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  • richard evans

Are we going to see another regional bank crisis?

Good morning

 

We’ll start with the BoE rate decision yesterday.  Rates left unchanged, no surprise there.   The guidance was tweaked, the wording about risks for further tightening was removed, although Bailey made it clear the Bank needed more information before we’d see any suggestion of rate cuts.  It was mixed in the voting, we’d though it was possible that all nine members would vote for no change, as it turned out six voted for no change, two for a rate rise and one voted to cut rates there and then.  This mixed, or indeed reasonably neutral outcome, meant GBP had no new direction to take and for a while GBPUSD pivoted 20 pips or so either side of 1.2650. 

 

EURUSD had started the day yesterday just below 1.0800, it did ticked slowly higher through the day, reaching up to 1.0830 ahead of the US ISM numbers.  By this time GBPUSD was at 1.2670.  The ISM numbers were stronger than expected despite a revision lower for the previous month, which initially helped push the US dollar a touch higher, GBPUSD to 1.2640, EURUSD to 1.0805.

 

Then we saw a complete turn.  USD weakened in late London trading, EURUSD traded up to 1.0875, GBPUSD up to 1.2750, and they have held in that sort of area overnight, attempting to push even higher this morning with EURUSD up to 1.0890 and GBPUSD to 1.2670, but that little flurry was short-lived and we are back to the 1.0875 and 1.2750 area.

 

Why the move?  A couple of suggestions have been touted.  First, there was a hint of a ceasefire deal between Israel and Hamas, which pushed risk sentiment higher and USD lower.  At one stage it seemed as though both sides had accepted the deal, it then transpired this was a little premature but the idea that a deal is perhaps close was enough to keep equities supported and USD weaker. 

 

In addition, concerns over regional banks and banks exposed to commercial real estate reared its ugly head again yesterday.  We had similar stories back in March 2023, you’ll remember SVB and Signature Bank failed and others such as First Republic were brought into the mix a month or two later.  Now we’ve seen others starting to come under the spotlight, for example New York Community Bancorp’s shares have halved in the last couple of days, taking them below the levels seen last March.  Japan’s Aozora Bank shares fell some 30% or so on reports of losses due to exposure to US commercial real estate and I understand Deutsche Bank have also talked of large loans linked to US CRE.

 

The hope is that we do not see any contagion among other Banks although I am sure we’ll see some other bank shares suffering over the next few weeks.  Worth noting that during the 2023 regional bank crisis, the USD weakened from March to May, EURUSD moved from around 1.0535 to 1.1075, while GBPUSD went from 1.1815 to 1.2650.  Worth paying attention to regional bank headlines over the coming weeks.

 

Closer to home, I have been reading that water bills are likely to rise above inflation in order to fund much needed infrastructure improvements.  I have made my utter contempt for water companies clear in recent months.  They have been paying out dividends to shareholders rather than invest in their infrastructure, and now demand more money from their customers, some of which may go to improvements but you wait, they will still pay hefty dividends.  I am not against firms making money but water is something of a right, let alone a need, and its disgraceful how the water firms have operated.  I am not alone in thinking this, although rather powerless to do anything other than pay the bills.

 

Meanwhile England’s bowlers have been pretty powerless against India’s batsmen so far, with India clocking up 230-3 in their first innings of the second test.  Still, all is not lost just yet, the same thing happened in the first test and England went on to win that somehow.  It’s a pretty decent weekend for sport, the rugby six nations kicks off this evening with  France v Ireland, could be a real cracker of a match.  I’m not sure how England will fare this time, could be interesting.  They take on Italy tomorrow while Wales take on Scotland.

 

A lot of premier league action as well, Spurs take on Everton in the early match tomorrow which could see Spurs go level on points with Arsenal although the latter have a superior goal difference.  Arsenal v Liverpool on Sunday afternoon may well be the pick of the weekend.  So cricket Saturday morning, Spurs around midday, England rugby straight after that.  A good plan, chance will be a fine thing though!

 

So that’s about it, all that is left is for us to see the latest US nonfarm payroll numbers this afternoon and we can maybe sit back and look forward to the weekend.  For the record, consensus is for a headline around +185k, if anything risks seem tilted to the upside.  The unemployment rate is expected to tick a fraction higher to 3.8%, while average hourly earnings are expected to remain unchanged. 

 

Have a great weekend as and when it comes

 

-  13.15 BoEs Pill speaks

-  13.30 US nonfarm payrolls

-  15.00 US michigan sentiment survey, factory orders

 

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