Banks help push European shares higher
A surge in the banking sector has helped lift European markets, as investors once again shrugged off the Italian referendum result and the resignation of prime minister Matteo Renzi. Hopes that the country’s parliament might pass a budget on Wednesday provided some support, as did the continuing optimism that investors might rescue struggling Monte dei Paschi. If that does not happen, there was growing talk that a state bailout could take place this weekend.
The idea that the bank would be recapitalised one way or another pushed the Italian banking index 9% higher, its best one day performance since 8 July. Monte dei Paschi itself added 1%, while Unicredit climbed 13%.
Elsewhere Deutsche Bank jumped 8% while in the UK, Royal Bank of Scotland rose nearly 6% and Barclays 4.5%.
The final scores showed:
- The FTSE 100 finished up 33.01 points or 0.49% at 6779.84
- Germany’s Dax rose 0.85% to 10,775.32
- France’s Cac climbed 1.26% to 4631.94
- Italy’s FTSE MIB jumped 4.15% to 17,757.80
- Spain’s Ibex ended 2.64% higher at 8893.3
- In Greece, the Athens market added 0.36% to 622.52
On Wall Street, the Dow Jones Industrial Average is currently up 19 points or 0.1%.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Back with Boeing, and Donald Trump’s tweet saying the company was charging too much to build the new Air Force One - $4bn - and should lose the contract.
Boeing has now responded with a statement, saying:
We are currently under contract for $170m to help determine the capabilities of these complex military aircraft that serve the unique requirements of the President of the United States. We look forward to working with the US Air Force on subsequent phases of the program allowing us to deliver the best planes for the President at the best value for the American taxpayer.
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Ratings agency Fitch has moved its outlook on Italian banks from stable to negative for 2017, in the wake of the referendum vote and worries about their ability to recapitalise. Fitch said:
The Negative Outlook for the Italian banking sector reflects its increased vulnerability to shocks following the asset-quality deterioration in legacy portfolios... A step-up in pressure from authorities and market participants on the sector to reduce the very high levels of impaired loans has increased urgency and risks for Italian banks.
Profitability in the sector is frail. Disposals of non-performing loan portfolios could lead to losses that require additional capital. These are some of the factors driving the 2017 Outlook to Negative from Stable. Problems for a small number of distressed banks raising capital have added to these pressures
The “No” vote at the constitutional referendum has further heightened political uncertainty and possibly reduced the capacity to implement economic reforms. The risks from political instability were one factor that contributed to our revision of the Outlook on Italy’s ‘BBB+’ sovereign rating to Negative in October.
The referendum result could also damage the recapitalisation plans of some Italian banks, most notably Banca Monte dei Paschi di Siena and UniCredit, and have negative implications for the broader banking sector, whose attractiveness with investors has already reduced significantly during 2016. The sector’s ability to access the institutional markets for funding and capital, which has become more difficult and expensive this year, could deteriorate further...
Significant disposals that materially improve asset quality could be positive for ratings. However, the disposals are likely to result in further provisioning and possibly more capital shortfalls for the banks involved. Portfolio sales could also result in risk-weighted assets rising for the remaining loans if the sales affect loss-given-default estimates at banks using internal rating models.
Capitalisation will remain under pressure in 2017 with a weak earnings outlook limiting banks’ ability to build capital. Low interest rates, tepid economic growth and fierce competition for healthy borrowers are challenges for earnings. Profitability could also be dented by restructuring costs as banks focus on cost-cutting.
We also believe regulators could require higher capital buffers from Italian banks to compensate for the risk in their large non-performing loan portfolios and for the large portion of Italian sovereign debt held. This could result in additional capital requirements at some banks.
The Italian referendum proved a non-event for markets, including emerging markets, because it had effectively been priced in, and at the same time suggested the European Central Bank might well extend its quantitative easing programme this week. So says David Rees of Capital Economics. But he adds:
Nonetheless, the political situation in Italy, and indeed the rise of populism in Europe more generally, is something to keep an eye on in the months ahead. Italy’s economy and banking sector are weak, and if the Five Star Movement’s momentum continues to build, it may not be long before an exit from the euro becomes a more realistic concern for investors....Similar fears have rocked emerging market equities in the past, when the Greek debt crisis first came to the fore and Spanish and Italian bonds came under fire in 2012.
Italy’s banking sector continues to recover, helped by talk that the country’s parliament might approve its budget on Wednesday, and there could be a state bailout of troubled Monte dei Paschi this weekend.
The country’s banking index is currently up more than 7%, its best daily performance since the middle of July.
