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U.S. stocks, commodities drop; U.S. Treasury yields surge

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US stocks fell in a volatile session exacerbated by sharp moves in the UK currency and bond markets, as hawkish central banks across the globe continued to subdue sentiment.

The S&P 500 ended Monday’s session at its lowest level since December 2020. The Cboe Volatility Index spiked past 30, a level it hasn’t closed above since June. US Treasury yields rose, with the 10-year rate climbing as much as 21 basis points to 3.898 per cent, its highest level since April 2010.

The Bloomberg Commodity Spot Index, a key gauge for raw materials prices, tumbled to the lowest in eight months as fears of a global recession intensified. The pound dropped after the Bank of England said it may not act before November to stem a rout that took the sterling to a record low. The dollar soared to yet another record high.

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Markets were on the edge after a selloff of risk assets deepened last week as the UK’s plan to lift its economy fueled fears that heightened inflation would push rates higher and ignite a global recession. UK markets were in focus on Monday as the pound remained volatile after crashing to an all-time low, with the Bank of England’s comments doing little to reassure traders that were waiting for a broader policy response to the fallout from the goverment’s massive tax cuts.

Federal Reserve officials added to the hawkish rhetoric. On Monday, Boston Fed President Susan Collins said additional tightening is needed to rein in stubbornly high inflation and cautioned the process will require some job losses. Atlanta Fed President Raphael Bostic also said the central bank still has a ways to go to control inflation.

“On the macro front, it feels like a remake of West Side Story, with a gang of central bankers going after the job market, which refuses to let go,” said Mike Bailey, director of research at FBB Capital Partners. “Powell and now Andrew Bailey at the BOE are trying to slow the economy down, but my sense is employers are keeping as many workers as they can to avoid being left out in the cold when we recover from the next recession. So we almost have an arms race with central bankers raising rates and employers holding on to workers.”

US markets will continue to remain challenged by uncertainty until companies start to report their third-quarter earnings next month, which will provide greater detail on the health of corporate revenues and profit, wrote John Stoltzfus, chief investment strategist at Oppenheimer. Any company or industry that needs lower rates could be in trouble, FBB’s Bailey says.

Investors will also be keeping an eye on the economic data stream for hints of prices cooling, Art Hogan, chief market strategist at B. Riley, wrote in a note.

“What the market will need to see now to get out of the current conundrum is for inflation inputs to start coming down noticeably,” said Hogan. “We will get a read on the Fed’s preferred inflation indicator this Thursday when the second quarter core PCE is reported. Along with that investors will keep a close eye on the economic data stream for hints of prices paid coming down.”

Trading this week will be punctuated by a number of economic reports including US initial jobless claims and gross-domestic-product data, along with PMI figures from China. Choppiness in price moves is likely with a steady stream of Federal Reserve officials speaking through the week.

U.K. GILTS

The plunge in UK gilts sent 10-year yields above 4 per cent for the first time since 2010. Traders ramped up wagers on the scale of interest-rate hikes in the short term, with money markets pricing in more than 200 basis points of increases by the central bank’s next meeting in November.

Meanwhile, Christine Lagarde said the European Central Bank will consider shrinking its balance sheet only once it has completed the “normalization” of interest rates. Raising borrowing costs is the most appropriate and effective tool for now to combat record-high euro-area inflation, the ECB President said on Monday.

Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also continue to weigh on market sentiment. The OECD cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes. And a gauge of German business confidence deteriorated.

Key events this week:

  • Fed official Loretta Mester speak at events, Monday
  • China industrial profits, Tuesday
  • US new home sales, Conference Board consumer confidence, durable goods, Tuesday
  • Fed Chair Jerome Powell and Charles Evans speak at events, Tuesday
  • Fed’s Mary Daly, Rafael Bostic, Charles Evans and ECB President Christine Lagarde speak at events, Wednesday
  • Euro zone economic confidence, consumer confidence, Germany CPI, Thursday
  • US initial jobless claims, GDP, Thursday
  • Fed’s Loretta Mester, Mary Daly speak at events, Thursday
  • China PMI, Friday
  • Euro zone CPI, unemployment, Friday
  • US consumer income , University of Michigan consumer sentiment, Friday
  • Fed’s Lael Brainard and John Williams speak, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1 per cent as of 4:03 p.m. New York time
  • The Nasdaq 100 fell 0.5 per cent
  • The Dow Jones Industrial Average fell 1.1 per cent
  • The MSCI World index fell 2 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 1 per cent
  • The euro fell 0.7 per cent to US$0.9617
  • The British pound fell 1.5 per cent to US$1.0697
  • The Japanese yen fell 0.9 per cent to 144.56 per dollar

