InvestMacro

By George Kladakis, Edinburgh Napier University and Alexandros Skouralis, City, University of London 

The US banking crisis triggered worries about the global banking system earlier in the year. Three mid-sized US banks, Silicon Valley Bank, Silvergate and Signature, fell in quick succession, driving down bank share-prices across the world.

America’s central bank, the Federal Reserve, made significant amounts of cash available to the failed banks and created a lending facility for other struggling institutions. This calmed investors and prevented immediate contagion, with only one more US regional bank, First Republic, collapsing a few weeks later.

Yet it’s far from clear whether the crisis is really over. As traders return from their summer holidays to a period commonly associated with upheaval in the markets, how are things likely to play out?

Tight margins and dwindling deposits

Central banks have continued to increase interest rates to counter sustained inflation in recent months. In July, the Fed raised its key interest rate to as much as 5.5%, the highest in 20 years. The rate was near zero as recently as February 2022.

Though the increases have slowed this year, such a sudden change can be very harmful for banks – particularly as part of the sort of U-shaped movement in rates that we have seen since the global financial crisis of 2007-09.

US benchmark interest rate, 2007-23

Raising rates reduces the value of banks’ assets, increases what they have to pay to borrow, limits their profitability and generally increases their vulnerability to adverse events. Especially in the first half of 2023, banks have had to cope with low loan growth and high deposit costs, meaning the amount they have to pay out in relation to customers’ deposits.

This increased cost is partly because lots of customers have been withdrawing their money and putting it into places where they can make more interest, such as money market funds. It forced banks to borrow more from the Fed to ensure they have enough money, and at rates much higher than they used to be.

This was one of the reasons for the banking collapses in the spring, destabilising them at a time when the value of the debt on their balance sheets had also fallen sharply. This saw more customers at other banks withdrawing deposits for fear that their money wasn’t safe either. In sum, US banks saw deposits declining between June 2022 and June 2023 by almost 4%. Together with higher interest rates, this is generally bad news for the banking sector.

You can see the effect on banks’ profitability by looking at overall net interest margins (NIMs). These are a measure of what banks receive in interest income minus what they pay out to depositors and other funders.

US banks’ net interest margins (%)

Credit rating downgrades

The ratings agencies have added further pressure. In early August, Fitch downgraded its rating of US government debt to AA+ from AAA. It cited a likely deterioration in the public finances over the next three years and the endless politicking around the debt ceiling, which is the maximum level that the government can borrow.

Sovereign downgrades often reflect problems in the wider economy. This can destabilise banks by making them seem less creditworthy, leading their credit ratings to be downgraded too. That can make it harder for them to borrow money from the markets or potentially even from the Fed. This can then have knock-on effects in reducing banks’ lending capacity, capital buffers for coping with bad debts, overall profitability and share prices.

US banks’ share prices 2023

Sure enough, a week after the Fitch announcement, Moody’s downgraded the credit ratings of ten US mid-sized banks, citing growing financial risks and strains that could erode their profitability. It also warned that larger banks including Bank of New York Mellon and State Street were at risk of a future downgrade.

The other major ratings agency, S&P Global Ratings, has since followed suit, while Fitch is threatening to do likewise. Our research suggests bank downgrades are associated with making them riskier and more unstable, particularly when accompanied by a sovereign downgrade.

Having said all that, there are positives for US banks. Both interest rates and bank deposits are at least projected to stabilise in the coming months, which should help the sector. Despite the overall decline in banks’ profitability, bigger banks are reporting improved margins from charging higher interest on loans. Some of these banks also expect a boost from things like increased deal-making later in the year. Signs like those could help to bring more stability across the board.

In Europe, banks have seen reduced deposits and net interest margins in recent years, which helps to explain why Credit Suisse needed to be rescued by fellow Swiss bank UBS in March. Yet European deposits and profit margins have been recovering in the most recent couple of quarters. At the same time, the European Banking Authority’s recent stress tests concluded that large EU banks are robust.