The overall European banking index is up 3%, hitting its highest level since the middle of January.
More fallout from Donald Trump’s election - this time affecting UK mortgage rates. Rupert Jones reports:
The first evidence has emerged that the era of record-low fixed-rate mortgages may be coming to an end after HSBC withdrew its “cheapest-ever” deal and increased rates on other products.
HSBC had been offering a mortgage that allowed customers to lock in for two years at a rate of 0.99%, but this deal has been pulled with immediate effect. The bank’s new mortgage offers are coming in at up to 0.5% higher.
The move follows warnings from mortgage brokers that a number of factors, including Donald Trump’s US election win, were set to push up the cost of new fixed-rate home loans.
David Hollingworth at broker London & Country Mortgages said: “The bottom of the market may have been hit. This [announcement] and the broader changes from HSBC, which has been very aggressively priced in the fixed-rate market, could spell the end of the sub-1% fixed rate, but also signals a potential turning point for fixed mortgage rates.”
The full story is here:
Donald Trump may be casting doubt on Boeing’s Air Force One order, but elsewhere US manufacturers are doing well.
New orders for US factory goods rose 2.7% in October, the biggest increase for nearly a year and a half and just above expectations of a 2.6% improvement. The September figure was revised upwards from a gain of 0.3% to 0.6%. The latest figures mark the fourth straight month of increases.
But there could be clouds ahead, given the strength of the dollar following Trump’s election victory. Paul Sirani, chief market analyst at Xtrade, said:
US factory orders surged... in October, providing manufacturers with plenty of optimism in what has been a turbulent year.
Uncertainty surrounds the sector, though, amid renewed strength of the dollar and the incoming president’s trade policy, particularly his approach to China.
Donald Trump’s promised fiscal stimulus and the increasing likelihood of raising interest rates has fuelled a greenback rally, and that could starve off exports and hit US factories hard in the new year.
And here’s a video clip of Donald Trump outlining his unhappiness with Boeing.
Trump on Boeing/Air Force One tweet: "The plane is totally out of control...we want Boeing to make a lot of money, but not that much money" pic.twitter.com/OnEuw8hfUM
— CNBC Now (@CNBCnow) December 6, 2016
Trump tweet sends Boeing shares down 1%
Along with the Oval Office, the nuclear codes and the attention of the whole world, winning a US presidential election gives you the power to move the markets.
And airline maker Boeing just saw that for itself.
Shares in Boeing fell by 1% at the start of trading in New York, after Donald Trump declared on Twitter (where else?) that the firm was charging too much to build the new Air Force One, and should lose the contract.
Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!
— Donald J. Trump (@realDonaldTrump) December 6, 2016
The suggestion that the next US president might take a tough line has worried investors in Boeing (after all, he does have his own Trump Force One).
Hello Boeing
— Michael Hewson (@mhewson_CMC) December 6, 2016
Just been Trumped pic.twitter.com/rOCjiTegft
Greek government welcomes debt relief moves, but clashes loom
Over in Greece this morning there has been much merriment over the euro group’s decision last night to define the contours of a debt relief agreement for the country long at the centre of Europe’s financial crisis.
Our correspondent Helena Smith reports from Athens
For the first time since economic crisis engulfed Greece just over seven years ago, a sitting government in Athens has felt fit to describe a decision taken in Brussels as a “national success.”
The positive spin and brave faces that have greeted the three bailouts rolled out for Greece, so far, have today been superseded by a genuine sense of relief at the announcement of short-term measures to lighten the country’s mountainous debt load.
Many in Syriza, the governing left-wing party, said the move by euro zone partners to shave €45bn euros off the pile – the equivalent of 22 percent of GDP – by extending the repayment period and adjusting interest rates - exceeded “every expectation.”
Addressing reporters today the government spokesman Dimitris Tzanakopoulos described the decision both as a “significant achievement” and “decisive step for the stabilisation of the Greek economy and complete restoration of confidence.”
But as Greece’s political opposition was quick to point out the victory was bittersweet.
This might be the first time that the nation’s unmanageable debt burden has been addressed head-on – and as such can only be seen as rich reward for prime minister Alexis Tsipras - but it comes against a backdrop of calls for Athens to adopt yet more austerity once its current bailout programme expires in mid-2018.
Amid signs of a looming showdown with the International Monetary Fund, which says further belt-tightening is the only way to plug the looming fiscal gap and thus ensure its own participation in Greece’s third bailout to date, the spokesman called the demands “irrational.”
