Archive for Economics & Fundamentals – Page 95

Silicon Valley investors want to create a new city – is ‘California Forever’ a utopian dream or just smart business?

By Iain White, University of Waikato 

He was, said George Bernard Shaw, “one of those heroic simpletons who do big things whilst our prominent worldlings are explaining why they are Utopian and impossible”.

The celebrated playwright was referring to the ideas of Ebenezer Howard, the creative force behind the idea of “garden cities” in the late 19th and early 20th centuries; new urban centres that Howard argued would have the best of town and country, but without the problems.

There’s a reminder of that somewhat backhanded compliment in the recent news of a Silicon Valley consortium named Flannery Associates buying land with a view to creating a new city in northern California’s Solano County. The controversial project is named after the investment vehicle’s parent company, California Forever.

The parallels between contemporary utopian thinking and Howard’s ideas from more than a century ago are readily apparent. The notion of something like California Forever may appear cutting edge, but it is part of the historical foundations of current planning systems.

Indeed, the science-fiction writer H.G. Wells – a futurist whose own ideas would resonate with many in Silicon Valley – was so attracted to Howard’s ideas that he joined the Garden City Association to support their creation.

Garden city visions

Any kind of new city model tends to reflect the politics of its founders. The vision and plans stretch beyond the built form to picture a preferred lifestyle, and interactions with nature and each other.

The artist’s renderings accompanying the California Forever project depict an attractive, harmonious landscape familiar to utopian thinking: plentiful parks, open spaces and sustainable energy.

It encapsulates a politics of urban living that also emphasises the need to recast our relationships with nature. As such, these ideas also involve a large dose of social engineering. They are not just about creating a new built environment, they envision a new kind of society that’s better than the current one.

But the garden cities that were eventually developed were a far cry from Howard’s initial vision. In fact, his ideas from over a hundred years ago make those from Silicon Valley look distinctly dated.

For Howard, it was as much about social reform and organisation as city planning. He advocated for local production and relatively self-contained settlements to reduce the need to travel, as well as innovative ways of treating waste that echo current circular economy thinking.

Planning and profit

Even less like the investment logic behind California Forever, Howard also imagined a city that could challenge some of the precepts of capitalism.

Given the significant deprivation and social divide between haves and have-nots, he advocated that land in garden cities could be organised cooperatively to share wealth and reduce poverty.

The need to attract investors was one of the reasons Howard’s ambitious politics eroded. To purchase land on that scale requires significant capital, and the providers of that capital would no doubt be looking for a return.

Ebenezer Howard.
Wikimedia Commons, CC BY-NC

Should California Forever materialise, history would caution us that there may be a similar gap between rhetoric and reality. While Howard’s ideas were partially implemented in places like Letchworth, the focus was more on the built environment than social justice or sustainability.

Howard moved into the new city, but his influence was marginalised by the need to accommodate shareholder interests.

While we don’t know how California Forever has been pitched to investors, it’s a fair assumption it is also shaped by the profit motive: buying cheaper agricultural land, rezoning for housing and development, drawing in state funding for infrastructure, and seeing the land rise in value.

While the images appear sustainable, long-distance commuting may be a problem given the nature of the labour market in California, as might expectations of genuine community involvement in the project. Utopian schemes have long been critiqued for their tendency towards authoritarianism – a charge not unfamiliar to the tech sector in recent times.

Howard’s ideas were also criticised as anti-urban. Shouldn’t we seek to improve existing cities rather than abandon and start anew, possibly to create a gentrified enclave?

For the tech sector, too, there is a recurring utopian trend that seeks to escape – whether to moon colonies or new cities – rather than use its vast wealth and influence to address current urban problems.

Progress and planning

But, ultimately, it’s encouraging to see groups like the Silicon Valley investors advocate for the benefits of good urban planning and what it can provide future generations. The bigger problem is that current planning systems aren’t anything like as progressive.

In many countries, similarly powerful investors routinely criticise urban planning as creating “red tape”, increasing the costs of development, or stopping markets from acting “efficiently”.

Yet the kind of city building represented by California Forever requires greater regulatory power and the kind of political ambition that was more common a century ago. And it raises the question of whether projects like this should be left to the private sector.

At the very least, perhaps, such initiatives provide an opportunity to reassess the potential of urban planning and cast a light on current societal problems. Howard’s utopian vision was designed to solve the problems of his time: exploitative landlords, slums, polluted cities and extreme disparities of wealth.

