Seeing the European Court of Justice’s ruling on the ECB’s OMT policy come in yesterday was a bit like watching figure skating during the Olympics; the favourites were going to win unless they fell on their rear ends – which of course they didn’t – and the outcome was a highly predictable 5.9 for technical merit and a 5.8 for artistic impression. There followed roaring applause and flowers were thrown onto the rink.
Fact is that the world has moved on since the OMT was announced and it is highly unlikely that it will ever be used, not least of all as it now appears as though the monetary union has got its head around the possibility of one of its members peeling off without that event necessarily having to bring down the entire edifice.
Meanwhile, Wednesday was a horrid day in risk markets albeit that credit fared quite well compared to equities. Disappointing US Retail Sales for December might have made the headlines with the key overall month-over-month index missing the forecast drop of 0.1% and reporting a loss of 0.9% and even the adjusted ex-auto and ex-fuel sub-index failing to shine at -0.3% as opposed to the forecast +0.5% but markets were already unhappy before the cherry on the cake was delivered by the US Census Bureau.
By the time we all went home, the VIX index was back up at 21.48 after the European iTraxx Xover index had gone out at 344.56. On a like-for-like comparison, if comparing the two could ever be that, the 3-month average of the VIX is 16.51 whereas the Xover averages 347.57. In other words, the former is significantly worse than the average whereas the latter is still better, albeit marginally. It might be comparing apples and pears but the VIX represents US apples where the economy is supposed to be on fire and the iTraxx reflects European pears which are supposed to be rotting in their barrel. Go figure.
The real whipping boy, however, was the FTSE which shed 2.35% of its value. This, just to remind the sleepy ones, is not an index of the UK’s leading 100 companies but of the 100 largest companies listed on the London Stock Exchange and those are two very different sets of stocks. Large swathes of global commodity producers are to be found listed on the LSE and given the size of some of them, they are vastly over-represented in the FTSE. Thus the slaughter of the innocent.
On Monday I noted the precipitous fall in copper prices on the LME but, to slightly miss-quote Al Jolson, “You hadn’t seen nothin’ yet!” On Monday spot copper still opened at US$6,130.00/tonne but by last night it had entirely fallen out of bed and settled at US$5,619.00/tonne. This is a loss of 8.3% in two days which isn’t chickenfeed, even in the volatile world of metals.
I would expect to see a dead cat bounce today in many of the asset classes which got so brutally beaten up yesterday; the world might well be about to end but it isn’t scheduled for either the Thursday or the Friday of this week.
Deposits and investment banking
Meanwhile, Deutsche Bank is in the news with the suggestion that it might be pressed by the regulator to spin off its retail banking business. I seem to recall the splitting of the businesses a decade or so ago – as I get older, my memory for detail becomes more fuzzy – when all the high-street branches were rebranded as Bank24. Deutsche, of course, also own the Postbank, the very epitome of a pure retail deposit-taking operation. The argument this time is that such customer deposits should not be used to fund investment banking business.
I’m not sure whether the thinking is the same behind the British idea of ring-fencing the retail bank but although it looks great on paper, it is rubbish. Investment banking has been placed in a deeply uncomfortable strait-jacket in order to reduce risk and thus to protect those retail depositors. If they get taken out of the equation, the regulators have to accept the consequences and give the investment banks free rein again to blow themselves and their shareholder up.
I don’t know where the idea comes from that commercial banking is any safer or any more ethical than investment banking. Until commercial banks took control of investment banks, they were always short of capital and thus rarely, if ever, carried any more risk than they absolutely had to. The Glass-Steagall Act took care of that.
It could actually be argued that it was Deutsche Bank above all others which first put the full force of the commercial bank’s balance sheet behind the debt and equity underwriting business and which forced the subsequent change in the global banking landscape where investment banking mandates became a function of the amount of balance sheet exposure offered in return.
Investment banks, once known for being fleet of foot and highly flexible became overcapitalised 10-tonne gorillas which knew nothing other than to outspend each other in overpriced manpower cost and underpriced lending.
Existing constraints such as the Volker Rule would lose validity if the functions were split – think also of the argument recently put forward by Goldman Sachs that JP Morgan should perhaps be broken up – and if one were to be done without the other, the mess banking is in at the moment will only get worse.
There’s never a boring moment where money is involved.
