European Banks Commit to €120 Billion Shareholder Returns from Interest Rate Gains

Traders' Opinions

Economic

Summary:

European banks target returning over €120bn to shareholders from their 2023 results, capitalizing on surging interest rates.

European bank executives are facing mounting pressure to enhance their institutions' valuations and regain investor confidence, which has waned due to dividend bans and windfall taxes imposed across the continent in recent years.

According to data compiled by UBS, the largest publicly listed European banks have committed to distributing €74 billion in dividends and €47 billion in share repurchases. This marks a significant 54 percent increase in capital returns compared to the previous year and surpasses figures seen in any year since at least 2007.

In the past three years, share repurchases have emerged as the primary driver of growth, a stark contrast to the minimal repurchase activity observed among the top 50 banks leading up to 2020. European banks have capitalized on their bolstered profits resulting from rapid interest rate hikes to repurchase stock at discounted prices.

While investors have greeted these capital returns cautiously, citing the need for high and sustainable yields, there remain concerns about the long-term sustainability of these actions, as expressed by Antonio Roman, portfolio manager of the Axiom European Banks Equity fund.

This surge in capital returns represents a notable shift from four years ago when the European Central Bank mandated a freeze on dividends and share buybacks at the onset of the Covid-19 pandemic, significantly denting the sector's reputation among international investors.

Over the past two years, European banks have reaped a €100 billion windfall from the spread between the interest they pay out on deposits and the interest they receive on loans, known as net interest income.

Some of the most notable distribution announcements this year include UniCredit in Italy committing to pay out €8.6 billion—equivalent to its entire 2023 profit—to investors. Barclays recently pledged to return £10 billion to shareholders over the next three years, while Standard Chartered announced it would return $5 billion over the same period.

However, analysts caution that the level of shareholder returns is likely to decline next year as central banks reduce interest rates, prompting banks to explore alternative revenue streams.

In recent years, European regulators have eased their stance on share buybacks as banks have fortified their capital reserves. However, there is a growing discomfort among regulators regarding shareholder returns that surpass the annual profits of banks.

This month, UBS announced plans to increase its dividend by 27 percent to 70 cents per share in May, alongside a share buyback program of up to $1 billion in 2024. The implementation of this capital return program was halted when UBS agreed to acquire Credit Suisse last spring.

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Alex

Economic

Expect a sigh of relief across the Eurozone this Friday. Word on the street is, the latest data’s about to show a dip in the core inflation rate – yeah, the one that ignores the seesaw game of energy and food prices – to below 3% for the first time in a couple of years. This is big news, especially for the folks over at the European Central Bank (ECB) who’ve been biting their nails off ahead of their March 7 meeting, pondering over the right time to start slashing interest rates.

The Rollercoaster Ride of Eurozone Inflation Rates

Since peaking at a jaw-dropping 10.6% back in October 2022, the headline inflation rate in the Eurozone has been taking a steady dive. Economists, the kind who spend their days making predictions, reckon the annual price hikes will cool off from January’s 2.8% to 2.5% in February. But let’s not pop the champagne yet. This dip might not be enough to convince the ECB’s decision-makers that we’re close to hitting their sweet spot of a 2% inflation rate, an important threshold that could trigger rate cuts.

Peter Schaffrik from RBC Capital Markets dropped a truth bomb saying we’re witnessing “one of the last months where base effects will exert a significant drag” on inflation. Translation: the slowdown in inflation we’ve been cheering for might start dragging its feet. The minutes from the ECB’s latest pow-wow hint at a possible downward revision of this year’s inflation forecast come March. But it’s not all smooth sailing. The consensus is that easing off the pedal too soon could wipe out the progress made so far in taming inflation.

A Deep Dive into Consumer Expectations and Economic Indicators

Let’s talk expectations – not the kind you had for your last Tinder date, but what consumers are thinking about inflation and the economy. The ECB’s Consumer Expectations Survey for January 2024 revealed some interesting tidbits. For starters, folks think inflation over the past year was at 6.0%, down from 6.9% the previous month. They are a little less optimistic about the next 12 months and think inflation will rise a little.