Whether or not California Forever is built, the reasons behind the idea demonstrate that while history may not repeat, it does sometimes rhyme.The Conversation

About the Author:

Iain White, Professor of Environmental Planning, University of Waikato

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

Norway sees a drop in inflation. Natural gas rises amid workers’ strikes in Australia

By JustMarkets 

As of Monday’s stock market close, the Dow Jones Index (US30) increased by 0.25%, while the S&P 500 Index (US500) added 0.67%. The NASDAQ Technology Index (US100) closed positive by 1.14% on Monday. Strengthening tech stocks provided support to the overall market yesterday. Tesla shares rose more than 7% after Morgan Stanley upgraded their rating. Additionally, Qualcomm shares were up more than 3% after Apple extended its contract with the company to supply semiconductor chips for modems for another three years.

On Sunday, US Treasury Secretary Yellen made bullish comments for equities, saying she “feels very good” about the premise of a soft landing as “all inflation indicators are going down,” and she is increasingly confident that the United States will be able to contain inflation without severely damaging the labor market.

Equity markets in Europe were mostly up yesterday. Germany’s DAX (DE40) added 0.39%, France’s CAC 40 (FR40) gained 0.52% on Monday, Spain’s IBEX 35 (ES35) increased by 0.75%, and the UK’s FTSE 100 (UK100) closed 0.25% up.

The European Commission lowered its 2023 eurozone GDP forecast to 0.8% from the previously projected 1.1%. It also lowered the Eurozone inflation forecast for 2023 to 5.6% from the previous forecast of 5.8%. Italian industrial production for July fell by 0.7% m/m, weaker than expectations of 0.3% m/m.

Berenberg currency analysts believe that the leveling of interest rates in the US and Europe, as well as the declining attractiveness of the US dollar as a safe haven, point to the possibility of a revival of the euro in the coming periods. Excess US government debt combined with potential refinancing difficulties could put downward pressure on dollar strength and give confidence to the euro. By the end of 2023, analysts forecast a significant strengthening of the euro against the dollar to 1.1200.

Norwegian inflation slowed more than expected in August. Data showed core inflation falling from 5.4% to 4.8% y/y and core inflation from 6.4% to 6.3% y/y. The consensus forecast pointed to an acceleration. All this raises doubts that Norges Bank will go for further monetary tightening. However, it should be understood that inflation is not as important to Norges Bank as it is to other central banks because Norway’s Central Bank operates on a model-based approach that places great importance on currency fluctuations and oil prices.

On Monday, oil prices fell from their highest in nearly ten months amid concerns about global energy demand after the European Commission cut its Eurozone GDP forecast. But dollar weakness on Monday provided support for energy prices. In addition, crude oil received support last Tuesday when Saudi Arabia and Russia announced an extension of oil production cuts until the end of the year. Oil was also supported by news of increased credit demand in China, the world’s second-largest oil consumer, which could lead to stronger economic growth and energy demand.

On Monday, natural gas prices received support from a rise in European gas prices to a one-week high. LNG production workers at key Chevron facilities in Australia began a partial strike last week after talks with management failed to reach an agreement. The workers said that if no agreement is reached, they will completely stop work for two weeks starting this Thursday.

Asian markets traded flat on Monday. Japan’s Nikkei 225 (JP225) decreased by 0.43% yesterday, China’s FTSE China A50 (CHA50) added 0.67%, Hong Kong’s Hang Seng (HK50) lost 0.58% on the day, and Australia’s S&P/ASX 200 (AU200) was positive by 0.50% on Monday.

In China, authorities returned to strong measures to defend the yuan. This came after the USD/CNY pair rose above the 7.30 level. Along with a much stronger CNY fixing, the PBoC issued a statement saying that market participants should “voluntarily maintain a stable market” and avoid speculative trades. However, sentiment towards China is still wary as other economic indicators for August continued to point to continued unfavorable factors for Asia’s largest economy.

Alibaba shares fell by 1.8% on Tuesday, extending losses after the head of its cloud division unexpectedly resigned this week.

