Dec 20 • Morning Roll Call • 1612 Views • Comments Off on MORNING ROLL CALL

Italian bank problems resurface whilst Ukraine’s largest bank failsbetween-the-lines1

Monday was a relatively quite day in terms of scheduled high impact news event and data, which is to be expected as trading winds down towards the year’s end. However, there are several issues bubbling up under the surface in Europe that are causing grave concerns; Ukraine’s banking system, Italy’s banking system, the UK’s Brexit and Greece’s bailout renegotiation, are beginning to create ripples of uncertainty throughout the region.

The news that the Ukraine’s largest retail bank PrivatBank is insolvent, despite assurances from its leading management over the weekend that the bank was in robust health, came as quite a shock. Estimates suggest that the bank controls between 50-75% of consumer savings in Ukraine. Whilst it’s obvious that the state’s central bank will somehow step in to rescue the bank, it does raise questions regarding the overall stability of the Ukraine banking system, particularly when evidence is emerging of huge holes in the balance sheet.

Ukraine’s central bank stated that PrivatBank hadn’t fulfilled its recapitalisation programme and more worryingly, circa 97 percent of its corporate loans had gone to companies linked to the bank’s shareholders, immediately flagging up concerns regarding the senior bank officials’ probity and ethics. As of Dec.1st, the capital shortfall stood at $5.65 billion. In order to avoid a bank run the Ukrainian president assured PrivatBank’s clients that their money was safe, and called for savers and investors to remain calm.

The issue of Italy’s banking system has once again been in the spotlight. Banca Monte dei Paschi di Siena shares fell by 11 percent after the lender said it will begin selling shares to institutional investors this week. The bank is trying to resolve differences with a key investor over its 5 billion euro ($5.2 billion) rescue plan to allow the deal to go ahead and avoid a state bailout.

Italy’s third largest bank has until the end of December to raise capital and offload 28 billion euros in gross bad loans as requested by the European Central Bank. On Monday, it shook the market with a warning that Italian bank industry bailout fund “Atlante”, was rethinking its 1.5 billion euro purchase of bad loans from the lender.

Atlante expressed “deep reservations” in its December 17th letter over the terms of the bridging loan that Monte dei Paschi secured as part of the sale of bad loans, the bank said. If the issues raised by Atlante’s management can’t be resolved, the operation cannot be concluded by Dec. 31st as requested by the European Central Bank, the bank said in a statement.

The US economy continues to perform reasonably, despite signs of a seasonal slowdown between November and December. The initial Markit services purchasing managers’ index for December came in at 53.4, this was down from a final figure of 54.6 in November. The composite index came in at 53.5 in December, compared to 54.9 the previous month.

Labour activity and wages in the Eurozone are on the rise according to the relatively healthy data published by Markit economics on Monday. Howard Archer, chief UK and Europe economist at IHS Markit, said:

“A rise in Eurozone wage costs and total labour costs in the third quarter of 2016 may fuel hope within the ECB that underlying Eurozone inflationary pressures may just be starting to pick up. The ECB has been frustrated and disappointed by the lack of a pick-up in underlying Eurozone inflation in recent months, even though the headline consumer price inflation rate has picked up.”

In the euro area, wages & salaries per hour worked grew by 1.6% and the non wage element by 1.2% in the third quarter of 2016 compared with the same quarter of 2015. In the second quarter of 2016, the annual changes were +0.9% and +1.5% respectively. In the EU28, hourly wages & salaries rose by 2.0% and the non-wage component by 1.5% in the third quarter of 2016. In the second quarter of 2016, annual changes were +1.4% and +1.7% respectively.

The S&P 500 rose by 0.2 percent to 2,262.56 on the day in New York, falling back from a gain that at one point reached 0.4 percent. The index has advanced by circa 6 percent since the Nov. 8th presidential election, while the Dow Jones Industrial Average is up 8 percent. The DJIA closed up 0.22% on the day at 19,863, a rally of circa 120 points needed to break the 20,000 barrier before the year is out.

In an indication that the holiday season is already with us, the SPX on Monday was some 23 percent below its 30 day average trading volume. Emerging market equities fell by 0.7 percent registering a fourth consecutive day of losses. The Stoxx Europe 600 Index fell by 0.1 percent, with mining equities leading the declines. The DAX closed up 0.2%, the CAC down 0.22%, the FTSE 100 up 0.08% and Italy’s MIB closed down 0.24% with thr banking issues weighing on the finance sector.

Threats by Scotland, to force a second referendum on independence, should the UK’s government follow through on its Brexit programme, forced the UK’s pound into a retreat versus the dollar and euro during Monday’s trading sessions. Cable crashing through S3 early in the London opening session, whilst at one point falling by over a cent, but eventually recovering to end the day close to 1.23862. Sterling also plunged versus yen; again crashing through S3, to end the day close to 145.05.

Despite the fact that many analysts are predicting sterling to fall further in 2017 the recent COT report (commitment of traders) illustrated a reduction in shorts of sterling by large institutions. The euro saw the biggest decrease in net-short positions, where net-shorts decreased by 27,043 contracts -87.5K contracts. The net short positions in British pound sterling declined by 4,895 contracts to -72.3K contracts. New Zealand shorts were covered marginally by 250 contracts to -3.7K contracts.

The dollar declined by circa 1 percent to 116.72 yen on Monday, after gaining for the past six weeks. The broader dollar index gauge of the dollar versus it’s ten major peers, rose by 0.1 percent; a rally of over 7 percent this quarter. The Swiss franc strengthened by 0.4 percent to 1.06838 per euro.

Gold advanced for a second day as the dollar weakened. Bullion for immediate delivery rose by circa 0.4 percent on Monday to $1,139.38 an ounce. WTI Oil rose by 0.4 percent to $52.11 a barrel in New York, whilst copper futures slumped to the lowest level witnessed in four weeks, as stockpiles increased on the London market.

There are no high impact news events or data releases, scheduled for releases during the two distinct trading sessions on Tuesday 20th December, which are likely to impact the markets. However, in relation to the value and volatility of the euro, traders should stay alert to the crises developing in both the Italian and Ukrainian banking systems and the ongoing Greek bailout discussions.

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