Aurelia Butler

WASHINGTON (Reuters) -Some big U.S. banks have again started stockpiling cash to cushion potential loan losses due to growing worries over the war in Ukraine and the impact of inflation on the U.S. economy, although trading continues to be bright spot for Wall Street.JPMorgan Chase & Co (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS) and Citigroup Inc (NYSE:C) combined put aside a $3.36 billion in credit loss reserves in the first quarter, the banks said. That’s a reversal from the past 12 months when lenders released reserves after COVID-19-related losses failed to materialize, signaling lenders believe the economic rebound from that crisis may be short-lived as inflation soars and the Ukraine conflict roils markets and dampens global growth. “The prospect for higher rates and slowing economic growth likely mean increased credit losses,” said Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York. “The banks do not see much in the way of current economic problems, just the likelihood that weaker economic conditions are likely to develop.”Citigroup, the most global U.S. bank, bore the brunt, adding $1.9 billion to its reserves related to its Russia exposure and the war’s broader macroeconomic impact. The bank’s executives said it could lose $ 2.5 to $3 billion on its Russia exposure. JPMorgan, the country’s largest lender, on Wednesday added $902 million to its reserves, driven by “the probability of downside risks due to high inflation and the war in Ukraine,” as well as accounting for Russia-associated exposure. It has said it could lose $1 billion on its Russia exposure over time. Goldman likewise cited “macroeconomic and geopolitical concerns” among other reasons for its $561 million provision and said it will take a $300 million first quarter hit on Russia. Soaring inflation could dent consumer spending while aggressive Federal Reserve interest rates rises aimed at reining-in prices will likely crimp loan growth, analysts said.The war in Ukraine and Western sanctions could knock more than 1% off global growth this year and add two and a half percentage points to inflation, the OECD has said.Still, some banks like Morgan StanleyN > and Wells Fargo (NYSE:WFC) & Co have little direct Russia exposure. Wells Fargo, a domestic focused bank with a small capital markets business, actually released $1.1 billion of pandemic reserves.Wells chief executive Charles Scharf nevertheless warned on the economic outlook in a change of tone from previous quarters, noting rate hikes will “certainly” reduce growth. “The war in Ukraine adds additional risk to the downside,” he added.Wells Fargo’s shares were down 6% and Citi’s were up nearly 2%. TRADING, M&ABanks’ trading businesses, however, performed better than analysts had anticipated as clients rejigged portfolios in response to expected rate hikes and the war.Analysts had forecast trading revenue declines of 10% to 15% across the board compared with 2021 when central bank moves to stimulate the economy amid the pandemic saw equity indexes hit record highs and drove a trading bonanza across Wall Street. Goldman Sachs said global markets first quarter revenues rose 4%, driven by a 21% rise in fixed income revenues. Morgan Stanley (NYSE:MS)’s overall trading revenue fell just 6%. The banks’ share prices rose 1.3% and 2.7% respectively. L3N2WC2E1][L3N2WC2EO]”Equity and fixed income again delivered exceptional results, particularly in Asia and Europe as we supported our global clients amid a turbulent backdrop,” Chief Executive James Gorman told analysts on a conference call.JPMorgan also reported a better-than-expected trading performance on Tuesday, with overall markets revenues down just 3% compared to last year.Equity underwriting fees slumped though as stock market listings dried up due to volatility. Goldman Sachs and Morgan Stanley both reported an 83% decline in equity underwriting revenues.The picture for the M&A advisory business was mixed. Executives said pipelines remain healthy but some companies are pausing transactions until markets stabilize. Some deals initiated before the war were completed in the first quarter. Morgan Stanley said advisory revenues nearly doubled from a year ago driven by completed M&A transactions. Goldman Sachs said revenues at its advisory businesses were “essentially unchanged.” More