UK banks appear to be in a slightly worse condition than EU banks. They remain resilient on their balance sheets, but their deposits have not recovered to quite the same extent as in Europe. They have also been adjusting down their profit forecasts in anticipation of further rate hikes by the Bank of England.

Regulatory intervention

To strengthen the US sector, the regulators are planning to further increase the minimum levels of capital that must be held by large US banks (with assets worth more than US$100 billion (£79 billion)).

These plans to increase banks’ capacity to absorb losses are encouraging, though will take more than four years to fully implement. The Basel II international banking rules were introduced to a similar end in 2004, but were not implemented in time to prevent the global financial crisis.

For the moment, the US banking system remains vulnerable both to shocks within the financial system and more general calamities. It will still be a few months before we can say with confidence that the worst is over.

About the Author:

George Kladakis, Lecturer in Financial Services, Edinburgh Napier University and Alexandros Skouralis, Research Assistant, Bayes Business School, City, University of London

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior 

The G20 summit in India must have a “concrete plan” for “scaled-up” green financing for the Global South as a critical strategy to combat climate change, affirms the founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The comments from deVere Group’s Nigel Green comes as leaders of the Group of 20 top industrialised and developing countries will gather this weekend in New Delhi for a summit that will celebrate the end of India’s 12-month G20 presidency.

He says: Climate change is no longer a distant threat; it is a present reality. Rising global temperatures, extreme weather events, melting ice caps, and sea-level rise are already affecting communities, ecosystems, and economies worldwide.

“The Global South, comprising developing nations with limited resources, bears a disproportionate burden in this climate crisis, despite contributing minimally to greenhouse gas emissions.

“As such, the leader of the G20 – the richest countries in the world – must use the summit starting in India this week to formulate a concrete plan for scaled-up green financing to help the Global South tackle the biggest issue of our time.

“A failure to do this could, ultimately, have catastrophic consequences for our planet and its communities.”

Green financing encompasses a range of mechanisms designed to support sustainable, environmentally friendly projects that mitigate climate change and enhance resilience.

These include investments in renewable energy, energy efficiency, climate adaptation, sustainable agriculture, and conservation efforts.

“One of the major challenges faced by the Global South is access to financial resources needed for climate action. Developing nations often lack the financial capacity to invest in green projects without incurring significant debt,” says the deVere CEO.

“The G20 summit must play a pivotal role in bridging this financial gap by prioritising green financing and creating mechanisms to make it more accessible.”

G20 countries, being the largest economies in the world, must also “commit to increasing in a considerable way their financial contributions to international climate finance mechanisms. These funds are essential for providing support to developing nations in their efforts to mitigate emissions and adapt to the impacts of climate change,” he notes.

Nigel Green goes on to add that the G20 summit should also serve as a platform for fostering collaboration between developed and developing nations.

This collaboration can take various forms, including knowledge sharing, technology transfer, and capacity building.
In addition, to scale up climate action, it is crucial to engage the private sector. G20 countries can promote public-private partnerships and initiatives that attract private sector investment in green projects.

“This can be achieved through incentives, guarantees, or risk-sharing mechanisms that make investments in sustainability more appealing to businesses.”

Innovation in financial instruments, such as green bonds and climate insurance, can unlock alternative funding sources for climate projects in developing nations.

The deVere CEO says: “The G20 summit must urgently encourage the development and adoption of such instruments to diversify funding options.”

The G20 summit in India presents a crucial opportunity to prioritize green financing for the Global South as a key strategy to combat climate change.

This summit can be a turning point in the global fight against climate change, demonstrating that unity, innovation, and commitment can drive transformative change toward a sustainable future for all.

“The urgency of climate action cannot be overstated, and the global community must act decisively.

“By committing to green financing, promoting collaboration, and bridging the financial gap, the G20 can lead the way in ensuring that all nations, particularly those in the Global South, have the resources and support they need to address the climate crisis effectively,” concludes Nigel Green.

