Aurelia Butler

Deutsche Bank (ETR:DBKGn)’s five-year credit default swaps (CDS) jumped 19 basis points (bps) from Thursday’s close to 222 bps, data from S&P Global (NYSE:SPGI) Market Intelligence showed.Five-year CDS on the German bank were trading at their highest levels since early 2019 and on Thursday saw their largest one-day rise on record, according to Refinitiv data.    UBS’s five-year CDS also shot up 14 bps from Thursday’s close to 130 bps, the data showed.Banking stocks fell sharply across Europe, with heavyweights Deutsche Bank and UBS hit hard by worries that the worst problems in the sector since the 2008 financial crisis were not yet contained.”Underlying sentiment is still cautious and in this environment no one wants to go into the weekend risk-on,” said Nordea chief analyst Jan von Gerich.European banks’ Additional Tier 1 (AT1) debt also came under fresh selling pressure, with Deutsche and UBS AT1s down around four and two cents in price, respectively, according to Tradeweb data.Bank AT1s have been hurt since the Swiss regulator ordered 16 billion Swiss francs ($17.5 billion) of Credit Suisse’s AT1 debt to be wiped out as part of its rescue takeover by UBS last weekend.Shareholders, who usually rank below debt investors when a company becomes insolvent, will receive $3.23 billion.Although European regulators and authorities in Asia have said this week they would continue to impose losses on shareholders before bondholders – unlike the treatment of bondholders at Credit Suisse – unease lingers. More

EDINBURGH (Reuters) -The European Central Bank must continue to raise interest rates to fight inflation, Bundesbank President Joachim Nagel said on Friday, playing down another sell-off in bank shares as a natural extension of the recent market volatility. The ECB has lifted rates at the fastest pace on record over the past year but recent turbulence on financial markets in the wake of prominent bank failures has raised doubts about its resolve to tighten policy further.But Nagel made clear that a pause is not in order as inflation, seen averaging around 6% in Germany, the euro zone’s biggest economy, will take too long to come back to the ECB’s 2% target.”Wage developments are likely to prolong the prevailing period of high inflation rates,” Nagel said in a lecture in Edinburgh. “In other words: Inflation will become more persistent.”Bank shares tumbled again on Friday, led by a 12% drop in Deutsche Bank (ETR:DBKGn) on worries that sector’s worst problems since the 2008 financial crisis were not yet contained.”I’m not so surprised that the markets are a little bit more volatile compared to before these events,” Nagel said, declining to comment on Deutsche Bank. “In the weeks after such interesting events, it is often a bumpy road.”ECB policymakers have spent the past week arguing that euro zone banks are well capitalised and hold ample liquidity, so the volatility is merely exported contagion and not a symptom of domestic weakness. LABOUR MARKETThe ECB also said that price and financial stability are not opposing goals and it has different tools to fight both. For inflation, the key issue is the jobs market, which is so tight now that labour shortages are an obstacle to production and unions have greater bargaining power over wages, Nagel said.Wage growth is already too high to be consistent with the ECB’s 2% target and, while a wage-price spiral is not yet underway, second-round impacts from income growth will keep domestic price pressures high.Firms are hoarding labour out of fear that hiring beyond the current economic dip will be too costly and the supply of labour is already shrinking in much of the 20-nation bloc, so structural tensions will remain, Nagel argued. “It will be necessary to raise policy rates to sufficiently restrictive levels in order to bring inflation back down to 2% in a timely manner,” Nagel said. “We should likewise keep policy rates sufficiently high for as long as necessary to ensure lasting price stability.” More