NEW YORK (Reuters) -U.S. stock investors are increasingly turning to the options market for protection against more downside on Wall Street as they worry the Federal Reserve will be less sensitive to equity market volatility as it hikes interest rates to fight inflation.Demand for puts, typically bought for downside protection, is in line with a trend that has seen investors ramp up hedging in recent months, as the Fed’s hawkish tilt roils markets after years of double digit gains. The one-month moving average of open puts for each open call on the SPDR S&P 500 ETF Trust (ASX:SPY), stands at 2.25, the most defensive it has been in at least the last four years, data from Trade Alert showed.Stocks pared losses last month, but the rebound stumbled in April, leaving the S&P 500 down 7% year-to-date. The Cboe Volatility Index, Wall Street’s “fear gauge,” recently stood at 21 and has spent most of 2022 well above its historic median of 17.6.”It all goes back to the Fed put… where the Fed does not have the equity market’s back right now,” said Chris Murphy, co-head of derivative strategy at Susquehanna.The term “Fed put” how investors describe the market’s belief that the central bank will stop tightening or even loosen monetary policy if stocks fall too steeply. One recent example investors often cite is 2019, when the Fed halted its rate hiking cycle after the stock market tumbled.Some investors believe policymakers are likely to be less reactive to market weakness this time around, however, as the central bank signals it is ready to fight the worst inflation in four decades with jumbo rate hikes and a rapid unwind of its balance sheet.”High and persistent inflation is turning the Fed from a suppressor of vol and source of returns to a source of vol and suppressor of returns,” analysts at BofA Global Research said in a note on Tuesday.Fund managers in the bank’s most recent survey said they believed the S&P 500 would have to fall to 3637 before the Fed stepped in to support markets – about 13% below this year’s lows. In another sign of nervousness, cash allocations among fund managers stood near their highest since April 2020. Stock investors could also be nervous about the potential for bond market turbulence to spill over into equity markets, said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.The ICE (NYSE:ICE) BofA MOVE Index, a measure of expected volatility in U.S. Treasuries remains close to the two-year high hit in early March.More investors also have been taking advantage of any strength in stocks to snap up options hedges. This is a departure from the entrenched trend of “buying the dip,” where investors put cash to work by buying more shares whenever the market pulls back. “Volatility levels are bid because when we do see stocks rebound, when we do see volatility come in, investors are quick to pounce on it,” Susquehanna’s Murphy said. The Russell 2000 small-cap index and the S&P 500 retailing exchange-traded fund have drawn defensive options positioning in recent weeks as well, analysts said.Steven Sears, president of investment adviser Options Solutions, which specializes in options strategies for high net worth individuals, said a murkier outlook for markets combined with sizeable unrealized gains that investors logged last year driving more clients to put on protective trades.”They are looking to lock those gains without selling,” Sears said. More

NEW YORK (Reuters) – Wells Fargo (NYSE:WFC) & Co and JPMorgan Chase & Co (NYSE:JPM) reported a rise in net interest income in the first quarter, as the U.S. Federal Reserve’s rate hikes help their bread-and-butter business –taking deposits and lending.The Fed raised rates by a quarter point in March to a 0.25%-0.5% range, and has flagged another half-point move on May 4. These moves, aimed at tackling soaring inflation of 8.5%, are expected to bring an end to the low interest-rate environment that banks have faced for most of the past decade, particularly through the COVID-19 pandemic. That should be good news for net interest income, a closely watched measure of how much money banks make from lending. It declined during the pandemic due to interest rate cuts and a drop in borrowing, but is now ticking up.Wells Fargo & Co led the pack, with net interest income for the first quarter rising 5% from a year ago. The bank also lifted its expectations for 2022, saying net interest income (NII) percentage growth could hit the mid-teens.”In January, we thought NII would be up about 8%. We’re almost doubling that to kind of the mid-teens … due to the loan growth we’ve seen, as well as the substantial move in rates,” chief financial officer Mike Santomassimo on a call with analysts. Overall loan growth was 3%. The NII from JPMorgan Chase & Co’s core banking businesses, excluding the markets business, increased 9% from a year earlier, the bank said on Wednesday. Total NII is expected to be more than $53 billion for 2022, the bank said, roughly in line with its February guidance.”NII is going to get much better. Things are going to normalize,” chief executive Jamie Dimon told analysts. The bank is still running the numbers and expects to give updated guidance on NII revenue at the bank’s investor day on May 23, chief financial officer Jeremy Barnum said. Analysts expect the bank to revise its guidance upwards. Still, some banks said the outlook for rising interest rates is not all rosy. Higher rates could weaken economic growth, crimp lending overall and discourage some companies from transactions that generate fees. Citigroup (NYSE:C)’s NII grew 3% over the first quarter of last year, but its Chief Financial officer Mark Mason, when pressed by analysts, said it was too soon say what higher rates will mean for Citigroup’s revenue this year. He left its revenue guidance at up by a “low single-digit” percentage. More

