Week InReview
Friday | Jun 28, 2019
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Duration worries.
"... just look at the math. The Macaulay duration on a Bloomberg Barclays sovereign-debt index is near a record high of 8.32 years, meaning just a one-percentage-point increase in yields would equate to more than a $2.4 trillion loss."
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Uncertainty about global growth and trade is clouding the US economic outlook, and the Federal Reserve is monitoring data to determine whether it should act, Chair Jerome Powell said at the Council on Foreign Relations. "The crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy," Powell said. (The Associated Press | Jun 25)
The Financial Stability Board has called on the Group of 20, particularly the EU, to bring bank regulation into greater compliance with global standards. European banks oppose global standards that automatically designate unrated borrowers as a higher risk than investment-grade borrowers. (MLex | Jun 25)
It has been almost a decade since the Pittsburgh Summit, where G20 leaders met to discuss post-financial crisis bank and derivatives regulatory reforms. In a letter to the G20 at the Osaka Summit, Financial Stability Board Chair Randal Quarles, described the progress accomplished in post-financial crisis reforms. (Forbes | Jun 25)
‘Risk-on, risk-off’ trading, in which major assets move in tandem, has become more prevalent. Bonds, stocks and currencies are moving in tandem more often, as central-bank surprises and trade uncertainty assert their grip over markets. (The Wall Street Journal | Jun 24)
The Commodity Futures Trading Commission, Securities and Exchange Commission and UK Financial Conduct Authority will coordinate efforts for curbing the abuse of so-called manufactured credit events. The regulators said they will "prioritize the exploration of avenues, including industry input which will address these concerns and foster transparency, accountability, integrity, good conduct and investor protection." (Reuters | Jun 24)
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SEC, CFTC, U.K. Financial Conduct Authority to address credit derivatives issues
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(Jun 24)
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The heads of the leading U.S. and U.K. financial oversight organizations announced that they will collaborate to address concerns in the credit derivatives market.
The issue at hand deals with manufactured credit events. Jay Clayton, chair of the US Securities and Exchange Commission (SEC), J. Christopher Giancarlo, chair of the US Commodity Futures Trading Commission (CFTC), and Andrew Bailey, chief executive of the UK Financial Conduct Authority (FCA), issued a joint statement on how the concerns and how to address them.
“The continued pursuit of various opportunistic strategies in the credit derivatives markets, including but not limited to those that have been referred to as ‘manufactured credit events,’ may adversely affect the integrity, confidence, and reputation of the credit derivatives markets, as well as markets more generally,” the agency heads wrote. “These opportunistic strategies raise various issues under securities, derivatives, conduct and antifraud laws, as well as public policy concerns.”
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(Jun 26) — Only six of 25 Senate committee members attended a hearing on whether to designate Fannie Mae and Freddie Mac as systemically important financial institutions (SIFIs), suggesting that the entities, and housing regulation in general, aren't a priority right now on Capitol Hill. In a note, Height Capital Markets’s Ed Groshans said:
- Senator Mark Warner quipped that if the committee "held more GSE/housing hearings, it may scare away all the members."
- Senators, and panelists "appeared to be resigned to FHFA taking administrative actions to end conservatorship," while housing finance legislation is a "nonstarter."
- He doesn’t expect the Financial Stability Oversight Council (FSOC) will designate FNMA, FMCC as SIFIs, while FHFA capital standards and stress testing mitigate a SIFI designation.
- FNMA fell as much as 1.1% in early Wednesday trading; FMCC dropped as much as 0.8%.
- Both have soared this year on investor optimism about potential change; FNMA is up 161%, FMCC +149%.
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Fed gives boost to banks — and their investors
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(Jun 27) — The Fed is giving bank investors a boost. The central bank's Comprehensive Capital Analysis and Review, or CCAR, evaluated the capital planning processes and reserve adequacy of 18 of the largest banking firms in the US. According to the report, all of them have capital levels suggesting that they can proceed with more share buybacks and dividend hikes. The news is pushing bank share prices higher in after-hours trading.
For example, Goldman Sachs, said it would repurchase up to $7 billion of its stock and raised its dividend by more than 45%. JPMorgan said it will buyback nearly $30 billion in shares and will raise its dividend 12.5%. Returning money to shareholders could lift the S&P 500 Financials Sector Index, which up 14.3% YTD, lagging the 16.7% gain in the S&P 500.
Here are the key takeaways:
- All of the 18 banks passed the second round of stress tests. Deutsche Bank was the biggest surprise because its units failed three exams in recent years. Its ADRs rose as much as 4.1% in after-hours trading.
- JPMorgan scaled back its initial proposal for payouts a second straight year but still announced the fattest payout, with $41.1 billion versus an estimated $31.5 billion. Bank of America was next with planned returns of $37 billion.
- Morgan Stanley was able to boost its payout after the Fed limited returns last year. The bank said it was especially pleased to be able to pass the Fed’s assessment and increase its capital return while in the midst of buying Solium, its biggest acquisitions since the financial crisis.
- Even Wells Fargo had reason to celebrate: it announced plans to boost its dividend to 51 cents from 45 cents and to buy back up to $23.1 billion in shares.
- Overall, the Fed said its review showed big banks are resilient and managing capital carefully. The jump in payouts was higher than what analysts had been predicting for a number of banks.
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Financial industry not an easy target anymore
Businesses are being urged to prepare for possible cyberattacks, such as the denial-of-service attacks that hit US banks in 2012. Security experts say Iran is looking for poorly guarded systems, but most large financial firms have developed much stronger cyberdefenses since the 2012 attacks.
'Vaccine' said to protect against cyberattacks
Australian scientists say they can protect algorithms against cyberattacks with a "vaccine" that involves introducing a weakened adversary. "When the algorithm is trained on data exposed to a small dose of distortion, the resulting model is more robust and immune to adversarial attacks," said Richard Nock, leader of the machine learning group at Data61.
Hackers said to control 12+ carrier networks
A security company contends that hackers have accessed and taken control of the networks of more than a dozen mobile carriers over four continents outside North America and gained access to sensitive data about their subscribers. Cybereason said the attackers, who have infiltrated the carriers over the past seven years, could potentially crash the networks at any time.
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Hackers may be hiding in your hotel's remote-control curtains
Hackers target financial institutions because that’s where the money is, and they target retail chains because that’s where people spend the money. Hotels might be a less obvious target, but they’re hacked almost as often because of the valuable data that passes through them, like credit cards and trade secrets.
SEC ‘best interest’ rule is only good for laughs: Barry Ritholtz
There is much to be said for the fiduciary standard of care for investors, meaning that those in the business of selling investment advice and services put the interests of their customers first. It makes perfect sense that the people who buy financial services want a level of care closer to what a lawyer provides than a used-car salesman.
The knuckleballer’s guide to life
Life in baseball’s no-spin zone requires faith and patience. “You must commit to the pitch,” said Mr. Niekro — the winningest knuckleballer ever — who recalled throwing 106 knuckleballs in one game, out of 108 total pitches. “When it bounces in the dirt or sails over the backstop, act like that’s exactly where you wanted it to go. The hitters always assume you’re up to something anyway.”
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