S&P 500 (F)(US500) 4,487.46 +29.97 (+0.67%)

Dow Jones (US30) 34,663.72 +87.13 (+0.25%)

DAX (DE40)  15,800.99 +60.69 (+0.39%)

FTSE 100 (UK100) 7,496.87 +18.68 (+0.25%)

USD Index  104.53 -0.57 (-0.53%)

Important events for today:
  • – Australia NAB Business Confidence (m/m) at 04:30 (GMT+3);
  • – UK Average Earnings Index (m/m) at 09:00 (GMT+3);
  • – UK Claimant Count Change (m/m) at 09:00 (GMT+3);
  • – UK Unemployment Rate (m/m) at 09:00 (GMT+3);
  • – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+3);
  • – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

ECB could push EU into long recession with rate rise on Thursday

By George Prior

The European Central Bank would risk plunging the European Union into a long recession if it decides to raise interest rates at its pivotal meeting on Thursday, following the growth downgrades of the bloc by the European Commission.

This is the stark warning from Nigel Green, CEO and founder of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organizations, after the Commission, the executive arm of the EU, said on Monday that the economy will expand by just 0.8% this year and 1.4% in 2024.

The figures represent a downgrade from predictions by Brussels in May of 1% growth in 2023 and 1.7% next year.

The Commission also said that Germany is set for an extended recession in 2023 – it’s the only major European economy to witness an economic contraction this year.

Nigel Green comments: “It’s reported that the ECB’s decision on whether to raise interest rates or not on Thursday is on a knife-edge. This is because the central bank is having to deal with stalling growth and persistently high inflation.

“But we urge the ECB to refrain from raising interest rates considering the economic context and potential consequences.”

He continues: “The 0.4% contraction in Germany’s economy, coupled with the European Commission’s downward revision of growth expectations, suggests that the trajectory might be less stable than anticipated.

“In such a precarious environment, raising interest rates would further hinder economic growth and job creation.

“The largest economy in Europe is already struggling. Higher borrowing costs for businesses and consumers will further stifle investment and consumption, which are essential drivers of economic recovery. With Germany’s economy facing headwinds, it is crucial to maintain affordable-as-possible financing options to support businesses and individuals alike.

“Due to its size and influence, should the economic situation in Germany get worse due to further rate rises, there’s a real risk that the wider EU could be plunged into a long recession.”

The deVere CEO goes on to add: “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.”

The ECB must also consider the economic divergence within the Eurozone. Raising interest rates could exacerbate disparities and potentially lead to further divergence among Eurozone countries.

It is crucial for the ECB to communicate its intentions clearly, notes the deVere CEO, to the markets and the public. Raising interest rates without adequate explanation could lead to market volatility and confusion, which are detrimental to economic stability.

He concludes: “Despite the risks of steering the wider EU into a recession with another rate rise, we expect that the ECB will argue it is still too soon to pause in its battle against inflation and, therefore, will go for one final hike on Thursday.”

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.

Analysts forecast a significant euro rise by the year’s end. Inflation in China returned to positive dynamics

By JustMarkets

At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 0.22% (-0.86% for the week), while the S&P 500 Index (US500) added 0.14% (-1.61% for the week). The NASDAQ Technology Index (US100) closed positive by 0.09% on Friday (-2.61% for the week). Strengthening crude oil prices on Friday boosted energy stocks and the broader market. Stocks also received support as the likelihood grew regarding a pause in Fed rate hikes amid comments from Dallas FRB Governor Lorie Logan, who stated the following: “Another pass at raising interest rates may be appropriate at the FOMC meeting later this month.” Markets rate the odds of a 25 bps rate hike at the September 20 FOMC meeting at 7% and a 25 bps rate hike at the November 1 FOMC meeting at 48%.

Friday’s US economic news was negative for equities after consumer credit rose by $10.399 billion in July, weaker than expectations of $16.000 billion. On Friday, Canadian labor market data was released. In July, the number of employed in the Canadian economy increased by 39.9k, which was above expectations of 18.9k. The unemployment rate remained at 5.5%. A more detailed report showed that overall, Canada’s labor market remains resilient, but imbalances in certain sectors are widening, which could lead to problems in the future.

A draft document prepared by G-20 leaders meeting this weekend in India warned that “cascading crises” pose challenges to long-term economic growth and called for coordinated macroeconomic policies to support the global economy. In addition, global economic growth is uneven and below the long-term average as uncertainty about the economic outlook remains high, and the balance of risks tilts to the downside.

Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE40) increased by 0.14% (-1.03% for the week), France’s CAC 40 (FR40) gained 0.62% (-1.25% for the week), Spain’s IBEX 35 (ES35) added 0.61% (-1.27% for the week), and the UK’s FTSE 100 (UK100) closed up by 0.49% (+0.18% for the week).

Berenberg currency analysts believe that the leveling of interest rates in the US and Europe, as well as the declining attractiveness of the US dollar as a safe haven, point to the possibility of a revival of the euro in the coming periods. Excess US government debt combined with potential refinancing difficulties could put downward pressure on dollar strength and give confidence to the euro. By the end of 2023, analysts forecast a significant strengthening of the euro against the dollar to 1.1200.

Asian markets were predominantly up last week. Japan’s Nikkei 225 (JP225) decreased by 0.58% for the week, China’s FTSE China A50 (CHA50) fell by 2.77%, Hong Kong’s Hang Seng (HK50) ended the week down by 2.10%, and Australia’s S&P/ASX 200 (AU200) ended the week negative by 1.67%.

HSBC currency strategists revised downward their forecasts for the Australian (AUD) and New Zealand (NZD) dollars against the US dollar (USD). Firstly, they assume that AUD and NZD will experience a weakening trend before stabilizing in the second quarter of 2024, with AUD/USD and NZD/USD rates reaching 0.62 and 0.55, respectively, by the end of the first half of 2024.

Bank of Japan Governor Kazuo Ueda said over the weekend that the central bank may end its negative interest rate policy when the 2% inflation target is reached, indicating a possible interest rate hike. Ueda said the central bank may have enough data by the end of the year to determine whether it can end negative rates. Currently, the BoJ is targeting short-term interest rates at 0.1% as part of its negative rate policy. In addition, 10-year government bond yields are at zero as part of efforts to revitalize the economy and sustainably meet targets.

Consumer prices in China returned to positive momentum in August, while the decline in factory prices slowed. According to the National Bureau of Statistics, the Consumer Price Index (CPI) rose by 0.1% year-on-year in August, slower than the median estimate of a 0.2% increase. The CPI declined by 0.3% in July. Core inflation, which excludes food and fuel prices, was unchanged at 0.8% in August. The Producer Price Index (PPI) fell by 3.0% from a year earlier, which was in line with expectations, after falling by 4.4% in July. According to analysts, overall, rate inflation still points to weak demand and requires more active policy support from the government.

S&P 500 (F)(US500) 4,457.49 +6.35 (+0.14%)

Dow Jones (US30) 34,576.59 +75.86 (+0.22%)

DAX (DE40)  15,740.30 +21.64 (+0.14%)

FTSE 100 (UK100) 7,478.19 +36.47 (+0.49%)

USD Index  105.07 +0.01 (+0.01%)

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Interest Rates: From 0% to Above 5% — to …?

“The lines in the chart will turn up, and no policy will stop it”

By Elliott Wave International

As you’re probably aware, many people who want to borrow to make a major purchase like a house or a car are bemoaning higher interest rates.

It wasn’t so long ago that 3-month T-bill rates were around zero, and at least one prominent figure at the Federal Reserve said rates needed to stay super low for a good while.

Indeed, let’s go back to this June 18, 2021 headline (CNBC):

Fed’s Kashkari opposed to rate hikes at least through 2023

Well, as Elliott Wave International has said time and again, the market determines the trend of bond yields (and interest rates), not the Fed. The Fed merely follows the bond market.

Nearly a month after that Fed official called for a continuation of very low rates, the July 13, 2021 Elliott Wave Theorist offered its own perspective via this chart and commentary (The Elliott Wave Theorist is a monthly publication which provides insights into major financial and social trends):

Rates at Zero, but Not for Long

[The chart] shows that U.S. Treasury bill rates have edged closer and closer to zero …. Nonexistent T-bill yields are due to one thing: historically elevated social mood. … When optimism and complacency finally melt like popsicles in the sun, the lines in [the chart] will turn up, and no policy will stop it.

Fast forward to the just-published August 2023 Elliott Wave Theorist, which provides an update on that July 2021 call with this chart:

As you can see, since our forecast, the 3-month T-bill rates have climbed from around zero to north of 5%. The black arrow points to the juncture at which the July 2021 Theorist made that noteworthy forecast. Mind you, Elliott Wave International was almost alone in making such a call.

Is the rise in interest rates over?

