Major US Banks Face Surplus of Bad Property Debt Over Reserves

Traders' Opinions

Economic

Summary:

Loan loss provisions decrease despite regulatory warnings about commercial real estate market risks.

At the largest US banks, bad commercial real estate loans have surpassed loss reserves, spurred by a significant uptick in late payments associated with offices, shopping centers, and other properties.

According to filings with the Federal Deposit Insurance Corporation, the average reserves at JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley have decreased from $1.60 to 90 cents for every dollar of commercial real estate debt where a borrower is at least 30 days overdue.

This sharp decline occurred over the past year, with delinquent commercial property debt for the six major banks nearly tripling to $9.3 billion.

In the broader US banking sector, the total value of overdue loans associated with offices, shopping centers, residential complexes, and other commercial properties surged last year, reaching $24.3 billion, compared to $11.2 billion the previous year.

FDIC data reveals that US banks currently maintain $1.40 in reserves for every dollar of delinquent commercial real estate loans, a decrease from $2.20 a year earlier. This marks the lowest level of coverage that banks have had to mitigate potential losses from commercial real estate loans in over seven years.

Source: Financial Times

Earlier this month, New York Community Bank experienced a drastic drop of over 50% in its market value following the revelation of hundreds of millions of dollars in previously undisclosed potential losses within its commercial property loan portfolio.

The crux of the matter revolves around loan allowances, also known as reserves, which banks set aside to anticipate future losses due to delinquencies. These provisions directly impact earnings, prompting banks to strategize ways to minimize their impact.

Traditionally, banks and regulators establish allowances based on loan categories and historical loss rates. For instance, banks typically allocate higher allowances, such as 10%, for unsecured lending like credit card loans, compared to 2 or 3% for commercial real estate loans, which historically have lower default rates.

However, some argue that relying solely on historical loss rates for commercial properties, especially offices, in light of the Covid-19 pandemic could be risky. They advocate for banks to base reserves on current levels of delinquencies instead.

In December, Bank of America's CEO, Brian Moynihan, stated that the bank had pinpointed only $5 billion in commercial property debt linked to sectors of the property market where prices had declined. He characterized this amount as insignificant for a bank that generated nearly $30 billion in earnings last year and holds assets exceeding $3.2 trillion.

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Ukadike Micheal

Economic

Commodity

Amid heightened tensions in the Red Sea due to another Houthi strike, oil prices remained at their highest in over three months. Brent traded above $83 per barrel, supported by a three-day consecutive surge, while West Texas Intermediate surpassed $78. The Rubymar's crew abandoned the vessel in response to the Sunday evening attack, marking the first evacuation since the group began targeting ships late last year.

The oil market has witnessed limited volatility, trapped within a $10-a-barrel range since the year's commencement, as conflicting factors, such as geopolitical tensions and demand concerns, vie for dominance. Notably, signs of weak demand, particularly from China, have been counteracted by efforts from OPEC+ to curtail output.

One key factor influencing the market's current "wait-and-see" mode is the anticipation of OPEC+'s decisions in their upcoming early March meeting. Analysts, including Rob Thummel from Tortoise Capital Advisors LLC, emphasize the importance of understanding whether the group will extend output cuts into the second quarter. This decision carries significant weight for market participants, as it directly impacts the delicate balance between global oil supply and demand.

In this context, a closer examination of Iraq, OPEC's second-largest producer, adds depth to the discussion. Iraq's commitment to enhancing compliance with production curbs following a review of external production estimates becomes a focal point. The nation's actions will likely influence OPEC+'s overall strategy and could play a pivotal role in stabilizing or further complicating the oil market.

As the market navigates these uncertainties, technical viewpoints on the potential impacts emerge. Analysts consider the geopolitical risks in the Red Sea against the backdrop of OPEC+'s production decisions. The delicate balance between supply and demand, coupled with ongoing geopolitical events, shapes the oil market's trajectory in the coming months.

Zooming out, the broader implications of the Red Sea incidents underscore the fragility of global oil supply chains. This added layer of complexity injects a heightened sense of caution into an already intricate market landscape. Investors and analysts alike recognize that the market's future hinges on a delicate equilibrium between various internal and external factors.

