Exchange rates return to the spotlight; RBS fails UK bank stress test – are banks becoming a threat again?; Big Trouble in Little Italy: Why a no vote could mean Ciao Signore Renzi; Chinese currency manipulation?; Vienna’s OPEC Deal: ‘The Devil is in the Detail’; UK – AIM market insight: Orwellian dreams or nightmares?
Exchange rates return to the spotlight
The higher oil price and the general upward price pressures that come in its wake, together with the improved industrial output prospects, immediately fed into rising inflation expectations. These had already moved up significantly since the summer and even more since the Trump win, in anticipation of fiscal stimulus measures which would be necessary to stem the rise of the global populism movement.
RBS fails UK bank stress test – are banks becoming a threat again?
In our view, and despite the headlines, RBS is not set to fail and not inherently weak. The BoE’s stress test represents a very significant step up from previous tests. While we agree that RBS is likely to face some stiff penalties in the US for misconduct, we believe the BoE’s overall test scenario is relatively aggressive and slightly unrealistic regarding RBS’ situation in assuming that substantial fines would be enforced during times of global financial stress.
In summary, we would observe that the portrayal of a weakening UK banking sector, as some of the media were quick to report, is far off the mark. Compared to 2008, UK banks are far better capitalised and therefore far more resilient against insolvency, even under the most severe loss pressures. This doesn’t, however, mean that because of the much improved capitalisation of banks, the financial sector could not still experience severe stress and, as a consequence, underperform in its role of providing the financial infrastructure for the UK economy – as it did in 2008/2009.
Big Trouble in Little Italy: Why a no vote could mean Ciao Signore Renzi
If Austria does indeed lurch to the right, the populist vote across Europe would be further strengthened. In The Netherlands, Geert Wilders and his far-right Party for Freedom are already topping some polls in the run-up to March’s election, while the next French President looks set to be either Republican candidate François Fillon or Marine Le Pen of the National Front. A double whammy of the election of Hofer, coupled with the displacement of Mr Renzi, is feared by some to become the domino that sees Europe fall into nationalism once more.
Chinese currency manipulation?
One potential issue for the future is the way in which the capital outflow can transmit a tightening of monetary policy for the domestic Chinese environment. Short-term rates spiked up above 4% in Hong Kong, from around 2%. Meanwhile, policy makers have (rightly) withdrawn economic support in the form of easier credit conditions, in particular to stem the sharp upswing in property prices. This tightening may have further to run, especially if the outflow rises ahead of any pinch-point before Trump is sworn in.
Vienna’s OPEC Deal: ‘The Devil is in the Detail’
Without a doubt, this was a make or break deal for OPEC. The failure to reach a deal would have seen the cartel’s credibility in tatters. Moreover, it could have prompted oil prices to plummet – at least in the short term, contributing further to concerns over the stability of the market. On the back of a much lower oil price than a few years ago and much downside uncertainty about its further development in light of the persistent supply overhang, we have seen investment in new oil exploration project fall for a record third year. This was simply due to the fact that energy giants lacked the willingness to invest without a clear perspective whether the future price of oil may be $50 or perhaps just $30.
What this deal potentially offers is a greater certainty in where the oil price will be further down the line. If OPEC and non-OPEC producers can follow through on their promises and help to reduce global oil stockpiles, this could establish a $50 floor for oil, which would return some planning certainty to oil producers for their exploration project business cases.
UK – AIM market insight: Orwellian dreams or nightmares?
As part of our research into investment opportunities in the Alternative Investment Market subsection of the UK stock market, we have identified a very interesting and expanding market sector. With the exponential growth of e-commerce, we focus here on one data intelligence company that provides businesses a means to identify their customers, employees and suppliers.
GB Group, who we saw this week, specialise in identity data. That is, they look for information about individuals which can be acquired from digital sources. With this information, they can help companies check that the people they are dealing with are really who they say they are.
Read the full Tatton commentary here