LONDON (Reuters) -Business activity across the euro zone unexpectedly accelerated this month as consumers splashed out on services, but weakening demand for manufactured goods deepened the downturn in the factory sector, surveys showed.Friday’s data add to evidence the bloc will dodge a recession and indicates the 20-nation region’s economy is resilient in the near term at least, potentially giving the European Central Bank room to continue tightening policy.The ECB will fulfil its 2% inflation mandate and monetary policy must be stubbornly tight to get the job done, Germany’s Bundesbank President Joachim Nagel said on Friday.But sentiment remains frail as turmoil in the U.S. and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.Still, S&P Global (NYSE:SPGI)’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, bounced to a 10-month high of 54.1 in March from February’s 52.0.That was well above the 50 mark separating growth from contraction and above all forecasts in a Reuters poll which had predicted a dip to 51.9.”The strong batch of euro zone flash PMIs for March means it is now all but certain that the economy expanded in Q1 while both employment conditions and price pressures remained very strong,” said Franziska Palmas at Capital Economics.S&P Global said the survey was consistent with GDP growth of 0.3% in the first quarter and accelerating to an equivalent rate of 0.5% in March alone. A Reuters poll earlier in March predicted a 0.1% contraction in gross domestic product (GDP) this quarter.Solid demand, at a 10-month high, meant firms were unable to complete all orders for the first time since June. The backlogs of work index rose to 50.1 from 49.5, just above breakeven.Growth in Germany expanded for a second month, boosted by a revival in services that more than offset a manufacturing decline in Europe’s largest economy, a German PMI showed.It was a similar story in France where business activity strengthened by more than forecast as the euro zone’s second-biggest economy benefited from growth in its dominant services sector.In Britain, outside the euro zone, services companies reported a second month of growth in March, suggesting the overall economy expanded in early 2023, and businesses also turned more upbeat about their prospects in the year ahead. Cash-strapped British households cut back on eating out and takeaways last month but buying food at supermarkets and shopping at discount stores gave an unexpected boost to retail sales, official data showed.SERVICES SHINEA PMI covering the euro zone’s dominant services industry jumped to 55.6 this month from 52.7, well above all forecasts in the Reuters poll which had predicted a decline to 52.5.To cope with the increase in activity, firms took on additional staff at the fastest pace since May last year. The employment index bounced to 54.3 from 51.9.However, it was a different picture for factories. The headline manufacturing PMI fell to 47.1 from February’s 48.5, confounding expectations in the Reuters poll for an uptick to 49.0.An index measuring output, which feeds into the composite PMI, slipped back below breakeven to 49.9 from last month’s 50.1.”The growth remains unbalanced, as manufacturing output and new orders fell, while services showed an unexpected uptick,” said Paolo Grignani at Oxford Economics.Record improvements to supply chains meant the cost of raw materials fell for the first time since June 2020, when the COVID pandemic was cementing its grip on the world. The euro zone PMI input costs index slipped to 46.4 from 50.9.That will likely be welcomed by policymakers at the ECB who increased interest rates last week, sticking with their fight against inflation despite recent turmoil in the banking sector.”With the employment index still rising it is clear that price pressures remain high. That leaves us comfortable with our forecast for the ECB to hike by a further cumulative 100bps, taking the deposit rate to 4.00%,” Palmas said. More

Investing.com — Banks are in the spotlight again, with Europe leading the way down after a mystery spike in Federal Reserve lending to other central banks. Payments company Block is the latest to feel the wrath of short-seller Hindenburg Research, and oil slumps as the Biden administration says it will take its time to refill the Strategic Petroleum Reserve.1. Banks under pressure again amid spike in Fed lendingEuropean banks slumped, as investors took fright at a gradual buildup of circumstantial evidence suggesting that the sector’s problems are far from over.The Federal Reserve on Thursday reported a sharp spike to $60 billion in loans under its FIMA repo facility, which makes dollars available to overseas central banks in emergencies. While there is no confirmation of any connections, the reporting period covers the hasty deal to merge Credit Suisse (SIX:CSGN) with UBS (SIX:UBSG), its stronger local rival.  UBS stock slumped on Friday after Bloomberg reported that both it and its new acquisition are under investigation in the U.S. on suspicion of having helped Russian oligarchs get around western sanctions. Deutsche Bank (ETR:DBKGn) stock also fell 12% to a five-month low, while its credit default swap spreads widened sharply, without any obvious trigger (other than a two-decade history of reckless mismanagement which its current CEO appeared to have ended).2. Hindenburg downs anotherFresh from its reverberating bet against India’s Adani Group, short-sellers Hindenburg Research landed a heavy blow against Block (NYSE:SQ), the payments company formerly known as Square.Block stock was down another 4.7% in premarket by 06:00 ET (10:00 GMT) after losing 15% on Thursday in response to the report.Hindenburg had accused the company, founded by ex-Twitter CEO Jack Dorsey, of systematically misleading its investors and clients and avoiding regulation. It highlighted the frequency with which rappers, in particular, boasted of using Block’s Cash App function for fraudulent or illegal purposes.Block said it is considering legal action. Hindenburg’s action has ensured the question of how to sustain the heroic valuations of tech companies with little or no profitability at a time of high interest rates.  3. Stocks set to open lower; regional banks down only a littleU.S. stocks are set to open lower again, reversing Thursday’s gains to put them on course for a negative week.  The spotlight will once again be on the banking sector, although the regional banks that have commanded so much attention over the last two weeks are down in premarket by far less than their European counterparts. The Fed’s weekly balance sheet showed that overall lending from the Fed’s facilities was broadly stable, albeit banks shifted more of their loans to the new and more lenient BTFP program.By 06:20 ET (10:20 GMT), Dow Jones futures were down 267 points, or 0.8%, while S&P 500 futures were down 0.7% and Nasdaq 100 futures were down 0.4%.With no major earnings due, and with Capitol Hill also set to quieten down after Thursday’s fireworks with TikTok CEO Shou Zi Chew, trading is likely to be sentiment-driven.4. Eurozone economy strengthened in March; U.S. durable goods dueThe Eurozone economy picked up in March, with S&P’s composite PMI hitting its highest level since June. That was due overwhelmingly to the services sector, which performed much better than expected in both France and Germany.Manufacturing, meanwhile, remained in contractionary territory, with the end of supply chain disruptions meaning that factories are working through a dwindling pile of backlogs at a faster rate.The U.K. PMI, by contrast, was not as strong as February’s red-hot inflation print and the Bank of England’s latest interest rate hike might have you believe.  5. Crude slumps as U.S. says it won’t rush to refill SPRCrude oil prices fell again after the U.S. government backed away from its intention to immediately refill the Strategic Petroleum Reserve, which it had depleted last year to take the edge off spiking world energy prices.By 06:30 ET, U.S. crude futures were down 3.6% at $67.44 a barrel, their lowest in a week, while Brent crude was down 3.4% at $73.33 a barrel.The administration is aiming to buy barrels for the SPR at around $70, but Energy Secretary Jennifer Granholm told Congress on Thursday it will be “difficult for us to take advantage” of the current market weakness, adding “we will continue to look for that low price into the future because we intend to be able to save the taxpayer dollars.” More