The oil market stands at a critical juncture, influenced by geopolitical tensions, demand dynamics, and OPEC+'s policy decisions. The Red Sea incidents serve as a stark reminder of the vulnerabilities inherent in global oil supply chains, contributing to the intricacies of the market. As investors and analysts closely monitor developments, they acknowledge that the market's future is shaped by a delicate balance, with each variable playing a crucial role in determining the trajectory of oil prices.

Source: Bloomberg

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Alex

Economic

Fundraising activity in India will be stronger than ever over the next two years as conglomerates, tech firms and financial services providers hunt for capital to fuel growth and owners seize the moment to sell holdings, Bank of America Corp.’s co-head of investment banking in the country said.

“2023 was the year of block trades, 2024 is going to be the year of IPOs — and that momentum will most likely carry into 2025,” Debasish Purohit said in an interview with Bloomberg News in Mumbai. “2024 and 2025 as a block will be the busiest years of IPOs in our lifetime.”

Purohit expects between 5 and 10 tech firms and two or three local subsidiaries of multinational companies to launch initial public offerings in the period.

Reliance Industries Ltd., controlled by Asia’s richest person Mukesh Ambani, has been looking to list its wireless carrier Reliance Jio Infocomm Ltd. and Reliance Retail Ventures for several years, while the financial services unit of Tata Sons, another giant conglomerate, is one of several shadow lenders that the Reserve Bank of India has told to list before 2025. Hyundai Motor Co. is also considering listing its Indian business in one of the country’s biggest IPOs, Bloomberg reported earlier this month.

India’s equity markets have been on a tear — the benchmark Sensex has risen in all of the past eight years, including a 19 per cent rally in 2023 — and the retail investor base in the world’s most populous country is growing. A robust economy also provides favorable conditions for IPOs and exit opportunities for investors. The International Monetary Fund expects India’s economy to grow 6.5 per cent in 2024 and 2025 following its 6.7 per cent expansion last year.

This is unfolding as neighbor China tries to address ructions in its stock and property markets, along with trade conflicts and various regulatory crackdowns. That’s further encouraging global investors to shift billions of dollars into India.

“Every single private equity fund that you talk to wants to have a China plus strategy, so you’ll see at least two, three funds being raised for India alone,” said Purohit, who has worked in investment banking for over two decades.

India should be regarded as a standalone market rather than an extension or part of the wider Asia Pacific, according to Purohit. Japan and South Korea are sources for inbound deals in real estate, infrastructure, manufacturing and financial services, while investment in local semiconductor businesses may come from Taiwan, he said.

Some founders of Indian companies will partner with financial sponsors to spur growth, while others will exit or sell assets amid sector consolidation or based on family decisions, according to Purohit.

“These are three or four broad areas which will attract M&A,” he said. “If you get 7 per cent to 8 per cent of the fee pool you are in a good place.”

Source:Business Standard

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Cohen

Commodity

The yellow metal had found some support at the $2,000 an ounce level, recovering sharply from a two-month low over the past two sessions.

But the recovery still put gold comfortably within a $2,000-$2,050 trading range established through most of 2024.

Spot gold prices rose 0.1% to $2,019.17 an ounce, while gold futures expiring in April steadied at $2,030.20 an ounce by 23:34 ET (04:34 GMT).

While increased geopolitical ructions in the Middle East and between Russia and Ukraine offered gold some support in recent sessions, bigger gains in the yellow metal have been largely held back by the prospect of higher for longer U.S. interest rates.

Traders began steadily pricing out chances of early interest rate cuts by the Fed after a series of hotter-than-expected U.S. inflation readings for January, while several Fed officials also warned against bets on early rate cuts.

Higher rates bode poorly for non-yielding assets such as gold, given that they increase the opportunity cost of investing in the yellow metal.

Still, analysts at Citi said gold could soar to $3,000 an ounce by 2025, especially if central banks increase their bullion purchases, inflation turns sluggish and if the global economy enters a deep recession in the coming year.

But the near-term outlook for gold remained uncertain, while other precious metals also weakened. Platinum futures fell 0.4% to $903.10 an ounce, while silver futures fell 0.1% to $23.023 an ounce.

Copper takes little cheer from China rate cut

Among industrial metals, copper prices fell slightly on Tuesday, taking little support from a bigger-than-expected benchmark interest rate cut in top importer China.

Copper futures expiring in March fell 0.1% to $3.8087 a pound.