BRASILIA/SAO PAULO (Reuters) – The Brazilian currency’s monster rally may soon run out of gas, analysts and government officials say, as U.S. interest rate hikes and risks to the Chinese economy threaten the fundamentals of the world’s best-performing major currency.Brazil’s real has gained over 18% against the U.S. dollar so far this year, more than twice the rise of any other peer, as aggressive rate hikes drew in foreign investment flows seeking distance from the Ukraine war.While Brazil’s double-digit interest rates may still offer a lucrative carry trade for hot money, looming rate hikes from the U.S. Federal Reserve may narrow that gap quickly. China’s aggressive lockdowns to fight COVID-19 have also weighed on prices for the iron ore, soybeans and oil that Brazil exports.”There are two big risks to the real’s performance: the Fed raising rates more than expected and a sharp deceleration in the Chinese economy that could affect commodity prices,” said Alvaro Mollica, emerging markets strategist for Citigroup (NYSE:C).A note from his colleagues at Citi Economics on Thursday flagged “a weaker currency ahead” for Brazil, forecasting a year-end exchange rate of 5.19 reais per dollar – a nearly 10% depreciation from Wednesday’s close.Even in Brazil’s Economy Ministry, which has trumpeted the jump in foreign investment and perks of a stronger currency for fighting inflation, some officials doubt the trend will continue indefinitely. Right-wing President Jair Bolsonaro’s government, which generated huge initial optimism among investors, has had a mixed record on reforms as well as privatizing state assets.”I haven’t seen any structural factor, unfortunately. It all seems circumstantial,” said one official, requesting anonymity to give a frank assessment of the market. “The dollar came way down, even below where some institutions see its equilibrium … I think there’s room for some reversal.”The same official pointed out that Brazil’s main stock exchange, which has attracted a net 69 billion reais ($14.7 billion) in foreign flows this year, no longer looks so cheap in dollars or reais after an 11% runup this year.Another ministry source agreed that, apart from Brazil’s interest rates, the major drivers of the currency rally have been “external” and are subject to change.Not all officials are so skeptical.Fausto Vieira, undersecretary of macroeconomic policy at the Economy Ministry, said business-friendly regulation is boosting investment in areas such as sanitation, where private capital spending has jumped from 3 billion to 30 billion reais annually.The ministry projects some 360 billion reais in new private investments through 2025, helping to draw long-term foreign capital flows regardless of short-term market effects.However, that may hinge on this year’s election. Leftist former President Luiz Inacio Lula da Silva, who leads Bolsonaro in polling ahead of the October vote, has vowed to roll back much of the incumbent’s economic agenda.As the presidential race heats up, analysts warn that both Lula and Bolsonaro may resort to more populist rhetoric, raising investor concern about the country’s fiscal discipline.For now, Brazil’s risk premiums have come down, noted economist Jonathan Petersen of Capital Economics, which “may reflect fading concerns about fiscal sustainability and political risks.””But if our outlook for falling commodity prices and weakening economic growth proves correct, these concerns may re-emerge, especially prior to the election,” he told clients in a Thursday note, forecasting the exchange rate at 5.0 reais per dollar by the end of the year. More

Ashmore warned that Russia’s war in Ukraine could worsen growing inflationary pressures as the specialist emerging markets manager saw clients pull $3.7bn from its funds in the first quarter.The London-based fund reported a hefty 10 per cent reduction in assets under management to $78.3bn at the end of March — a fall that it blamed on Moscow’s invasion of Ukraine.“The principal economic impact of the war has been to push inflation higher and this is being felt across the world,” said Mark Coombs, Ashmore’s chief executive, on Thursday.The Ukraine war would have “far-reaching consequences for the existing world order,” said Coombs, echoing a warning from the IMF which described Russia’s aggression as “massive setback” for global economy’s recovery from the coronavirus pandemic. Ashmore had placed sizeable bets on Russian assets in the weeks leading up to the invasion of Ukraine and holds about $500mn in debt exposure to struggling Chinese property developer Evergrande, according to Bloomberg.The fund’s shares fell by as much as 9 per cent to hit a six-year low on Thursday before recovering to close slightly up.Institutions such as the IMF have warned that emerging and developing economies face the prospect of higher borrowing costs and capital outflows as a result of Russia’s actions. Food and energy prices globally have spiked higher owing to fears about supply disruptions in Russia and Ukraine, two of the world’s most important producers of key commodities including crude oil, natural gas and wheat.“Rising energy and food prices as a result of the Ukraine war are a big problem for many emerging market economies which were struggling to recover from the coronavirus pandemic even before the conflict started,” said Maarten-Jan Bakkum, senior emerging market strategist at NN Investment Partners in the Netherlands.Stock markets across the developing world have also weakened as the war in Ukraine has escalated with the MSCI emerging markets equity index down almost 10 per cent since the start of the year.Investors have also withdrawn $2.5bn so far this year from Vanguard’s flagship emerging markets exchange traded fund, the largest EM tracker.Net outflows from emerging market ETFs sold in the US and Europe reached $14.8bn in the first quarter, according to Morningstar, the data provider.Active fund managers that aim to pick winning stocks in emerging markets have also struggled. Two-thirds of the 246 global emerging markets fund managers which together manage assets of $500bn failed to beat the MSCI emerging markets benchmark in the first quarter, according to Copley Fund Research, a data provider,“Some global emerging market funds have lost a fifth of their value this year with Russia acting as a key driver of those losses,” said Steve Holden, chief executive of Copley Fund Research. Bakkum of NN Investment Partners said he feared that the war in Ukraine would intensify further and create even bigger problems across emerging markets. “There are already signs of social unrest in some developing countries. This is making the policy response more complicated as central banks in emerging markets are under pressure to hike interest rates in response to rising inflation” said Bakkum. More