JD Wetherspoon has warned that “ferocious” inflation has hit its business, as the pub chain posted a small profit but sales continued to lag behind pre-pandemic levels. Like-for-like sales at the pub group were down 0.6 per cent in the 26 weeks to the end of January this year, compared with the same period ending in January 2020, the company said on Friday. Wetherspoons generated £916mn in half-year sales. The pub chain edged back into the black, posting half-year pre-tax profits of £4.6mn, down 90 per cent compared with the equivalent period in 2019 but up from a loss of £26.1mn in the first half of last year. “Inflationary pressures in the pub industry . . . have been ferocious, particularly in respect of energy, food and labour,” said Tim Martin, Wetherspoons’ founder and chair. The Friday trading update from Wetherspoons comes after UK inflation unexpectedly jumped to 10.4 per cent in February, according to the Office for National Statistics, driven by increased food and drink prices in pubs and restaurants.Food and non-alcoholic drinks inflation rose to 18.2 per cent, the highest level for more than 45 years, while increased alcohol prices in hospitality venues added 0.17 percentage points to the top-line inflation figure, the ONS said on Wednesday. Earlier this year, Wetherspoons upped prices by 7.5 per cent, increasing the price of a pint by 29p and food by around 75p. But Martin welcomed official projections that “inflation is on the wane, which will certainly be of great benefit, if correct”.Martin added that “supply or delivery issues have largely disappeared, for now” and despite a competitive labour market the company had “a full complement of staff”.He added that an improvement in sales and profits compared with the last financial year left the company feeling “cautiously optimistic about further progress in the current financial year and in the years ahead”.Sales performance improved further in recent weeks, with sales in the seven weeks to mid-March up 9.1 per cent compared with the same period in 2019. Greg Johnson, an analyst at Shore Capital, said that Wetherspoons is “a heavy discounting, high-volume business, so the fact that sales have strengthened further since the start of the year has to be seen as encouraging.” “If you look at their customer base and their pricing architecture, you would have thought it was one of the most exposed to the cost of living pressures . . . but the death of the UK consumer was overblown,” he added. Peel Hunt analysts said in a note that “if customers accept [price increases], as they have done in other parts of the pub sector, a strong recovery could follow. We are not yet assuming this.” More