Athens, he insisted, would neither accept the German proposal for Greece to achieve a primary surplus of 3.5 % through 2028 nor the IMF’s demands for extra measures in 2019 and 2020. Both are expected to dominate talks when auditors representing creditor institutions return to continue negotiating a second review of policy measures set as the price of bailout funds.
“Greek society cannot endure more measures,” said Interior minister Panos Skourletis hinting at the battle that is brewing. “The Greek economy can’t endure them either.”
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Angelino Alfano’s prediction that Italy could hold a general election in February 2017 didn’t impress the markets, sending shares and bonds down from their earlier highs:
Well done, @angealfa Nonsense about Feb snap polls has spooked the markets. pic.twitter.com/Ddk6bzvHyT
— wolf piccoli (@wolfpiccoli) December 6, 2016
#ITALY | MONTE PASCHI HALTED, LIMIT DOWN AFTER FALLING 5% IN MILAN - BBG
— Christophe Barraud (@C_Barraud) December 6, 2016
But shares are now pushing higher again, following a report that the parliament might approve the 2017 budget on Wednesday, in a confidence vote.
That’s sent the FTSE MIB index back up to its earlier highs, gaining 1.7% today.
Updated
Italian election in February 2017 predicted
Over in Italy, a political leader has suggested that fresh general elections could be held next February.
Interior Minister Angelino Alfano, whose centre-right party is part of Matteo Renzi’s coalition, told the Corriere della Sera newspaper that:
“I forecast there will be the will to go to elections in February.”
Significantly, Alfano was speaking after having met with Renzi (whose resignation was put on hold by the country’s president last night).
Here’s Reuters’ take:
#Italy | Italian minister, after talking to Renzi, sees new election likely in February - Reuters - https://t.co/rmUMArAmJn
— Christophe Barraud (@C_Barraud) December 6, 2016
Alfano rose to prominence as a key ally of Silvio Berlusconi, before dramatically splitting from the former PM in 2013 to form a new party.
Italian bonds are still looking stable as traders head for lunch:
Italian bonds shrug off referendum result in less than 24 hours https://t.co/duQRbk7jBC pic.twitter.com/obfmIITWP5
— Bloomberg (@business) December 6, 2016
One fundamental problem with Italian banks is that there are too many of them, says Kathleen Brooks of City Index.
She argues that closing some branches would help make the sector competitive, and free up capital for other uses:
Italy has more bank branches than pizzerias, in the future it desperately needs more pizza and less banks!
She also explains why Monte dei Paschi’s future matters, especially if its cash call fail this week.
It’s certainly not as systemically important as other banks, for example Italy’s Unicredit, but Monte dei Paschi’s main problem is that it has become symbolic of Italy’s rotten banking sector that now relies on foreign capital for life support.
If the Qatari’s decide against investing in it then it gives a terrible signal to the world about the ‘investability’ of Europe’s banks. Interestingly, in Europe it is not the systemically important banks that are the biggest risk to the financial sector, but the glut of mid-size banks that hold billions in bad debts that could endanger the health of the bigger banks in Europe, if contagion is to spread.
.@KATHLEENBROOKS about Italy: "In the future it desperately needs more pizza and less banks!". Do you agree? https://t.co/hQSX53l6GJ pic.twitter.com/44BwfSE97w
— FXStreet Team (@FXstreetUpdate) December 6, 2016
Business confidence in Italy is likely to be hurt by the political uncertainty created by Sunday’s referendum result, and the struggles in the banking sector.
Ana Boata, economist at trade insurance firm Euler Hermes, believes 0.3 percentage points could be knocked off growth next year, taking the annual rate down from 0.9% to 0.6%.
She predicts that foreign investment will be hit, and Italian firms could suffer high financing costs if their banks remain weak:
While there is no need to panic, the resounding ‘No’ result and political turmoil that has followed could cause a mild confidence crisis in 2017. Even without any spill over to banks or the bond market, we expect -0.3pp of Italian GDP could be shaven off, leaving the economy with the prospect of a mere 0.6% growth next year.
“It will be Italian companies that bear the brunt of a confidence shock, albeit a mild one, which are already contending with some of the worst cash flow conditions in the world – businesses are waiting on average for 88 days for payment for goods and services. We are likely to see divestment from abroad and tougher financing conditions mean that inward investment levels will stay flat, compared to 2% growth we previously predicted for 2017, and hamper the economy’s chances of recovery.”
Bank shares rally on Italian bailout hopes
European banking shares are rallying this morning, as traders look for silver linings in the Italian political upheaval.
Almost every bank in the index of major European banks, the Stoxx 600, has gained ground.