Well, at least one observer says “no.” This Aug. 18 Fox Business caption captures the view of a contributor to a news and opinion website:

[Financial and economics editor]: Interest rates will go higher than Americans think

This is in stark contrast to a recent Reuters poll of economists, the majority of whom say that interest rates have plateaued.

Who’s right?

You may want to check out a chart of bond yields and its Elliott wave structure.

If you’re unfamiliar with Elliott wave analysis, read Frost & Prechter’s Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here’s a quote from the book:

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott’s highly specific rules reduce the number of valid alternatives to a minimum.

If you’d like to find out about “Elliott’s highly specific rules,” you can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior for free.

That’s right — Elliott Wave International has made this definitive text on Elliott wave analysis available to Club EWI members for free. A Club EWI membership is also free and members enjoy free access to a wealth of Elliott wave educational resources.

Join the approximately 500,000 Club EWI members who are already gaining insights into trading and investing from an Elliott wave perspective by following this link: Elliott Wave Principle: Key to Market Behavior(get free access now).

This article was syndicated by Elliott Wave International and was originally published under the headline Interest Rates: From 0% to Above 5% — to …?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Trade relations between the US and China are escalating again. Natural gas rises as inventories fall

By JustMarkets 

As of Thursday’s stock market close, the Dow Jones Index (US30) increased by 0.17%, while the S&P 500 Index (US500) lost 0.32%. The NASDAQ Technology Index (US100) closed negative by 0.89% yesterday. The broader market was under pressure yesterday due to weakness in technology stocks. Apple (AAPL) stock prices fell again by more than 3% yesterday amid a Wall Street Journal report that China plans to extend its iPhone ban to government agencies and state-owned companies. Shares of Nvidia (NVDA) fell more than 2%, complementing Wednesday’s 2% drop after Research Affiliates said the stock is “a textbook story of a Big Market Delusion,” and with the stock trading at 110 times earnings, the stock is off the charts.

Stocks were also pressured by news that weekly US jobless claims unexpectedly fell to a 7-month low, indicating the strength of the labor market and could prompt the Fed to raise interest rates for longer.

Equity markets in Europe were mostly down on Thursday. Germany’s DAX (DE40) decreased by 0.14%, France’s CAC 40 (FR40) closed just above the open, Spain’s IBEX 35 (ES35) was 0.07% cheaper, and the UK’s FTSE 100 (UK100) closed positive by 0.21%.

Eurozone Q2 GDP was revised downward to 0.1% Q/Q and 0.5% Y/Y from the previously announced 0.3% Q/Q and 0.6% Y/Y. German industrial production for July fell by 0.8% m/m, weaker than expectations of 0.4% y/y. The Eurozone economy is showing resilience but with signs of an early slowdown.

Crude oil prices moved lower yesterday amid a stronger dollar and concerns over energy demand. The dollar index rose to a nearly 6-month high on Thursday, and global economic news was mostly weaker than expected, suggesting weaker energy demand.

Natural gas prices bounced off a two-week low on Thursday and rose moderately on lower weekly supplies after EIA natural gas inventories rose by  33 bcf, below expectations of  41 bcf. As of September 5, European natural gas storage inventories were 92% full, well above the 5-year seasonal average of 82% for this time of year. The US natural gas inventories as of September 1 were 7.6% above the 5-year seasonal average. Gas was also boosted by news from Australia. Workers at an Australian LNG plant are threatening two weeks of 24-hour shutdowns at two major export plants starting September 14 unless an agreement is reached. Inspired Plc predicted that Asian LNG buyers are “likely to raise LNG import prices” to replace Australian volumes in the event of a workers’ strike. Australia is the world’s third-largest exporter of liquefied natural gas (LNG), accounting for 10% of global supply.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) fell by 0.75%, China’s FTSE China A50 (CHA50) fell by 1.22%, Hong Kong’s Hang Seng (HK50) ended the day down by 1.34%, and Australia’s S&P/ASX 200 (AU200) ended Thursday negative by 1.19%. Most Asian stocks continued to decline on Friday as weak economic data from Japan added to concerns about slowing growth, while the prospect of higher US interest rates and deteriorating Sino-US relations weighed on technology stocks.

Japan’s Nikkei 225 index was the worst-performing index in Asia, down by 1%, after data showed Japan’s economy grew by 1.2% in the second quarter, less than the originally estimated 1.5%. The weak figures suggest that ongoing stimulus measures from the Bank of Japan may not be supporting growth as much as originally expected, which dampened investor sentiment toward local equities.

