EARLY CHATTER ABOUT the chilling subject that has been hanging over the European bond market for months caught a few people off-guard this past week. Even though there’s not frankly a whole lot new to say, I think reactions to the chatter were so telling that passing comment now is too difficult to pass up. I’m talking, of course, about the dreaded ECB taper.
Talk – fiercely denied by the ECB communications machine – that European Central Bank officials are hatching an asset-purchase reversal plan should hardly be news, given the purchase programme’s finite lifespan. But media chatter about a tapering of bond purchases before the programme’s technical March 2017 end-date caused some noteworthy wobbles on Tuesday in late US trading that saw Treasury yields back up, with follow-on sympathy moves in Wednesday in Asia and Europe.
Ever since the ECB put its bond purchase plan into action, it’s been impossible to have a conversation about the near-term prognosis for the European bond market without someone bringing up the subject of the plan’s aftermath while simultaneously sharply drawing in breath with a look of terror.
What last week’s price action showed beyond doubt is the bond market is wound up pretty tight and when the ECB does end its QE phase and start to slow down then end its bond buying, it’s going to cause some severe market volatility, no matter how much bond market participants hate the hugely distortive impact of its current actions. It’ll throw pricing levels up in the air and the market will need to start thinking once again about the knotty subject of fair value amid a process of normalisation.
Here’s one certainty: it’s going to hurt. I’m imagining hundreds of panic-tinged huddles of buysiders trying to figure out value-preservation strategies for their credit and fixed-income portfolios, chunks of which are now in negative yield territory. I’m also imagining similar huddles among agitated borrowers kicking themselves for not taking better advantage of the dirt-cheap levels available. At this stage, all I can say is don your hard hats now.
BEYOND TAPER TALK, a few other things have caught my eye in my travels and travails in recent days. I’ve been rather taken with some of the comments coming out of some bank corner offices. I’ve often wondered what bank CEOs think about other banks’ difficulties. Do they smile at the prospect of a competitor being taken out and at the upside of market-share gains amid capacity give-up? Or do their hearts miss a beat in that ‘there but for the grace of God’ sort of way?
We got a bit of a glimpse the other day on two counts. We had JP Morgan boss Jamie Dimon telling us there’s no reason why Deutsche Bank can’t resolve its issues with the DoJ, and that his friend Wells Fargo CEO John Stumpf is a quality human being. All a bit platitudinous to be sure, but kind of cute.
It’s a grave shame Stumpf wasn’t able to extend his quality-human-being qualities to running a quality bank. Firing thousands of hourly-paid workers, paying a derisory fine and flinging US$41m of your own unvested stock into the pot in the hope the scandal goes away while you keep your job suggests, perhaps, less than quality-human-being qualities.
But I digress. We also had Credit Suisse boss Tidjane Thiam the other day saying Deutsche Bank is a great institution. He wishes them well and hopes the bank comes out of its current predicament. It’s nice to see fellow CEOs coming out with supportive comments about their competitors, even if they were made with fingers firmly crossed behind their backs. Must have made John Cryan feel all gooey inside.
Of course, Deutsche has pulled itself out of panic mode for the time being, thanks to the interestingly timed rumour the previous week – from a supposedly knowledgeable source – that the DoJ is willing to shrink its US$14bn opening gambit to a US$5.4bn settlement. I won’t go beyond a mention here that as the DoJ issue looks resolvable, the Russian and MPS issues – the latter looking quite nasty – are still in the frame.
Just to keep up the pressure, Berenberg’s James Chappell was out last week with a note saying a DB capital-raising seems inevitable “but core profitability is weak and it is unclear what return investors could earn on any new capital. Exposed to an industry in structural decline, it is hard to see DBK delivering a ROTE above 5% and is one of many banks to avoid.” Ouch!
RETURNING TO THIAM, I was fascinated by his darkly negative comments about the banking sector. In the same breath as his comments about DB, he told a Bloomberg conference that European banks are in a very fragile situation. So far, so uncontroversial; that much we already knew. But then he added that European banks are not really investable as a sector, what with uncertainty created by regulatory change and fines for past misdemeanours.
He talked of fundamental doubts that there is a viable business model for banks to cover their cost of equity. Coming from the mouth of a major bank CEO, that’s pretty incredible. Who on earth advised him to say such things? Or was it another case of Thiam going off-piste and making it up as he went along?
I wonder what possible upside he figured would come out of such comments a matter of months after his own bank completed its SFr4.7bn rights issue and at a time so many others are asking investors to take restructuring and cost-cutting plans on trust while they grapple with future targets against a complex backdrop. Should his peers take his comments as one of those “speak for yourself” moments? Answers on a postcard.