The prospect of Monte dei Paschi (-2.6%) receiving a dose of state aid this weekend is calming the markets, as this would remove the risk that it might simply collapse.
Joshua Mahony, market analyst at IG, has taken his eye of his company’s plunging share price to explain all:
One of the biggest worries surrounding the referendum was the impact it could have upon the nation’s banking system, with the likes of Unicredit and Monte dei Paschi in the midst of a recapitalisation and bank rescue plan.
Plans to raise substantial funds at Monte dei Paschi have hit the buffers after the ‘No’ vote and while a likely government bailout may not be the ideal otucome for the bank, it will mitigate the risk of a collapse and contagion in the region, hence the widespread gains across the financial sector today.
Eurogroup chief Jeroen Dijsselbloem has weighed in on Brexit this morning, warning that the UK’s demands are not compatible with a smooth exit from the EU.
Our politics liveblog has all the details:
City spreadbetting firms shares plunge on CDF crackdown
Britain’s financial spread-betting firms love to talk about the possibilities created by stock market volatility.
But they’ve had a nasty taste of it themselves this morning, after the City regulators announced a crackdown on ‘contract for difference’ products.
CFD’s allow a customer to make big profits if they correctly predict a market move -- or see their nest egg crushed by the stampeding herd if they get it wrong.
So today, the FCA announced new rules to prevent “inexperienced” clients from getting burned. It wants to restrict how much leverage a retail customer can take on (to restrict them from taking big positions on a small deposit), and better risk warnings.
And no wonder - given that 82% of clients manage to lose money on CFD!
All sensible-sounding stuff. But shares in IG and CMC Markets, two of the biggest players, have both plunged by 30% this morning -- showing how profitable these retail investors have been.
More here:
So I hop over to Facebook, which tells me to SPREAD BET NOW. Not shy on promotion, these guys pic.twitter.com/hKROfqrWLR
— Katie Martin (@katie_martin_fx) December 6, 2016
Pound hits two-month high
The pound has hit a two-month high this morning, after chancellor Philip Hammond meets with fellow finance ministers in Brussels.
Arriving at the meeting, Hammond told reporters that the UK government hasn’t ruled out paying into the EU budget in return for access to its markets.
He said:
“We want to keep all options open....
That is something we would have to look at, looking at the costs and the benefits based on what is in the best interests of the British taxpayer.”
The possibility of a so-called Soft Brexit has nudged sterling up to $1.277 this morning, its highest level since early October.
European stock markets are remarkably calm this morning.
Most stock indices are up in early trading, led by Italy, where the banking index has rallied by almost 2%.
Shares in Monti dei Paschi, though, have fallen by 3% in volatile trading, as investors wonder whether its rescue plan can be salvaged by the weekend.
Britain’s FTSE 100 is becalmed, down a few points. Connor Campbell of SpreadEx says:
The FTSE is lacking any macro-momentum bar the continued, and exhausting, Brexit-brouhaha that have been a constant presence since June, meaning it is struggling to significantly break through the levels it has been stuck around for the last few months.
Newsflash from Italy:
Monte Paschi Board Meeting Said To Be Delayed Until Wednesday Or Thursday – RTRS Source
— Livesquawk (@Livesquawk) December 6, 2016
The Rome government will be desperate avoid inflicting bail-in losses on small bondholders, says the Economist Intelligence Unit’s Robin Bew:
After #Italy no vote, private bank bailout falling apart. So scramble underway to ensure Gov one doesn’t force losses on retail investors.
— Robin Bew (@RobinBew) December 6, 2016
That could mean breaking EU rules on bank rescues, unless Italy can ‘bend’ them by finding a way to compensate those small savers.
Updated
Here’s a handy reminder of how badly Italian banks have fared this year, and how badly Italy has performed this millennium, from the Wall Street Journal.
Italy. A poorer country than 20 years ago. Bank shares lost half their value in 2016. Not looking good. @WSJ chart pic.twitter.com/CL5aTe8OU3
— Paul Kirby (@paul1kirby) December 6, 2016
Italian government debt is strengthened in value this morning, showing that the markets remain relaxed about the situation.
The rally has pulled down the yield on Italy’s 10-year bonds to 1.95%, down from 1.9% last night, and actually lower than before Sunday’s referendum.
The gap between Italian and German debt remains steady too - another sign of market calm.
The Spread, the day after! #Italy's bond spread steady at 1.65% after yesterday's 'NO' in the referendum. Waiting for the #ECB now. pic.twitter.com/vCXPwhSzOb
— jeroen blokland (@jsblokland) December 6, 2016
FT: State bailout of MPS this weekend
The Financial Times reckons that Monte dei Paschi may have to be bailed out this weekend.