Asian tech stocks have been hit by calls from US lawmakers for a complete ban on technology exports to China after two companies, namely Huawei and Semiconductor Manufacturing International Corp, allegedly violated US trade restrictions. The move, coupled with Beijing’s recent restrictions on Apple, has heightened fears of deteriorating trade ties between the world’s largest economies, which could trigger a renewed trade war.

S&P 500 (F)(US500) 4,451.14 −14.34 (−0.32%)

Dow Jones (US30) 34,500.73 +57.54 (+0.17%)

DAX (DE40)  15,718.66 −22.71 (−0.14%)

FTSE 100 (UK100) 7,441.72 +15.58 (+0.21%)

USD Index  105.04 +0.18 (+0.17%)

Important events for today:
  • – Japan GDP (q/q) at 02:50 (GMT+3);
  • – Canada Unemployment Rate (m/m) at 15:30 (GMT+3);
  • – US FOMC Member Barr Speaks (m/m) at 16:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

Is the US banking crisis over?

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

Graph showing US benchmark interest rates over the past 15 years
St Louis Federal Reserve

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 (%)

Graph showing US banks' net interest margins
Based on 641 banks.
S&P Capital IQ

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

Graph showing US banks' share prices in 2023
Bank of America = blue; Citigroup = orange; Goldman Sachs = pale blue; JP Morgan = yellow; Morgan Stanley = indigo; Regional banks = purple.
Trading View

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.The Conversation

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.

G20 must urgently tackle global poverty with financial inclusion: deVere

By George Prior 

With 1.7 billion people having no access to basic financial services, the G20 summit starting this week has a golden opportunity to address financial inclusion and potentially lift hundreds of millions out of poverty.

This is the call-to-arms demand from deVere Group’s founder Nigel Green as 40 leaders of the world’s richest and most powerful nations descend on New Delhi, India, for the critical two-day event.

Financial inclusion refers to the availability and equality of opportunities to access and use financial services. These services include banking, credit, insurance, and savings facilities.

Nigel Green comments: “In our ever more interconnected global society, it is remarkable that a substantial segment of the world’s population still lacks adequate access to banking services or is underserved by them.

As data from the World Bank shows, around 1.7 billion adults across the globe currently lack any kind of fundamental financial services, with the majority of these individuals living in nations classified as low- and middle-income.

“Enhancing financial inclusion serves as a powerful instrument in the fight against poverty.
“When individuals can access financial services, they can effectively save, make investments, and safeguard themselves from unexpected economic shocks and financial setbacks.

“Consequently, this newfound capability enables them to break free from the cycle of poverty and enhance their quality of life. It can be truly life changing.”

Financial inclusion also serves as a catalyst for economic growth through the encouragement of entrepreneurship and the nurturing of small businesses.

“When both individuals and small enterprises gain entry to credit and other financial assets, they become capable of making investments in their businesses, generating employment opportunities, and encouraging economic progress,” says the deVere founder.

Another critical focus on the G20 agenda is the worldwide pursuit of gender equality, and financial inclusion can prove pivotal in achieving this goal.

Nigel Green continues: “Women, especially in developing nations, frequently encounter substantial obstacles when attempting to access financial services. By giving priority to financial inclusion, we can work to close this gender gap, thereby promoting economic empowerment for women and other underserved groups.”

He concludes: “By addressing the critical issue of financial inclusion, the G20 has a golden opportunity to potentially help lift hundreds of millions out of poverty, encourage economic growth, and promote gender equality.

“By acting on this issue, the G20 leaders will act to immeasurably contribute to global economic stability and prosperity.”

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.

Australia’s economy shows resilience to high-interest rates. OPEC+ production cuts support oil rally

By JustMarkets

As of Tuesday’s stock market close, the Dow Jones Index (US30) decreased by 0.56%, while the S&P 500 Index (US500) lost 0.42%. The NASDAQ Technology Index (US100) closed negative by 0.08% yesterday. The NASDAQ Stock Index (US100) was more resilient to the decline, helped by a 7% gain in Airbnb stock and a 4% gain in Tesla stock. Airbnb jumped on the back of its inclusion in the S&P 500 Index this month, while Tesla rose after China’s August auto shipments rose more than 30% m/m.