The People’s Bank of China cut its benchmark five-year loan prime rate by a bigger-than-expected 25 basis points to 3.95%, as it moved to further loosen monetary conditions and shore up an economic recovery.

But investors doubted whether the move would substantially aid the Chinese economy, given that Chinese interest rates have been at record lows for nearly two years.

Beyond fears of economic weakness in the world’s largest copper importer, the UK and Japan both entered a recession in late-2023, ramping up concerns over slowing global economic growth, which is likely to stymie copper demand.

Source:Investing

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Zi Cheng

Forex

Traders' Opinions

Fundamental Analysis

During the London session, S&P500 futures are subdued, extending the weekend due to the Presidents' Day holiday in US markets. Concurrently, 10-year US Treasury yields have rebounded to 4.31%, driven by the hotter-than-anticipated Producer Price Index and consumer price inflation data for January.

Although investors have scaled back expectations of rate cuts in the upcoming May monetary policy meeting by the Federal Reserve, policymakers view the unexpectedly higher data as a temporary anomaly that should not be overemphasized. The focus should primarily be on the broader declining trend in inflation.

Looking ahead, market participants will closely monitor the release of the Federal Reserve Open Market Committee minutes for the January policy meeting scheduled for Wednesday. These minutes will offer detailed insights into the rationale behind maintaining the status quo and provide a fresh perspective on interest rates.

Meanwhile, the Japanese Yen has found support against the US Dollar, despite investors tempering expectations for the unwinding of the Bank of Japan's expansionary monetary policy stance. With the Japanese economy experiencing a technical recession, BoJ policymakers are likely to persist with plans to expand stimulus measures to bolster economic growth.

Conversely, Federal Reserve Chair Jerome Powell has pushed back against the anticipation of interest rate reductions, with investors now eyeing the possibility of the first 25 basis points rate cut in 2024, potentially as early as June. Insights into further monetary policy adjustments may be gleaned from the FOMC Minutes scheduled for release on Wednesday, particularly in light of recent indications of persistent inflationary pressures.

Looking ahead, Japan's Trade Balance figures are expected on Wednesday, preceding the release of the FOMC Meeting Minutes. Additionally, traders will closely monitor speeches by Fed officials Bostic and Bowman. On Thursday, the preliminary Japanese Jibun Bank PMI for February will be made available, adding further context to market movements.

USD/JPY Strengthens Towards The Key Resistance Level_1

Technical Analysis

USD/JPY has been moving in a bullish market structure forming higher highs and higher lows. As you can see from the chart attached below, it tried to cross below the 200 Day Moving Average but turns out it was a fake breakout and now it is heading towards the key resistance level.

It is too late to enter long position now as the price is very high up. I will remain patient and monitor if there's a retracement for long entries or if there's not then I will wait for a clear breakout of the resistance to look for long entries.

USD/JPY Strengthens Towards The Key Resistance Level_2

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MarketPulse by OANDA Group

Forex

No positive reaction from AUD/USD despite more stimulus policies from China

In addition, today’s more-than-expected 25 bps cut (the consensus view was a 15 bps cut) on China’s 5-year loan prime rate, the benchmark for mortgage rates to 3.95%. This latest cut is the largest since 2019 but has failed to provide a positive feedback loop for the AUD/USD where it shed by -0.14% on an intraday basis at this time of the writing.

Based on an intermarket perspective, it seems that the ongoing weakness in AUD/USD is likely to be primarily driven now by the timing and pace of the US Federal Reserve’s highly anticipated interest rate cut cycle initiation in 2024 which in turn impacts the fixed income yield spread between the 2-year US Treasury note and Australia government bond.

The hotter-than-expected US CPI print for January has pushed back the expectations of the first Fed rate cut to June from March (priced at the start of the year based on the CME FedWatch Tool) and reduced the number of expected cuts from six (at the start of the year) to four before 2024 ends.

A widening of the yield discount between 2-year Australian government bond over US Treasury note has put downside pressure on the AUD/USD

A less dovish Fed has put downside pressure on the 2-year negative yield spread between the Australian government bond and the US Treasury note where the spread has declined by -50 bps from 15 January to 19 February, making the Australian government bond less attractive to the US Treasury note, in turn capping AUD/USD’s potential upside movement.