It all depends whether Qatar can be persuaded to still back its €5bn cashcall, even though Italy has been plunged into political limbo.
Bankers are running out of private-sector solutions for Monte dei Paschi di Siena and have told the Italian lender to prepare for a state bailout this weekend after prime minister Matteo Renzi was felled by a referendum defeat.
While financial markets responded relatively calmly to the referendum result, people briefed on the situation said the political upheaval made it “more difficult” to secure a €1bn investment from Qatar on which Monte dei Paschi’s €5bn capital-raising plan hinges.
Senior bankers fear that a failure to shore up the bank, which was the worst loser of this summer’s European bank healthcheck, could damage already jittery investor confidence about Italy’s overall banking sector, which is hobbled by €360bn of bad loans and weak profitability.
JPMorgan Chase and Mediobanca, advisers to Monte dei Paschi, have been working with Pier Carlo Padoan, Italy’s finance minister, to persuade the Qatar Investment Authority to pump money into Italy’s third-largest lender. But hope is fading that they can secure a deal by this week’s deadline.
Without the cornerstone investment from Qatar, the other parts of the complex plan to fill the bank’s €5bn capital shortfall are likely to collapse.
Just published: front page of the Financial Times UK edition for December 6 https://t.co/RU01QmMXrV pic.twitter.com/TJ8ts5JZpQ
— Financial Times (@FT) December 5, 2016
Updated
Reuters: Precautionary recapitalisation ready for MPS
Reuters is reporting that Italian authorities are standing by to provide ‘precautionary’ state aid to their oldest bank, Monte dei Paschi, if its rescue plan fails.
Intriguingly, this measure could (apparently) allow Rome to get much-needed capital into MPS without triggering European rules forcing some bondholders to take a hit. That would protect those families and pensioners who hold bank bonds.
Here’s the story:
Measures to allow state aid for Banca Monte dei Paschi di Siena are ready but will depend on political developments in coming days, sources familiar with the matter said.
The Tuscan lender is looking at the idea of a precautionary recapitalisation which would avoid the triggering of European bail-in rules, one source said.
Monte dei Paschi needs to raise 5 billion euros ($5.38 billion) by the end of December to avoid being wound down, but investors are reluctant to back the cash call after Prime Minister Matteo Renzi lost a referendum on Sunday and pledged to resign.
The agenda: Italy bank rescue in focus
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Matteo Renzi’s defeat in Sunday’s Italian referendum continues to reverberate around Europe, even though the outgoing PM has agreed to stay on a little longer to get the country’s 2017 budget passed.
The big worry, of course, is Italy’s banks - with their €350bn of non-performing loans and uncomfortably thin capital reserves.
The City is watching to see if Renzi’s defeat has scuppered the plans to recapitalise these institutions using private money; potential investors could well have been scared away by the crisis in Rome.
If these efforts fail, then Italy’s government may have to activate bail-in procedures, which would inflict losses on private bondholders. And in Italy, that includes many members of the public.
As CMC’s Michael Hewson explains, the Italian banking sector is a serious worry:
Any new government technocratic or otherwise is still faced with the unenviable task of either bailing in the Italian banking sector and wiping out a wave of Italian pensioners and savers, or defying Brussels and trying to bail the banks out with taxpayer’s money in contravention of new rules to protect taxpayers.
As it is the recapitalisation plan for Monte dei Paschi di Siena is much more problematic now that Renzi has gone given the uncertainty that is likely to come next as we await the shape of any new administration.
No one in their right mind is likely to invest in a bank that has already been bailed out three times in the last few years against such an uncertain political backdrop.
One thing is certain the events of the last few days make it likely that we will see the ECB extend its asset purchase scheme by at least another six months, beyond March 2017 when they meet later this week.
The wider stock markets, though, continue to be quite relaxed about the political situation in Italy. Most European indices rose yesterday, and traders are expecting a quiet morning today.
The morning-after-the-night-before-sell-off-and-rebound-following-a-big-political-event is getting quicker and quicker
— Mike van Dulken (@Accendo_Mike) December 6, 2016
We’ll also be watching Greece, which was last night granted some short-term debt relief by its European creditors.
But more seriously, the eurogroup and the IMF are still split over Greece’s fiscal targets, meaning the Fund still hasn’t officially joined the €86bn bailout programme.
Euro zone grants Greece short-term debt relief; no deal with IMF
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