When it comes to how much money people think they’ll make and spend, expectations for income growth haven’t budged, while guesses on spending growth have ticked up a notch. On the brighter side, consumers are feeling slightly less gloomy about economic growth and are somewhat optimistic about finding jobs or not losing the ones they have.

The housing market seems stable with expectations for home price growth unchanged. However, folks are eyeing a drop in mortgage interest rates over the next year, which could be good news for potential homebuyers. Speaking of buying, access to credit appears to be getting a smidge easier, with fewer people applying for credit recently.

There you have it – a deep dive into the Eurozone’s inflation drama and the economic vibes on the street. So, will the decline in inflation persist? What do you think?

Source：Cryptopolitan

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Thomas

Economic

A gathering “perfect storm” — due to various developments, several of which are quite deliberate — now threatens to wreak much devastation in the global South, and is likely to most hurt the poorest and most vulnerable.

Globalisation's protracted decline

The age of globalisation had mixed consequences, unevenly incorporating national markets for labour, goods and even some services. It ended gradually, with the trend far more pronounced following the protracted worldwide stagnation since the 2008 global financial crisis.

Sometimes still referred to as the Great Recession, the crisis spurred Western central banks to resort to unconventional monetary policies, mainly “quantitative easing”, to keep their economies afloat. But easier credit enabled more financialisation and indebtedness, rather than promoting a recovery, let alone sustainable development.

But the end of the era of globalisation did not mean a simple return to the status quo ante. Most economies had been transformed irreversibly by economic liberalisation, both nationally and internationally, with dire and lasting consequences.

Market pressures for fiscal austerity were strengthened by conditionalities and advice from international financial institutions. This inevitably led to deep cuts in government spending, leaving little for public investments, which might contribute to the recovery of the real economy.

Interest rate hikes accelerate stagnation

The 2008 Wolfowitz doctrine, which emerged late in the Bush Jr presidency, was revised by the Obama administration to launch the second Cold War. The Covid-19 pandemic and the last two years of war and sanctions have worsened supply-side disruptions, exacerbating “cost-push” inflation.

Some prices spiked due to opportunistic market manipulation by investors and speculators as well as deliberate disruptive interventions for political advantage. The rule of law — and even once sacred property rights — has been sacrificed for political expediency, undermining trust, especially in states.

Hence, concerted interest rate hikes by influential Western central banks have proved to be an unnecessary, inappropriate and blunt demand-side tool to address contemporary inflation driven primarily by supply-side factors.

Instead of addressing inflation due to supply disruptions, higher interest rates have cut both private and government spending, resulting in less demand, jobs and incomes in much of the world.

In the US, successive presidents maintained full employment since Obama inherited the 2008 global financial crisis. Uniquely, its central bank, the US Federal Reserve, has a dual mandate to maintain full employment and financial stability.

All over the world, the deliberate and concerted interest rate hikes of 2022 and 2023 have proved to be both contractionary and biased against labour and jobs.

Global South's hands tied

Policymakers in the global South are greatly constrained by their circumstances. Exposed to global markets and with limited fiscal and monetary policy instruments at their disposal, they are captive to pro-cyclical policy biases.

The International Monetary Fund and other international financial institutions tend to demand fiscal austerity conditionalities in return for any credit relief provided.

Thus, recipient governments are subject to spending constraints instead of providing relief. Worse, many legislatures have imposed unnecessary spending constraints on themselves, supposedly to enhance government fiscal credibility.

Supposedly independent central banks have further compounded monetary policy constraints. Such central banks are primarily responsive to international and national financial interests rather than national policy priorities.

Following monetary and financial liberalisation in recent decades, developing countries are much more exposed to debt crises worse than those experienced in the 1980s.

Then, governments in Latin America, Sub-Saharan Africa and elsewhere had borrowed heavily, mainly from US and UK commercial banks. After US Fed chair Paul Volcker raised interest rates sharply from 1980, severe fiscal and debt crises paralysed many of these governments for over a decade.

The debt exposure level is much higher and funds are borrowed from varied sources, significantly more market-based and non-bank. Governments have also provided guarantees for state-owned enterprises to borrow heavily, but less accountably than with sovereign debt.

