future”, after Houthi militants in Yemen escalated their attacks in the region.The move by Maersk came as container shipping rates shot higher this week and economists warned that the global economy would come under fresh inflationary pressure if the disruption continued. “The situation is constantly evolving and remains highly volatile, and all available intelligence at hand confirms that the security risk continues to be at a significantly elevated level,” said Maersk in a statement. “We have therefore decided that all Maersk vessels due to transit the Red Sea/Gulf of Aden will be diverted south around the Cape of Good Hope for the foreseeable future.”The world’s largest shippers have been abandoning the Suez Canal route connecting Asia and Europe despite US-led efforts to bolster maritime security in the region, following a swath of attacks by the Iranian-backed militants. The Houthis have launched at least 20 attacks on ships off Yemen’s coast in recent weeks and have vowed to continue targeting vessels in response to Israel’s war in Gaza. Maersk’s announcement illustrates how shippers are now preparing for a prolonged disruption. The longer distances container vessels are sailing around Africa have tightened the availability of ships and led to rates more than doubling since mid-December on the key Shanghai to Rotterdam route, rising to $3,100 per standard 40-foot container from $1,400, according to Xeneta.“This confirms that there are no quick solutions to this crisis,” said Peter Sand, chief analyst at Xeneta, a container market intelligence company. “Maersk and other shipping companies will now be thinking in months and quarters rather than days and weeks.”Economists warned that if the problems persisted it would slow the pace at which global price pressures subside and could delay the timing of expected interest rate cuts by central banks.Investors expect the US Federal Reserve and European Central Bank to start cutting borrowing costs as early as March in response to a rapid cooling of price pressures. But markets have scaled back these bets in the past week after a rise in eurozone inflation and signals that Fed officials want to keep borrowing costs high for longer.Ben May, director of global macro research at consultants Oxford Economics, said that based on IMF research the recent rise in shipping costs could add about 0.6 percentage points to global inflation if it was sustained for the rest of this year.This would slow the speed of disinflation and “could be another reason to believe that market expectations for the extent of policy loosening by the Fed this year have gone too far”, he said.Thomas McGarrity, head of equities at RBC Wealth Management, said: “If the Red Sea disruption persists, the knock-on impact will likely be felt by industries such as clothing retail, with negative implications for margins due to higher freight costs.”Western powers have deployed a number of naval vessels to the region to help provide protection for commercial shipping. But they have so far avoided a more robust response, such as targeting Houthi military facilities in Yemen, for fear of expanding the conflict. Shipping companies are widely seen as beneficiaries from the Red Sea problems as freight rates increase and investors bet that what is bad news for the global economy and retailers could bring better profits for the biggest container groups.Shares in Denmark’s Maersk are up almost 40 per cent since December 12 while those in German rival Hapag-Lloyd have increased two-thirds in the same period.A Maersk container ship on the Suez Canal in December. Shippers are now largely avoiding this route despite US-led efforts to bolster security More

LONDON (Reuters) – A 150 billion euro ($165 billion) deluge of government bond sales in January is fueling unease in euro area bond markets, a foretaste of a potentially record amount of public debt that markets will have to absorb this year. Bond yields, which move inversely to prices, have started 2024 higher after plunging in November and December. Germany’s 10-year yield, the euro zone benchmark, has risen to just over 2% from a one-year low of 1.896% last week.A trimming of investor bets on how much and how early central banks will cut interest rates this year has driven the bond selloff. Now adding to it, are concerns that markets will struggle to digest another year of hefty government debt sales.ING estimates that the euro area will issue around 150 billion euros of debt this month alone as governments seek to take advantage of the recent yield fall and investors look for new-year opportunities. There is 72 billion euros of net supply when redemptions are factored in.Inflation has driven euro zone states to increase welfare payments and public sector wages, while higher borrowing costs are adding to their interest bills, keeping debt issuance high.A similar amount of debt was issued in January last year, but it’s now coming after a powerful rally that looks like it’s nearing an end, said Societe