Economic news from the US on Tuesday provided support for the dollar after factory orders fell by 2.1% m/m in July, the biggest decline in 8 months, but stronger than expectations of a 2.5% m/m decline. FOMC representative Waller’s comments on Tuesday were dovish for Fed policy and bearish for the dollar as he signaled his support for a pause in Fed rate hikes. But weaker-than-expected economic news from China and the eurozone on Tuesday boosted relative optimism about the US economy and the dollar.

The Bank of Canada will hold its monetary policy meeting today. The latest inflation data for June showed a marked slowdown in both base and core inflation, but July’s figures show some resilience, with overall inflation rising to 3.3% y/y from 2.8% and core inflation holding steady at 3.2%. While there is only a 20% chance of any action being taken today, the probability of another 25 bps rate hike before the end of the year is around 50%.

Equity markets in Europe were mostly down on Tuesday. Germany’s DAX (DE40) decreased by 0.34%, France’s CAC 40 (FR40) fell by 0.34%, Spain’s IBEX 35 (ES35) lost 0.22%, and the UK’s FTSE 100 (UK100) closed down by 0.20%. Economic news from the Eurozone on Tuesday proved dovish for ECB policy. The Eurozone Composite PMI for August was revised down by 0.3 to 46.7 from the previously announced 47.0, the sharpest rate of contraction in 3 years. But July’s Eurozone producer price index (which displays the rate of inflation between factories and plants) fell to minus 7.6% y/y from minus 3.4% y/y in June, the sharpest decline in 14 years.

Oil prices rose on Tuesday after Saudi Arabia said it would maintain a unilateral 1.0 million BPD oil production cut through December. The move will keep Saudi oil production at around 9 million BPD, the lowest level in three years.

The World Gold Council (WGC) said in its latest report that Australian investors have switched to fixed-income assets amid economic uncertainty. The outlook for fixed-income assets is now threatened by inflationary pressures. The report recommends considering gold as a long-term strategic asset alongside bonds.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) rose by 0.30%, China’s FTSE China A50 (CHA50) fell by 0.77%, Hong Kong’s Hang Seng (HK50) ended the day down by 2.06%, and Australia’s S&P/ASX 200 (AU200) ended Tuesday negative by 0.06%.

According to Japan’s Central Bank official Hajime Takata, Japan is seeing the first signs of a change in the established view that wages and inflation will not rise much, indicating that conditions are forming for a gradual withdrawal of large-scale stimulus. Takata emphasized the need to maintain ultra-soft monetary policy for the time being, as the slowdown in global economic growth is adding to uncertainty about whether Japan can sustainably meet the Bank of Japan’s (BoJ) 2% inflation target. However, he also noted that there are signs of a change in corporate pricing and wage-setting behavior, which is driving up prices not only for goods but also for services, indicating that inflationary pressures are intensifying. Japan’s core inflation reached 3.1% in July, surpassing the Bank of Japan’s 2% target for the 16th consecutive month.

Australian GDP grew by 0.4% in quarterly terms, in line with the previous quarter’s pace and economists’ estimates. This result is likely to boost the Reserve Bank of Australia’s (RBA) confidence that it can provide a soft landing for the economy. However, Goldman Sachs forecasts that growth in the Australian economy will weaken as households come under pressure from rising interest rates and prices.

S&P 500 (F)(US500) 4,496.83 −18.94 (−0.42%)

Dow Jones (US30) 34,641.97 −195.74 (−0.56%)

DAX (DE40)  15,771.71 −53.14 (−0.34%)

FTSE 100 (UK100) 7,437.93 −14.83 (−0.20%)

USD Index  104.80 −0.57 (−0.57%)

Important events for today:
  • – Australia GDP (q/q) at 04:30 (GMT+3);
  • – UK Construction PMI (m/m) at 11:30 (GMT+3);
  • – Eurozone Retail Sales (m/m) at 12:00 (GMT+3);
  • – US Trade Balance (m/m) at 15:30 (GMT+3);
  • – Canada Trade Balance (m/m) at 15:30 (GMT+3);
  • – UK Monetary Policy Report Hearings at 16:15 (GMT+3);
  • – US ISM Service PMI (m/m) at 17:00 (GMT+3);
  • – Canada BoC Interest Rate Decision (m/m) at 17:00 (GMT+3);
  • – Canada BoC Rate Statement (m/m) at 17:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

G20 summit must formulate plan for Global South climate change threat

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.