Bearish breakdown from “Head & Shoulders”

Fig 1: AUD/USD medium-term trend as of 20 Feb 2024 (Source: TradingView, click to enlarge chart)

Fig 2: AUD/USD short-term trend as of 20 Feb 2024 (Source: TradingView, click to enlarge chart)

Also, through the lens of technical analysis, the AUD/USD has staged a bearish breakdown from a medium-term bearish “Head & Shoulders” reversal configuration on 2 February and its former neckline support of 0.6570 has now turned into a pull-back resistance that also confluence with the 200-day moving average (see daily chart).

In the short term, last week’s push-up from the 14 February low of 0.6443 to the 19 February high of 0.6552 has started to show signs of exhaustion. The price actions have failed to make a clear breakout above a minor descending trendline resistance from the 31 January high and at the same time, the hourly RSI momentum indicator has flashed out a bearish divergence condition at its overbought region (see 1-hour chart)

Watch the 0.6570 key short-term pivotal resistance for the risk of a potential decline to expose the near-term supports of 0.6500/6470. Failure to hold at 0.6470 may see further weakness for the medium-term support to come in at 0.6410/6390 (also the 76.4% Fibonacci retracement of the prior upmove from 26 October 2023 low to 28 December 2023 high).

On the flip side, a clearance above 0.6570 negates the bearish tone for the next intermediate resistance to come in at 0.6620 (also the downward-sloping 50-day moving average).

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Alex

Economic

In a world where economic indicators often spell uncertainty, the latest report from the University of Michigan brings a glimmer of hope. As of February 2024, the consumer sentiment index nudged up to 79.6, a testament to American resilience in the face of inflationary pressures and a shifting economic landscape. This modest increase underscores a broader narrative of stability and cautious optimism among U.S. households, despite a backdrop of global economic challenges and domestic policy debates.

The Pulse of the Nation: Consumer Sentiment in Focus

The strength of the American economy, as often noted, lies in the hands of its consumers. The recent uptick in the University of Michigan's consumer sentiment index is more than just a number—it's a reflection of a collective belief in the economic future. Even as retail sales experienced an unexpected dip in January, this sentiment points towards an enduring confidence bolstered by a slowdown in inflation and robust labor markets. Notably, this optimism isn't uniform across the board; political affiliations have cast a partisan shadow over economic perceptions, with Democrats generally exhibiting higher levels of confidence compared to their Republican counterparts. Despite these divides, an underlying faith in the economy's fundamentals remains intact, hinting at a possible increase in consumer spending, which is crucial for sustaining economic growth.

A Complex Economic Tapestry

The narrative of American consumer confidence is woven against a backdrop of significant financial maneuvers and strategic shifts in the global market. The acquisition of Discover Financial Services by Capital One for a staggering $35.3 billion in an all-stock deal, along with Alibaba Group's pivot towards expanding its international e-commerce footprint, reflects a broader trend of adaptation and resilience among major players. These developments come at a time when the 'Magnificent 7' companies have come under scrutiny for their outsized influence on U.S. and global stock markets, raising questions about market concentration and its implications for economic stability. Amid these dynamics, the report sheds light on the nuanced challenges of maintaining the Federal Reserve's 2% inflation target, a goal that appears increasingly complex amidst fluctuating inflation expectations.

Looking Ahead: Economic Resilience Amidst Uncertainty

As the American economy navigates through the headwinds of higher-than-expected inflation readings and geopolitical tensions, particularly in the Middle East, the resilience of consumer sentiment offers a beacon of hope. Disruptions in energy markets and potential trade disruptions loom large, yet optimism persists regarding the diversification of the energy sector and supply chains, which may mitigate the impact on U.S. inflation. This landscape of challenges and opportunities underscores a critical point: the American consumer's outlook remains a pivotal gauge of economic health and a driver of growth. With improvements in real wages, wealth, business creation, and job opportunities contributing to a brighter economic outlook, there's a cautious yet palpable sense of hope as we move forward.

In conclusion, the American economy stands at a crossroads, marked by challenges and bolstered by enduring consumer confidence. As we navigate the complexities of inflation, market dynamics, and global uncertainties, the spirit of resilience and optimism among U.S. consumers serves as a vital underpinning for the journey ahead. The slight increase in consumer sentiment, as reported by the University of Michigan, is not just a statistic—it's a reflection of a nation's enduring faith in its economic future.