Good morning. The EU leaders’ potpourri summit lived up to its billing yesterday. “What did we do all day?” remarked one very senior EU official on the way out of the meetings. One thing the EU’s 27 leaders did do, however, was talk about China. Not that you’ll find it in the official record, as our bureau chief points out.Plus, I hear from Viktor Orbán’s right-hand man on Budapest’s soured relations with Berlin and his general disdain for Germany’s chancellor.The dragon in the roomSearch the conclusions of the first day of the EU summit in Brussels and you will not find any mention of China, writes Sam Fleming.But the fiendishly difficult balancing act Europe faces in trying to define its relations with Beijing ran through the entirety of the meetings, which kicked off late yesterday morning and ended at the relatively civilised time of 9.20pm. China, observed one EU diplomat, was the “undercurrent to the summit”. It came up in “every discussion”, added another. UN secretary-general António Guterres set the tone early, as he warned the EU leaders against isolating China, according to people familiar with the private discussion. Guterres also told them that Beijing considered it still had a positive relationship with the bloc, the people added. As Guterres is well aware, however, the union is being strongly pulled in the other direction by the US, with hawkishness on China one of the few points of agreement between the Democrats and Republicans. Ursula von der Leyen, the European Commission president, echoed that tough tone towards Beijing in a joint statement with President Joe Biden earlier this month, declaring a “common interest” in preventing corporate technology from fuelling military and intelligence capabilities of their “strategic rivals”. That includes outbound investment — with both Washington and Brussels examining rules to screen flows of corporate cash towards China. But EU member states are at loggerheads over how far to tack towards the US line given how deeply ingrained their economies are with China, which is the biggest source of EU imported goods and its third-largest export market. Then there are Chinese president Xi Jinping’s recent efforts to portray himself as a peacemaking force in Russia’s war against Ukraine.Spanish prime minister Pedro Sánchez made clear his determination to continue engaging with China, announcing a state visit to Beijing shortly before the summit began. “If you look through all the economy and trade conclusions you won’t see the word ‘China’ written anywhere,” said one senior EU official. “But they are behind every line.”Chart du jour: Staying wokeIn anglophone countries, divides between progressive and conservative values — such as attitudes towards immigration — are increasingly related to age. This does not seem to be the case in continental Europe, writes chief data reporter John Burn-Murdoch.Missing MerkelFor all his antagonism towards Brussels, Hungarian prime minister Viktor Orbán could count on former German chancellor Angela Merkel to see his side during heated EU meetings. Not so much with her successor — and his apparent inability to control his coalition.Context: Months after a deal on phasing out combustion engines by 2035 was agreed by member states and the European parliament, Germany announced a last-minute U-turn earlier this month, throwing it into disarray and opening it up to additional demands from other member states.“This is really an anti-German way of managing European issues,” was the verdict of Balázs Orbán, Viktor’s political director (and no relation). He pointed to Merkel’s ability to both ensure German interests and also “to try to involve every country which is open to reach a compromise”.“German chancellor [Scholz] was part of that [Merkel] coalition and that power structure. So he’s a wise man. But his political coalition is doing something which is simply not good,” Orbán told the Financial Times yesterday. Socialist Scholz’s three-party coalition includes the Greens (who supported the combustion engine ban) and the Liberals (who didn’t). Liberal transport minister Volker Wissing has demanded exemptions to the rules for carbon-neutral e-fuels.Orbán isn’t the first to voice concerns over how Scholz has both struggled to control his coalition partners’ contrasting positions and failed to fill Merkel’s vacuum as the most powerful voice around the EU table.“In the end, it sends a very negative sign about leadership. And it is raising concerns in Budapest that what is going on here [in Brussels] and in Berlin as well,” Orbán added. “The weakness of the current German government is a problem not only for Hungary and not only for Germany, but for the entire Europe.”What to watch today EU leaders meet for second summit day in Brussels, including a briefing from ECB president Christine Lagarde.Nato secretary-general Jens Stoltenberg meets Norwegian premier Jonas Gahr Støre.Now read theseHostage politics: A row over government building extensions threatens to unravel Germany’s coalition.Brexit island: Spain and the UK are fighting over who should check passports in Gibraltar. Nuclear option: Hungary is in talks to increase France’s role in its atomic programme — and potentially reducing Russia’s. More