Generale (OTC:SCGLY) interest rates strategist Jorge Garayo.”The current (yield) levels, they look difficult for the market to digest the amount of supply that is going to be coming,” he said. “For us, supply will be a worry and should have an upward impact on yields.”Michael Weidner, co-head of global fixed income at Lazard (NYSE:LAZ) Asset Management, said one concern is that governments plan to issue a large amount of longer-dated debt. Longer-dated bonds are generally viewed as more risky, so investors typically demand a premium to hold them.”We believe there will be more issuance in (longer-dated bonds), and how much duration the market’s ready to absorb is a bit of a question mark given the level of yields,” said Weidner. Germany plans to issue 10-year bonds this month, and Spain has already sold a 30-year maturity. ECB FACTOR Adding to investors’ worries is the fact that the European Central Bank (ECB), a hoover of government debt over the last decade, is extricating itself from the market.The ECB announced in December it would start to reduce its 1.7 trillion euro pandemic-era bond purchase programme – PEPP – by 7.5 billion euros a month in the second half 2024. It is already winding down another of its asset purchase schemes.When so-called quantitative tightening is taken into account, markets could have to absorb a record 675 billion euros of government debt this year, Barclays estimates, up 25 billion euros on last year.Weidner said he expects the gap between Italian and German bond yields to widen as Germany tries to bear down on its debt levels and the ECB, which has been a crutch for Italian bonds, steps out of the market.At around 168 basis points, that spread has widened roughly 10 bps over the past week but was still below peaks seen in recent years. Not everyone is concerned. Joost van Leenders, senior investment strategist at Van Lanschot Kempen, said inflation and central banks will continue to drive bond markets.”The economic and inflation cycles tend to be far more important than concerns about bond issuance,” he said. “Bond yields have fallen because inflation has fallen.”Governments will still be able to issue debt, said RBC Capital Markets’ chief European macro strategist Peter Schaffrik, especially as they also plan to redeem plenty of bonds, returning money to investors.”I don’t think there will be any failed auctions or anything like that, it’s just a question of the yield concession that the market demands.”($1 = 0.9122 euros) More

BUENOS AIRES (Reuters) – The rally in Mexico’s peso will probably lose some steam this year as an expected shift in central bank policy to a less restrictive approach could erode the currency’s attractive rate spread, a Reuters poll showed.In 2023, the peso had its strongest performance against the dollar in more than three decades, as the central bank – known as Banxico – drove inflows by leaving its key rate at a multi-year high of 11.25% for much of the year to lower inflation.But now the peso is seen trading at 18 per dollar at year-end, potentially losing 5.4% from around 17 on Wednesday, according to the median estimate of 25 currency strategists polled Jan. 2-4.The expected drop is bigger than a consensus inflation forecast of 4.0% – meaning the currency will undergo some pressure from narrower rate differentials ahead, apart from the usual adjustment to rising consumer prices.”Central banks will begin to ease in 2024 and we anticipate rate spreads between Mexico and the United States will decrease by 100-150 basis points,” said Montserrat Aldave, principal economist in Finamex.At 11.25%, Banxico’s rate continues to offer a big margin over the U.S. Federal Reserve’s range of 5.25%-5.50% for the cost of credit, which investors capitalize on in profitable so-called “carry trade” bets.Mexico’s central bank could weigh a rate cut in the first quarter of 2024, the bank’s governor said last month. Annual inflation stood at 4.32% in November, well below a 20-year record of 8.70% in August 2022.Meanwhile, the monetary outlook in the U.S. is less clear, even after the Fed’s latest minutes showed a growing sense among policymakers inflation is under control and concerns about downside risks for the economy from restrictive policy.Foreign exchange strategists are also on the lookout for events surrounding Mexico’s June 2 presidential election. Ruling party candidate Claudia Sheinbaum has a big lead over her main rival.”We do not expect any significant impact on the peso, since on previous (election) episodes volatility only increased one month before (the vote) and then dissipated afterwards,” Finamex’s Aldave said.Last year the peso gained 15%, surpassing the Brazilian real’s 9% advance. The real is set to end 2024 0.6% weaker at 4.95 per dollar, but still moving close to the 5.0 mark for a third consecutive year. (Reporting and polling by Gabriel Burin in Buenos Aires; Additional polling by Indradip Ghosh, Mumal Rathore and Susobhan Sarkar in Bengaluru; Editing by Andrew Cawthorne) More