Russia’s invasion of Ukraine has caused a “massive setback” for the economic recovery from the coronavirus pandemic, said the head of the IMF, with lower growth and higher inflation expected in most countries. Speaking at the Carnegie Endowment in Washington on Thursday ahead of next week’s IMF and World Bank spring meetings, Kristalina Georgieva said the economic fallout of the war in Ukraine is spreading across the world. Her analysis of the global economy was pessimistic, saying Russia’s invasion made “much worse” the squeeze on incomes for hundreds of millions of people around the world already suffering from higher food and energy prices.“This is a massive setback for the global recovery,” Georgieva said. “For the first time in many years, inflation has become a clear and present danger for many countries.”The fund’s managing director said that in its economic forecasts next week, the IMF would downgrade growth expectations for 143 countries around the world, representing 86 per cent of global gross domestic product. Although some commodity exporters were enjoying brighter prospects as prices for their exports increased, these would be easily offset by the downgrades in most countries. For those hardest hit, there would be “catastrophic economic losses in Ukraine [and] a severe contraction in Russia”, she added. As Russia and Ukraine are leading exporters of wheat and fertiliser, food insecurity would become a “grave concern” in areas such as sub-Saharan Africa and some Latin American countries.

With inflation hitting a fresh 40-year high in the US and a 30-year high in the UK this week, the IMF said its forecasts next Tuesday would also show rapid price increases would be more persistent than it previously thought. The task for central banks and economic policymakers, Georgieva said, was to “rein in high inflation and rising debt, while maintaining critical spending and building foundations for durable growth”.Georgieva was under no illusions how difficult this task would be and avoided making specific monetary policy suggestions while urging an end to the war in Ukraine. “In the face of this challenge, central banks should act decisively, keeping their finger on the pulse of the economy and adjusting policy appropriately. And, of course, communicating clearly,” she said. The head of the leading international financial institution also urged countries to recognise the threat of a fragmentation into economic blocs which would amplify the negative outlook she presented. “In a world where war in Europe creates hunger in Africa; where a pandemic can circle the globe in days and reverberate for years; where emissions anywhere mean rising sea levels everywhere — the threat to our collective prosperity from a breakdown in global co-operation cannot be overstated,” Georgieva said. More