New divides in post-unipolar world

The unipolar world that emerged after the end of the first Cold War briefly saw US hegemony being unchallenged. The Organisation for Economic Co-operation and Development developed policies for the global North in trade, investment, technology, finance, tax and other vital areas, typically at the expense of the South.

More recently, the “new Cold War” or geopolitical policies, including illegal sanctions, have frustrated developing countries' aspirations to reach the Sustainable Development Goals, adapt to global warming and its effects and retrieve a fairer share of global corporate income tax revenue.

With most economies barely growing, and efforts being made by many governments to reduce imports, export opportunities have become more uncertain and constrained, ending a crucial premise for globalisation. With higher interest rates, even finance has abandoned developing countries in “flights to safety” to the US.

Lacking the “exorbitant privilege” of issuing the US dollar, still the world's reserve currency, most developing countries lack monetary, fiscal and policy space to strengthen their economic position. Unlike rich nations, which borrow in their own currencies, most developing countries remain vulnerable to foreign exchange rate vagaries.

Poorest getting poorer

With Obama's “Pivot to Asia” strategy marking the launching of the US' efforts to check China, its lending to developing countries, including in Sub-Saharan Africa, fell from around 2016.

Despite higher borrowing costs, many of the poorest countries turned to private creditors. But private market lending to poor nations dried up from 2022 as the US Fed raised interest rates sharply for almost two years.

As debt service costs soared, distress risks have risen sharply, especially in the poorest nations. While not obviously a conspiracy against the global South, the interest rate hikes demonstrate that there is little concern for the predicament of the worst off in the poorest countries.

Meanwhile, poverty in the poorest countries has not declined for over a decade.

With international disparities growing at the expense of the poorest people in the poorest nations, the desire to emigrate continues to rise, although migration is mainly unaffordable to the poorest.

Source: The Edge Malaysia

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Economic

Forex

Will PCE gauge ease or fuel inflation worries?

Even though the Fed has made great progress in its bid to bring inflation in the US under control, the next phase to get it all the way down to 2% is proving to be a little more difficult. The CPI measure of inflation has been stuck above 3.0% for some time now and core CPI was unchanged at 3.9% in January.

US Dollar Eyes PCE Inflation Data After CPI Scare_1

The inflation picture according to the Fed’s preferred PCE measure has been somewhat more encouraging lately, particularly when focusing on the six-month annualized rate. The headline PCE price index stood bang on the Fed’s 2.0% target in December and the core PCE price index was at 1.9% by this metric. However, the year-on-year rates still have some ground to cover and came in at 2.6% and 2.9%, respectively, in December.

For January, the core PCE price index is forecast to have cooled slightly lower to 2.8%, although the month-on-month rate is projected to have picked up to 0.4%. A stronger-than-expected reading, particularly in the month-on-month rate, would likely further stoke fears about high inflation rearing its ugly head again.

The big repricing

The recent run of upbeat indicators out of the world’s largest economy has put markets in a spin, prompting a sharp rethink on the expected Fed rate path. Markets were pricing almost seven rate cuts for this year at one point in January. A month later, those dovish bets have been scaled down to less than four cuts.

On the bright side, investors are now better aligned with the Fed’s thinking, although there is still some repricing to go as the Fed’s latest dot plot predicted three 25-bps rate cuts in 2024. Any further upside surprises in the inflation data following the CPI and PPI beats have the potential to spark some volatility across the major asset classes, including bonds and equities.

Can the dollar extend its uptrend?

Treasury yields have been steadier lately but could resume their rally if there’s another hotter-than-expected inflation print. A jump in yields could be enough to inject some life into the US dollar, which has been drifting lower over the past 10 days, even against the beleaguered yen.

The pair has been struggling to advance past the 150 level, losing momentum as it approaches the November peak of 151.92 yen. A strong PCE report might be what it takes to jumpstart the stalled uptrend and push the dollar to a new high above 152 yen. US Dollar Eyes PCE Inflation Data After CPI Scare_3

US Dollar Eyes PCE Inflation Data After CPI Scare_3

However, there are significant downside risks too for the greenback in the event of a miss in the core PCE price index. Whilst there are signs that the dollar’s latest upswing is running out of steam, it has nevertheless rebounded by around 2.5% against a basket of currencies this year and by more than 6% against the yen. A selloff could therefore stretch at least until the 50-day moving average in the 146.60 region if it turns into a negative correction.

