Investment banks to shrink by 10-15% more as regulation bites: study

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19 Mar7:12 PM

[LONDON] Investment banks are likely to shrink by another 10 to 15 per cent in the next two years as they cut back their trading desks due to the impact of tougher regulations, a study said.

That will reduce market liquidity and could raise trading costs for asset managers, forcing them to invest more in trading capabilities, according to the study by Morgan Stanley and consultancy Oliver Wyman.

New rules introduced since the 2007/09 financial crisis require banks to hold more capital for trading activities, making these areas less profitable and prompting cuts to trading desks.

Investment banks' balance sheets supporting trading markets have decreased by 20 per cent since 2010, and by 40 per cent in risk-weighted asset terms, the report said.

European investment banks will shrink by another 14 per cent on aggregate in the next two years, Morgan Stanley analyst Huw van Steenis estimated in the report.

That would include a 43 per cent reduction at Royal Bank of Scotland, 25 per cent at Credit Suisse, 19 per cent at UBS, 18 per cent at Barclays and 10 per cent at Deutsche Bank. "For banks, the diminishing returns on capital from market-making call for more and faster structural change," the report said, estimating that for banks to improve their return on equity (RoE) to above 10 per cent they need to deliver 2 to 3 percentage points of RoE improvement from restructuring. "More strategic selection is required, particularly in FICC (fixed income, currencies and commodities) and overseas markets," it said, adding they also needed to shift to a more technology-driven model.

The report said asset managers were increasingly concerned about the reduction in market liquidity and estimated the need for them to invest in trading and execution, collateral management and risk management could add between 1 and 5 percentage points to their costs.

REUTERS

      

Payrolls increased in 39 states in January led by California

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17 Mar10:53 PM

[WASHINGTON] Payrolls rose in 39 states in January and the unemployment rate fell in 24 as the US labor market continued its acceleration.

California led the nation with a 67,300 increase in employment, followed by a 25,100 advance in Ohio, figures from the Labour Department showed Tuesday in Washington.

Job growth is a bright spot in the US, as economic gauges from consumer spending to factory output have slowed amid inclement weather, sluggish growth abroad and limited wage gains for American workers. Employers will need demand for their goods and services to pick up in order to justify expanding headcount in the months ahead.

"The pace is running pretty hot right now," Sarah House, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. "We're at a particularly good point in the cycle - there's may be some catch-up going on from previous years."

Nonetheless, "it's going to be tough to grow employment by 2 per cent forever," Ms House said, citing the gain in total payrolls last year, which was the best since 1999.

Idaho showed the biggest per centage gain in employment with a 1.4 per cent increase, followed by Hawaii at 0.9 per cent. States where payrolls fell included Virginia, Minnesota and Louisiana.

The unemployment rate in January dropped the most in Oregon, where joblessness fell to 6.3 per cent from 6.7 per cent in December. No states showed a statistically significant increase in unemployment.

North Dakota had the lowest jobless rate in the US at 2.8 per cent in January. Mississippi and Nevada tied for the highest at 7.1 per cent.

The slump in oil prices hasn't yet led to widespread job losses. Payrolls in North Dakota climbed by 1,300 workers in January, while Texas showed a 20,100 increase, according to the report.

State and local employment data are derived independently from the national statistics, which are typically released on the first Friday of every month. The state figures are subject to larger sampling errors because they come from smaller surveys, thus making the national figures more reliable, according to the government's Bureau of Labor Statistics.

The national report showed payrolls across the US climbed by 295,000 in February following a 239,000 increase the month before. The unemployment rate fell to 5.5 per cent, the lowest in almost seven years and at the range that Federal Reserve officials consider full employment.

State employment figures for February are due March 27.

"Important progress" has been made toward the Fed's goal of maximum employment, Fed Chair Janet Yellen said in Feb 24 testimony to Congress. Still, "too many Americans remain unemployed, wage growth is still sluggish and inflation remains well below our longer-run objectives."

Fed officials are weighing labor market data as they decide the timing of their first interest rate increase since 2006. The central bankers are expected to release a statement and projections following the conclusion of two-day meeting in Washington on Wednesday.

One report Fed officials watch closely - the Job Openings and Labor Turnover Survey - showed vacancies at US employers rose to 5 million in January, a 14-year high.

BLOOMBERG

      

China yuan set for record rise as central bank moves against capital flight, speculation

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China's yuan looks set to post its biggest-ever weekly gain as Beijing moves to head off the risk of capital flight and quash speculation. 

PHOTO: REUTERS

19 Mar5:04 PM

[SHANGHAI] China's yuan looks set to post its biggest-ever weekly gain as Beijing moves to head off the risk of capital flight and quash speculation.

The sharp correction to the exchange rate comes as state-owned banks are aggressively selling dollars at the behest of the People's Bank of China (PBOC), traders said.

The sudden move has erased all of the yuan's losses this year and squeezed companies that have bet the yuan would fall further as the economy cools.

The yuan has risen sharply against the dollar in the last three days, including a gain of more than 0.5 per cent to 6.1961 on Thursday.

It looks set to gain a full per centage point for the week, which would be its sharpest rise since its landmark revaluation in 2005, and a Reuters poll on Thursday showed that analysts have backed off from short positions in face of the central bank's supporting firepower.

A firmer yuan may ease concerns that a further slide in the exchange rate could spark destabilising capital outflows, and comes alongside other steps seen as tightening the capital account, including a Thursday announcement increasing restrictions on trading in gold.

Chen Yulu, an adviser to the People's Bank of China (PBOC), told Reuters earlier in March that while China was not worried about capital outflows as such, it watching closely for signs of "capital flight." The yuan fell 2.4 per cent against the dollar in 2014 on the back of a rising dollar and concerns about slowing economic growth, sparking a record US$96 billion of capital outflows in 2014.

Traders saw the latest move as a repeat of a similar PBOC tactic in early 2014, when the central bank mustered major state-owned banks to drive speculators out of long-yuan positions.

"It is another case of the PBOC fighting speculators. What is different this time is that the central bank is now striking back at predictions of yuan depreciation, while until last year, it had battled against speculation of yuan appreciation," said a senior trader at a European bank in Shanghai.

The yuan began falling in November when the PBOC made a surprise interest rate cut in response to slowing growth, prompting companies to bail out of yuan on worries that increased liquidity injections would weaken the currency's value.

The yuan is still 2.5 per cent below its all-time high of 6.04 per dollar struck in January 2014.

The PBOC did not answer calls for comment.

Despite fears that some global central banks could engage in competitive currency devaluations, the PBOC's setting of its midpoint guidance rate has shown that Beijing was unwilling to allow the yuan to fall below 6.3 per dollar. The guidance rate determines the range in which the spot rate can trade on a given day.

Still, traders began consistently trading the yuan at its weakest allowable rate starting in January, on the assumption the central bank would eventually give way and let the currency fall further.

However, some economists also cite a genuine change in market sentiment as supporting the yuan, especially as a long-running rally in the dollar index shows signs of losing steam. They argued that market developments ultimately supported the central bank's refusal to let the yuan dive further.

They say that a record February trade surplus, signs of recovering exports and a weaker dollar after comments from the US Federal Reserve suggesting it was in no rush to raise rates combined to be the last straw for those who had been sticking to short-yuan positions.

"Many companies were holding on to long USD positions as the views on bearish CNY expectations had grown unanimous this year," said the head of trading at a US bank in Hong Kong.

"The dollar's fall this week has triggered a large-scale unwinding of these positions in the market."

REUTERS