BoE’s Stress Tests Show Brexit-proof Banks
The seven biggest UK lenders succeeded in passing the Bank of England’s (BoE) stress tests, proving that they are able to withstand a “disorderly” Brexit. Stress tests revealed that UK banks wouldn’t be in need of being bailed-out even if a global recession reduced the British GDP by 4.7%, interest rates picked up at 4% and house prices fell by 33%. The Royal Bank of Scotland (RBS) and Barclays were the weakest banks among the participants.
Mark Carney said that the BoE’s tests modelled a severe recession, adding that “a disorderly Brexit is not a good scenario. We are all working to avoid it as it has some material economic costs, even if the financial system continues to operate through it.” Carney urged negotiators on both sides of the Channel to ensure that financial institutions have the time they need to mitigate risks.
Pound Sterling – UK Markets
Today, the Pound fell against the US Dollar with the exchange rate set at $1.33. Sterling also lost ground against the Euro with the exchange rate set at £1.18. Earlier in the morning, the BoE published the results of the banks’ stress tests.
Stress tests conducted by the British central bank revealed that the UK’s banking sector could withstand the consequences of a bad outcome in Brexit negotiations. The worst test scenario included a slumping Sterling, interest rates set at 4% and a 33% decline in house prices. According to the BoE’s report, all seven biggest lenders in the country managed to pass the test, proving their resilience. However, it should be noted that the RBS and Barclays passed the hurdle rate set because the BoE took into consideration their efforts to improve their finances during the last year.
The BoE’s Governor, Mark Carney, held a press conference to discuss the banks’ stress test results and the financial stability report. Carney re-assured British citizens that “the financial system is resilient to a very broad range of risks so that UK’s people can move forward with confidence.” The Canadian banker noted that a Brexit transition period should be agreed as soon as possible, and that the government should pass new laws to cover the continuation of derivative contracts post-Brexit.
US Dollar – US Markets
The US Dollar strengthened against the Euro with the exchange rate set at €0.84. The US Dollar Index (DXY) remained stable, coming in at 92.91. Some members of the Fed’s board will deliver speeches today which are going to attract the market’s attention.
Among them is the nominee for chairman of the Federal Reserve, Jerome Powell. President Trump announced a couple of weeks ago his intention to nominate Powell as Janet Yellen’s successor. Powell is going to appear today before the Senate banking panel for his confirmation hearing. Powell is expected to say that the Fed should be able to retail the flexibility to adjust its policies to respond to any new economic downturns. In his remarks, Powell will note that he will reduce banking regulation and that he will protect the Fed’s independence.
Neel Kashkari, one of the Fed board members, speaking on a university panel in Minnesota, said that if Congress passes a tax bill, the Federal Reserve should update its economic models which could result to changing the path of interest rates. Kashkari stressed that he doesn’t think that raising borrowing costs to bring down the stock market is a good idea. Then, he added that there is also no point of hiking rates when US inflation is that low.
Euro – European Markets
The Euro edged lower against the US Dollar with the exchange rate set at $1.18. The single market currency had earlier hit a monthly high against the US currency, trading at $1.19.
A report by Fitch noted that one of the biggest risks for markets in the next year could be adjustments made to the European Central Bank’s asset purchase programme. Analysts at Fitch suggested that governments around the world are not well positioned to deal with higher interest rates, despite the fact that central banks are moving towards that direction. In Spain, retail sales declined by 0.1% in October instead of increasing by 2.0% as analysts had forecast.
An ECB survey showed that lending to households, during October, rose by 2.7% on an annualised basis. Lending to companies increased by 2.9% on a year-to-year basis, according to the ECB’s data. A report by the INSEE noted that French consumers felt more optimistic in November, for the first time in four months. The French consumer confidence index gained 2 points to stand at 102, surpassing expectations.
Other Currencies – Highlights
Sterling inched lower against the Australian Dollar, trading at 1.75 AUD. Gerard Minack, an ex-director of Global Developed Markets for Morgan Stanley told ABC that Australia’s risk of a recession has fallen from 33% to 20%. Minack said that the Australian economy will improve thanks to a pick-up in business confidence and non-mining investment.
The Pound lost ground against the New Zealand Dollar, trading at 1.92 NZD. A Property Institute survey revealed that the coalition government’s housing policies are popular with the public. Almost half of the people asked said that they would have a positive impact on the housing market. The poll also showed that the majority of people are not expecting house prices to rise during the next six months.
The Pound moved higher against the Japanese Yen, trading at ¥148.34. Haruhiko Kuroda, the Governor of the Bank of Japan (BoJ), said that he doesn’t see the Japanese economy hurt by the monetary easing policy. Prime minister Shinzo Abe said that he hopes that the central bank will continue its bold policy.