Slowing consumption could be a good thing

Investors will also be watching the latest numbers on personal income and personal consumption that will be released alongside the PCE price indices. Personal income is expected to have increased by 0.4% m/m in January versus 0.3% in December. More importantly, personal consumption is forecast to have risen at a more moderate pace of 0.2% in January after surging by 0.7% in December.

US Dollar Eyes PCE Inflation Data After CPI Scare_4

A slowdown in consumer spending could ease concerns about an overheating economy and so would likely be welcomed by equity markets, though not so much by the dollar. However, markets would not react as positively if there’s a sudden deterioration in consumption as investors are positioned for a soft landing in the US economy. Anything that questions that view would weigh on risk sentiment.

Also coming up

In other data due this week, durable goods orders for January will be watched on Tuesday, along with the consumer confidence index for February. On Wednesday, the second estimate of Q4 GDP might attract some attention, though no change is anticipated to the advance estimate of 3.3% annualized growth.

Closing the week on Friday will be the ISM manufacturing PMI for Friday. It’s expected that manufacturing activity improved slightly in February, with the PMI edging up to 49.5.

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Ukadike Micheal

Economic

Stocks

On February 26, the Asia-Pacific stock market showcased a diverse array of movements, with the Japanese market marking a second consecutive day of gains while Hong Kong stocks faced a second day of declines. The nuanced shifts in various indices within the region underscore the multifaceted nature of market dynamics influenced by global economic trends, regional geopolitical tensions, and domestic economic conditions.

Hong Kong's Hang Seng Index, reflecting the region's economic and financial hub, experienced a 0.5% decline, settling at 16,634.74. This downturn was influenced by a variety of factors, including concerns over global trade disruptions and ongoing geopolitical uncertainties. The market sentiment in Hong Kong can often be sensitive to developments in the broader global economy, making it susceptible to shifts in investor confidence and sentiment.

In contrast, Japan's Nikkei 225 Index demonstrated resilience, posting a 0.3% increase to reach 39,233.71. The Japanese market's performance is not only impacted by global economic factors but is also intricately tied to domestic economic conditions and policies. The country's export-driven economy is influenced by global trade dynamics, and shifts in the yen's value against major currencies can further impact the performance of Japanese equities.

The Shanghai Composite Index, representing Chinese companies, witnessed a 0.9% drop to 2,977.02 on February 26. China's economic indicators, including manufacturing data and trade figures, play a pivotal role in influencing market movements. Concerns about a potential economic slowdown, coupled with disruptions in the global supply chain, contributed to the decline in the Shanghai Composite Index.

Singapore's FTSE Straits Times Index weakened by 0.5% to 3,167.87, reflecting the city-state's status as a key financial hub in the region. Singapore's economy is closely linked to global trade and finance, and any shifts in economic sentiment or disruptions in international trade can impact the performance of its stock market.

South Korea's KOSPI Composite Index registered a 0.8% decline to 2,647.08, indicating the sensitivity of the market to both domestic and international factors. As a major player in the technology and manufacturing sectors, South Korea's stock market is influenced by global demand for its exports, particularly in the semiconductor industry.

Australia's S&P/ASX 200 Benchmark Index recorded a marginal 0.1% increase to 7,652.80. Australia's economy, closely tied to commodity prices and its resource sector, can be affected by shifts in global demand and supply dynamics. The performance of the Australian stock market reflects the broader economic conditions in the country.

Within the Hang Seng Index constituents, notable movements included a 5.3% increase in shares of property management company Country Garden Services. This surge could be influenced by specific factors related to the company, such as positive earnings reports or strategic business developments.

Conversely, Hong Kong witnessed the largest decrease in shares of sporting goods retailer Li Ning, with a 3.8% decline. This decline may be attributed to factors like weaker-than-expected financial results, changes in consumer behavior, or broader economic concerns impacting the retail sector.