Central bankers have been at pains to stress that they can maintain a neat dividing line between actions taken to quell inflation, and those to fix turmoil in the banking system. So much so that the US Federal Reserve on Wednesday raised interest rates by a quarter point, despite the recent collapse of three midsized US lenders.Take a look at the central bank’s balance sheet, however, and it is clear financial instability has had an impact on monetary policy. Last week, the Fed pumped almost $300bn into the US banking system after unveiling a new facility, the Bank Term Funding Program. The facility, which offers to take lenders’ US Treasuries off them at par value in exchange for cheap central bank loans, is a direct response to the problems that befell the now defunct Silicon Valley Bank. Those problems owed a lot to poor risk management, with SVB making an ill-judged, oversized bet on long-dated US government bonds, which have plummeted in value over the past year. At root, however, the sharp reversal in the price of those bonds is down to the actions of the US central bank. Over the past year, the Fed’s focus on fighting inflation has led not only to bumper rate rises. It has also resulted in the run-off of more than $400bn-worth of US debt from the central bank’s balance sheet as bonds matured and were not replaced.That came after a long period when the Fed massively expanded its balance sheet under its quantitative easing programme to support markets and the economy by buying bonds to counter the impact of the Covid-19 pandemic. The Fed bought $800bn-worth of bonds between March 2022 and March 2021, and $2trn in Treasuries during the previous 12 month period. The renewed expansion of the balance sheet is expected to continue in the coming weeks. Michael Howell, managing director at Crossborder Capital, said: “In a world of massive debts, global markets must act as a whopping refinancing system where the capacity of capital — that is, balance sheets and liquidity — is key.” For some Fed watchers such as Ed Price of Ergo Intelligence, the reversal from contraction to expansion also fuels the sense that we are living through an era of “handbrake-turn” central banking. Fed chair Jay Powell has gone from hinting at a return of large half a percentage point rises to pumping hundreds of billions into the banking system. In theory, the balance sheet expansion ought to offset the impact of the Fed’s monetary tightening. That does not, however, mean prices are about to spiral. Milton Friedman might have said inflation is always and everywhere a monetary phenomenon, but the money central banks produce is only a small amount of overall supply. In the UK, the reserves, notes and coins linked to the Bank of England make up just under a fifth. The rest comes from deposits held at private financial institutions. The corollary of those deposits is credit creation. There have already been signs on both sides of the Atlantic that banks are tightening lending standards in response to higher interest rates and lower levels of liquidity. Powell acknowledged that more tightening was on the way, not only from rate rises, but from the banking turmoil, which would have an effect “equivalent to a hike”. However, no one knows quite how strong that turmoil-related “hike” will prove. As Claudia Sahm, a former Fed economist and founder of the Stay at Home macro blog, puts it: “No one put bank failures in the toolkit, but the reality is that’s what’s happened.”

Torsten Slok, chief economist at Apollo Global Management, adds: “This is a case of being careful what you ask for. Global central banks have over the past year tried to tighten credit conditions gradually, and with the ongoing headwinds to the banks, the tightening may come a lot faster.” It is possible that bank turmoil could dissipate, especially if the US limits the threat of bank runs through moves to guarantee all deposits, insured or otherwise. “Households and businesses built up excess savings during the pandemic and there is not so much excess leverage in the system,” says Sabrina Khanniche, senior economist at Pictet Asset Management. “The situation now is very different to 2008 as a result.” But the risk of an uncomfortable scenario still looms for the Fed, where a combination of rapid monetary tightening and banking stress triggers a lending crunch that will have a far more dramatic impact on demand than desired. A lending crunch and slowdown in the economy might help rein in inflation, but it may not be in a way central banks are keen to take credit for. [email protected]

Video: Fractured markets: the big threats to the financial system More

Being added to the list can potentially start a 60-day clock that could trigger much tougher penalties.”Enforcing our export controls is a crucial part of protecting American national security,” U.S. Deputy Secretary of Commerce Don Graves said in a statement following the announcement. “We are committed to using all of the tools at our disposal to establish how advanced US technology is being used around the globe.” ECOM International and HK P&W Industry Co Ltd were among those added to the list and did not respond to requests for comment. A spokesperson for the Chinese Embassy in Washington said “China strongly deplores and firmly opposes” moves by the United States to “abuse export control measures” and use “state power to suppress and contain foreign companies.””The U.S. side should immediately stop its wrong practices. China will take necessary measures to resolutely safeguard the legitimate rights and interests of Chinese companies,” the spokesperson added. The United States has used restrictions on exports of U.S. goods as a key tool to thwart Beijing’s technological advances, ratcheting up tensions between the two countries.The Commerce department, which oversees U.S. export controls, also added 18 other entities to the list from Turkey, the United Arab Emirates, Germany, Bulgaria, Canada, Indonesia, Israel, Malaysia, Saudi Arabia and Singapore. More