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

By George Prior

China’s efforts to kick-start a property sector revival are poised to have a substantial, positive  impact on international stock markets and delight global investors, says the founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The upbeat assessment from deVere Group’s Nigel Green comes as The People’s Bank of China eased borrowing rules and slashed the reserve requirement ratio for foreign exchange deposits from the current 6% to 4%. Some of the country’s largest banks also cut interest rates on yuan deposits.

He says: “Global stock markets are set to get a boost amid the rollout of steps being taken by the People’s Bank of China (PBOC) to revive the country’s beleaguered property sector.

“We expect the decision to ease borrowing rules and cut reserve requirements for foreign exchange deposits, plus the cutting of interest rates on deposits, will have a considerable positive impact on global stock markets as investors digest news that Beijing is being proactive on this critical economic issue.”

On Monday, Hong Kong’s Hang Seng Index gained 2.5%, while mainland markets were also in positive territory, with the benchmark CSI 300 up 1.33%.

Elsewhere, Japan’s Nikkei 225 also climbed 0.7%, in Australia the S&P/ASX 200 was up 0.56% and ended at 7,318.8, while South Korea’s Kospi traded 0.81% higher.

China’s property market had been facing a crisis marked by plummeting property prices, oversupply, and a debt-laden real estate sector.

This turmoil raised concerns not only for China’s domestic economy but also for global investors with exposure to Chinese assets.

“The global impact of China’s efforts to revive its property sector cannot be underestimated,” says Nigel Green.

“A healthy property market is a vital driver of economic growth. As China’s property sector stabilises, it will boost construction activities, create jobs, and stimulate related industries like cement, steel, and furniture. The resultant economic growth will have a positive spillover effect on global markets, especially for countries that rely on China as a major trading partner.”

He continues: “China’s property crisis had dented investor confidence in the country’s markets. Therefore, by addressing the issue, China is sending a reassuring message to international investors that it is committed to maintaining stability and promoting growth.

“Restored confidence will, we expect, lead to increased foreign investments in Chinese assets, benefiting both domestic and global portfolios.

“China’s property sector revival will offer new investment opportunities, both in the real estate market and related industries. Global investors looking for diversification and growth prospects can be expected to find China an appealing destination once again.”

Since the beginning of this year, Nigel Green has been publicly saying that Beijing will take the necessary measures to shore-up the world’s second-largest economy and that global investors “must not overlook the opportunities in China if they are serious about building long-term wealth.”

The deVere founder concludes: “Global financial markets will be buoyed by these measures that will stabilise the critically important Chinese property market, restore investor confidence, and stimulate economic growth.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.

By Christopher Decker, University of Nebraska Omaha 

Don’t be overly fooled by seemingly rosy jobs data heading into the Labor Day weekend.

Yes, the U.S. economy added 187,000 jobs in August 2023 – faster than the revised 157,000 increase for July and above most analysts’ expectations for the month. And yes, gains were seen across most industries, with health care and social assistance adding 97,300 positions, leisure and hospitality boosting numbers by 40,000, construction up by 22,000 jobs, and 16,000 additional general manufacturing jobs.

But there was also enough in the data released by Bureau of Labor Statistics on Sept. 1 to give comfort – of sorts – to the “Jeremiahs” among us economists. I’ll explain.

While jobs were up, so too was the unemployment rate, which ticked up a modest 0.3% from July to 3.8%. And average hourly earnings increased by just 0.2% in the month to US$33.82 – working out to a rather paltry 8 cent increase.

To me, rather than indicating that the job market is moving along at a healthy clip, as some suggest, it shows signs of something else: a continuing slowdown.

Look at the long-term trend

The fact that, overall, jobs expanded a bit faster than expected doesn’t suggest that the economy is ramping up and inflation is going to spike again soon. Rather, it mostly speaks to the difficulty in predicting month-to-month movements. There’s good reason, perhaps, that economics is sometimes called “the dismal science” – we aren’t always that good at saying with certainty what will happen over the short term.