Among the Nikkei 225 Index constituents, pharmaceutical company Chugai Pharmaceutical experienced the largest increase, with shares rising by 6.4%. Positive developments in the pharmaceutical industry, such as successful clinical trials or regulatory approvals, could contribute to such notable increases.

In contrast, games software company NEXON saw the largest decrease, with shares weakening by 3.5%. This decline might be linked to factors like disappointing earnings, concerns about the competitive landscape, or broader challenges facing the gaming industry.

The fluctuations in these individual stocks within the indices highlight the diverse factors influencing market movements. Investors, therefore, need to consider a multitude of variables, ranging from company-specific developments to broader economic trends, when making investment decisions.

The decline in Hong Kong stocks and the rise in Japanese equities on February 26 are indicative of the delicate balance that investors must navigate. The mixed performance across different markets in the region emphasizes the need for a nuanced understanding of the unique factors influencing each economy and market.

The Shanghai Composite Index's drop on February 26 underscores the concerns about China's economic trajectory. As one of the world's largest economies, developments in China can have far-reaching implications for global trade, supply chains, and commodity prices. Investors will closely monitor Chinese economic indicators, such as GDP growth, industrial production, and trade data, to gauge the country's economic health and its impact on the broader Asia-Pacific region.

Singapore's FTSE Straits Times Index's decline highlights the vulnerability of financial hubs to changes in global economic conditions. The city-state's reliance on international trade and finance makes it susceptible to shifts in global sentiment and economic trends. As the global economic landscape evolves, Singapore's stock market is likely to reflect these changes.

The decline in South Korea's KOSPI Composite Index on February 26 could be influenced by factors such as global semiconductor demand, geopolitical tensions, and domestic economic conditions. South Korea, a major player in the technology sector, is particularly sensitive to developments in the semiconductor industry. Investors will closely monitor indicators like semiconductor sales and export data to assess the health of South Korea's economy.

Australia's S&P/ASX 200 Benchmark Index's marginal increase suggests a more resilient performance. The Australian economy's ties to commodity prices, particularly in the mining and resource sectors, position it uniquely in the Asia-Pacific region. As global demand for commodities fluctuates, Australia's stock market may experience varying degrees of impact.

The movements within the Hang Seng Index constituents provide insights into the specific dynamics of Hong Kong's market. The increase in shares of property management company Country Garden Services suggests positive sentiment in the real estate sector, while the decline in shares of sporting goods retailer Li Ning may reflect challenges in the retail industry.

Within the Nikkei 225 Index constituents, the notable increase in shares of pharmaceutical company Chugai Pharmaceutical aligns with broader trends in the healthcare sector. The decline in shares of games software company NEXON may be indicative of challenges or shifts within the gaming industry.

The technical viewpoint adds another layer of analysis to these market movements. The decline in Hong Kong stocks and the rise in Japanese equities coincide with shifts in regional refining activities and global trade disruptions. This technical aspect underscores the interconnected nature of financial markets, where developments in one sector can have cascading effects on others.

The recent difficulties in securing U.S. diesel, as mentioned in the technical viewpoint, have complicated an existing supply crunch in Europe. This situation contributes to the challenges faced by European markets, impacting sectors such as transportation, manufacturing, and energy. The fluctuations in diesel prices and supplies have broader economic implications, affecting businesses and consumers alike.

Source: Market Watch

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Ukadike Micheal

Economic

Forex

Bank of England's deputy governor has emphasized the need for increased research into non-bank lenders to mitigate the risk of a potential "credit crunch sourced in market-based finance." Speaking at a conference in London, she stressed the significance of understanding the dynamics of market-based finance's willingness to lend to highly leveraged corporates, as any shift could have far-reaching implications for the real economy.

The call for more research comes amid growing concerns about the stability of non-bank lending institutions and their role in the broader financial system. With the potential for market-based finance to influence corporate lending, there is a heightened need to comprehend the intricacies of these entities and their impact on the overall credit landscape.