The European Central Bank on Thursday stuck to its gradual timetable for winding down bond purchases in the third quarter without putting a firm date on when it will raise interest rates despite intensifying inflationary pressures in the eurozone.Policymakers on the central bank’s governing council, who met this week in Frankfurt, face a dilemma of how drastically to tighten monetary policy in response to record inflation while the risk grows of a sharp economic downturn caused by the fallout from Russia’s invasion of Ukraine.The ECB kept its main policy rate unchanged at minus 0.5 per cent and repeated its statement that the “calibration of net purchases for the third quarter will be data-dependent and reflect the governing council’s evolving assessment of the outlook”.“How the economy develops will crucially depend on how the [Ukraine] conflict evolves, on the impact of current sanctions and on possible further measures,” the ECB said.“The upside risks to the inflation outlook have intensified,” said Christine Lagarde, ECB president, adding that it could stay higher if price expectations continued to rise and supply chain bottlenecks worsened. “However, if demand were to weaken in the coming months it would weaken inflationary pressures.”“We’ll deal with interest rates when we get there,” Lagarde said, emphasising that rising price pressures had “reinforced” the council’s expectation that it would end net asset purchases between July and September.The euro fell slightly while eurozone bonds rallied following the ECB announcement. The single currency was unchanged against the dollar at $1.088, giving up its 0.2 per cent gain ahead of the decision. Germany’s 10-year yield fell 0.03 percentage points from earlier highs to 0.77 per cent.Markets are pricing in an increase in the ECB’s deposit rate back above zero by the end of the year and to almost 1.5 per cent by the end of next year. But the central bank said any rate rise would be “gradual” and would only take place “some time” after it stops net bond purchases.Katharine Neiss, chief European economist at PGIM Fixed Income, said the announcement “suggests the door is now wide open to rate rises later this year” but given the risk to growth from the Ukraine war “the debate among the governing council will likely shift away from when to start raising rates, to when to stop”.In contrast, many other central banks have already stopped buying bonds and started raising rates. This week, the Reserve Bank of New Zealand and the Bank of Canada both raised rates by half a percentage point, while monetary authorities in South Korea and Singapore also tightened policy.The US Federal Reserve is expected to raise rates by as much as a half a percentage point at its policy meeting in May, while the Bank of England has increased its main rate three times since December and is expected to do so again at its meeting next month.The ECB accelerated its timetable for ending net bond purchases at its meeting last month. Since then eurozone inflation has risen to a new record high of 7.5 per cent in March, intensifying calls for the central bank to move even faster in withdrawing its stimulus.However, the ECB continues to forecast that inflation will dip back below its 2 per cent target in two years’ time, as energy prices retreat and supply chain bottlenecks ease.The central bank on Thursday also alluded to its plan to introduce a potential “new instrument” to make targeted bond purchases in response to any unwarranted sell-off in the bonds of a particular country or group of countries.“The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the governing council’s efforts to achieve its goal more effective,” it said, adding that “under stressed conditions” it would aim to maintain such flexibility.There has been a sell-off in eurozone sovereign bond markets since the start of this year, as investors anticipate that soaring inflation will force the ECB to stop buying bonds and start raising rates soon.The spread between German and Italian 10-year borrowing costs has increased only slightly, however, rising from about 1.3 percentage points to 1.6 percentage points since the start of the year. Still some policymakers fear the fallout from the Ukraine war could reduce growth and increase debt levels in southern European member states, pushing up their borrowing costs faster than for other countries. More

Fast Retailing, Asia’s largest clothing retailer and owner of the Uniqlo fashion brand, has said it expects a significant drop in profits in China this year as it warned on the impact of the country’s Covid-19 restrictions. “We are very much in trouble with China’s zero Covid policy, in terms of profit and the livelihoods of our employees,” Tadashi Yanai, chief executive of the Japanese group that is seen as a bellwether for multinationals’ performance in China, told reporters on Thursday. “Shanghai has been forced to suspend operations and shipping from the port has become difficult,” he added.Yanai’s blunt remarks come as a series of lockdowns in cities across Chinese adds pressure on transport and logistics in the country, exacerbating the economic fallout from the government’s coronavirus containment policies. Fast Retailing’s Greater China business, which includes Hong Kong and Taiwan, accounts for 55 per cent of its international operating profit, which on Thursday the company said had hit Y100.3bn ($801mn) for this six months to February.Mainland China is the company’s largest market with 863 stores, compared with 802 in its home market. In March, 133 of its Chinese shops, including those in Shanghai where strict lockdown measures are in place, were forced to close. International clothing brands including H&M and Nike, already suffering from the impact of a consumer boycott after distancing themselves from Xinjiang cotton, have also warned that the lockdowns will drag on their businesses in China. Despite the setbacks, Fast Retailing raised its full-year net profit forecast for the year to the end of August, to Y190bn ($1.5bn). That is up 9 per cent from the previous forecast of Y175bn in January, as Europe, North America and the rest of Asia are expected to boost profit.Yanai also warned on the impact of the weakening yen, which this week plunged to its lowest level against the US dollar in nearly two decades, against the backdrop of rising shipping and raw material costs. “The weak yen has no merit whatsoever. From the perspective of Japan as a whole, there are only disadvantages,” said Yanai. “Japan is engaged in the business of importing raw materials from all over the world, processing them, adding value to them, and selling them. In this context, there is no advantage if the value of a country’s currency weakens.” More