Monthly data has its place in making assessments and guiding policy, for sure. But focusing on just one month can be misleading as the data can be quite volatile.

The underlying trends are what matter more. And that is where I see signs of a slowdown.

In 2022, labor demand – as measured by job openings plus nonfarm employment – exceeded labor supply, as measured by the labor force. In other words, there were more job openings than people willing to fill the positions.

As a result, we saw labor earnings increase by 5.1% relative to 2021. Great news for employees, but less so for the Federal Reserve: Higher wages combined with supply chain disruptions and the effect of war in Ukraine meant that the inflation rate, as measured by consumer price index growth, rose 7.7% in 2022.

To tame inflation, the Fed embarked on a program of aggressive interest-rate hikes. This resulted in a general economic slowdown by the beginning of 2023. The housing market cooled. Construction and related markets slowed.

But now labor supply is outpacing labor demand – there are more people looking for jobs than there are openings.

Based on the first seven months of data in 2023, wage growth has slowed to 3.4% compared to 2022, as has general inflation, slowing to 3.5%.

So where is the economy heading? The preponderance of the data is pointing to a general economic slowdown. As a result, some suggest the U.S. economy may be heading for a “soft landing,” where inflation rates reach 2% to 2.5% as the U.S. avoids recession.

But when it comes to the chances of recession, the economy is not quite out of the woods yet. True, inflation is trending down. But earnings have generally grown slower than inflation, resulting in a loss of purchasing power for consumers.

Less cash to spend on goods doesn’t appear to have hit the economy yet. Consumer spending in the first seven months of 2023 was up 1.9% on the previous year, by my calculations. However, there is evidence that a lot of this was due to consumers purchasing on credit. Credit card debt reached a staggering $1.3 trillion in the second quarter of 2023.

This is not sustainable. At some point soon, consumer spending will have to slow.
And given that consumer spending represents about two-thirds of total GDP, a recession could still occur.

My best guess at the moment is that a recession is most likely to occur in early 2024, after the usual spending spree that is the holidays. But fortunately, thanks to the Fed’s recent efforts to decelerate the economy gradually, a major contraction is unlikely.

About the Author:

Christopher Decker, Professor of Economics, University of Nebraska Omaha

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By George Prior

The US Federal Reserve will “lose the confidence of the public and financial markets” and have “disastrous” economic effects, if it continues raising rates any further, warns the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.

The stark warning from deVere Group’s Nigel Green comes ahead of the Personal Consumption Expenditures index, which comes out Thursday at 8:30 am EST.

The PCE price index measures changes in the prices paid by consumers for goods and services over time. It’s one of the key indicators used by the US central bank and other economic analysts to assess inflation trends and make monetary policy decisions.

The deVere CEO comments: “The PCE is being keenly watched as investors were cheered earlier in the week by the weaker-than-expected payrolls data and annual gross domestic product growth forecast – both of which strongly make the case that the Federal Reserve must now stop its most aggressive tightening campaign in decades.”

He continues: “The Fed’s battles against inflation, growth and jobs are being won.

“There are now genuine concerns that unless the Fed drops raising rates, it will drive the US economy into a major recession.

“As the world’s largest and most influential economy, this would potentially have disastrous global implications.”

Nigel Green also stresses that not only must the Federal Reserve abandon its tightening program because the program has been effective, but it must also do so because inflation is likely to fall quicker than many anticipate for three reasons.

“First, there’s unlikely to be a wage price spiral as real wages are typically going down despite the increases.  Employers now seem to be holding back from increasing salaries on demand, which will help stifle wage inflation.

“Second, the time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are – and so financial conditions will get squeezed even harder in the near term.

“And third, although many economies are now likely to avoid a full-blown recession, economic growth is still expected to be weak for the foreseeable future.”

He concludes: “If the Fed does not stop its rate hiking agenda, it will lose the confidence of the public and financial markets which would have serious, far-reaching negative consequences for the US and the world.”

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.