Furthermore, the deputy governor urged researchers to delve into ways to simplify bank capital rules, aiming to reduce complexity in the financial regulatory framework. The complexity of capital rules can pose challenges for financial institutions in navigating regulatory requirements, and streamlining these rules could contribute to a more efficient and transparent financial system.

Additionally, she emphasized the importance of exploring the relationship between high capital standards and long-term financial success. Understanding how stringent capital requirements affect the financial health and resilience of banks is crucial for striking the right balance between stability and profitability in the banking sector.

From a technical viewpoint, the call for increased research into non-bank lenders aligns with the broader efforts to enhance financial stability. Non-bank financial institutions, often referred to as shadow banks, have grown in significance over the years, playing a substantial role in providing credit to various sectors of the economy. However, the lack of regulatory oversight comparable to traditional banks raises concerns about their potential impact on systemic stability.

Research into non-bank lenders can shed light on their risk management practices, funding structures, and interconnectedness with the broader financial system. Understanding these aspects is crucial for regulators to develop effective policies that address potential vulnerabilities and mitigate systemic risks emanating from the non-bank sector.

The emphasis on simplifying bank capital rules aligns with the ongoing efforts to create a regulatory framework that ensures both financial stability and economic growth. Complex capital rules can be burdensome for banks, requiring significant resources for compliance. Simplifying these rules can enhance the efficiency of regulatory processes, allowing banks to focus on their core functions of facilitating economic activity through lending and investment.

Exploring the interplay between high capital standards and long-term financial success is a nuanced challenge. While stringent capital standards contribute to financial resilience and protect against potential shocks, they may also impact banks' ability to generate returns. Striking the right balance is crucial, as overly stringent requirements could stifle lending and economic growth, while inadequate standards may expose the financial system to vulnerabilities.

The deputy governor's call for more research into non-bank lenders, simplification of bank capital rules, and understanding the relationship between capital standards and financial success reflects the ongoing efforts to enhance the resilience and efficiency of the financial system. As researchers delve into these areas, their findings can inform policy decisions and contribute to the development of a regulatory framework that fosters stability, transparency, and sustainable economic growth.

Source: Financial Times

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Zi Cheng

Traders' Opinions

Forex

Fundamental Analysis

During Monday’s European session, the NZD/USD experiences a sharp decline, dropping to 0.6167 from the previously noted round-level resistance of 0.6200. This downward movement is attributed to mounting pressure on the Kiwi asset as investors turn their attention to the upcoming interest rate decision by the Reserve Bank of New Zealand, scheduled for Wednesday.

Anticipation surrounding the RBNZ's announcement centers on the expectation that the Official Cash Rate will remain unchanged at 5.50%. Initially, there were speculations that the RBNZ might raise its key lending rates further to alleviate persistent inflationary pressures. However, these expectations were tempered following comments from RBNZ Governor Adrian Orr, who cautioned against the risks associated with overly tight monetary policy. Orr emphasized the need for the central bank to address core inflation while acknowledging potential economic risks posed by additional rate hikes. Despite inflation in New Zealand standing at 4.7%, double the desired rate of 2%, immediate prospects of RBNZ transitioning to rate cuts appear dim.

Market sentiment remains somewhat volatile as investors await the release of various economic data throughout the week. Of particular interest is the January United States core Personal Consumption Expenditure inflation data set to be unveiled on Thursday, which will offer fresh insights into the interest rate trajectory. Meanwhile, the US Dollar Index maintains a subdued position around 103.80.

Comments from New York Federal Reserve President John Williams on Friday hinted at the possibility of rate cuts later in the year. Williams noted that his overall economic outlook remains unchanged despite surprising inflation data in January, indicating potential future policy adjustments.

Technical Analysis

NZD/USD has been moving in a bullish market structure since February but it got rejected from a strong resistance that stopped the price from going higher many times. It is very crucial for NZD/USD as the channel is getting smaller which indicates a breakout could be coming soon. We can see the resistance is still very long when the price touched it, a huge bearish candlestick was formed.

I will closely monitor any trade opportunities for NZD/USD but it is better to wait for the New Zealand interest rate to be released to take any trades as the impact could be huge and cause unneccessary losses.