Cryptocurrencies

  • Bitcoin rose 1.4 per cent to US$19,173.2
  • Ether rose 2.9 per cent to US$1,329.58

Bonds

  • The yield on 10-year Treasuries advanced 21 basis points to 3.89 per cent
  • Germany’s 10-year yield advanced nine basis points to 2.11 per cent
  • Britain’s 10-year yield advanced 42 basis points to 4.24 per cent

Commodities

  • West Texas Intermediate crude fell 2.3 per cent to US$76.92 a barrel
  • Gold futures fell 1.3 per cent to US$1,633.60 an ounce

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How RBC pulled off its highly-coveted $13.5-billion deal for HSBC Canada — with some unintended help from Ottawa – The Globe and Mail

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A combination of external and internal factors made RBC’s HSBC deal a reality.Duane Cole/The Globe and Mail

He’ll never want to admit it, but Royal Bank of Canada RY-T chief executive Dave McKay can thank Prime Minister Justin Trudeau, at least in part, for landing Canada’s most coveted bank deal in decades.

Like many of his industry peers, Mr. McKay has been frustrated with Ottawa for slapping an additional, permanent tax on bank and life insurance company profits in the most recent federal budget, something Ottawa has attributed to clawing back some of the financial relief it provided during the COVID-19 pandemic.

While the federal government can taketh away, it can also provide, and seven months later, another pandemic financial policy has proven to be quite helpful to RBC – even if the assistance is unintended.

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Because there was so much economic uncertainty when Canada entered its first COVID-19 lockdowns in March, 2020, the federal government and the country’s banking regulator wanted banks to preserve cash as a buffer against any shocks. To enforce this, they prevented the lenders from hiking their dividends, something they often did annually.

There was no way to know it then, but Canada’s banks kept churning out profits, even through multiple lockdowns. That meant all the cash they would have normally put toward dividend hikes piled up on their balance sheets.

RBC wasn’t the only lender that saw its coffers swell, but because it is Canada’s largest bank by profit, it was able to hoard large amounts each quarter. Ultimately, that money was deployed to win the HSBC Canada auction, in the form of a $13.5-billion, all-cash bid.

At the same time, HSBC Canada’s parent, London-based HSBC Holdings PLC, must have seen all that money piling up. So, even though HSBC’s global management team had long said it was committed to Canada, if there was any time to sell, this was it. All that excess cash gave HSBC a greater chance of selling for top dollar – and, crucially, an exit before any potential recession.

The second element of RBC’s winning strategy, and arguably the most important, is an internal one, and it is rooted in something so often overlooked in business: discipline.

Ever since Mr. McKay acquired California-based City National Corp., which specializes in banking for high-net-worth clients, for US$5.4-billion in 2015, just five months into his tenure, there have been endless questions from investors and analysts about what RBC would do next. Often, they centred on growth in the United States.

Mr. McKay has been batting these away for years, suggesting RBC isn’t all that interested in establishing a large retail banking footprint in the U.S. Doing so requires scale, which means it would take one or two large deals to make an impact. To his mind, it just isn’t worth it, considering where RBC is starting from, and because retail banking isn’t as profitable in the U.S. as it is in Canada.

But the questions kept coming, especially as the Big Six banks started accumulated gobs of cash during the pandemic. Then two of RBC’s Canadian rivals, Toronto-Dominion Bank and Bank of Montreal, splurged on deals of their own. Late last year, BMO bought California-based Bank of the West for $17.1-billion, the largest U.S. deal in Canadian banking history, and early this year TD bought First Horizon for US$13.4-billion.

Standing pat is incredibly tough when rivals are writing big cheques. The fear of missing out is real, and investors tend to be myopic, too, so they have a habit of rewarding short-term revenue growth.

RBC, though, never wavered. “Patience is really important,” Mr. McKay said on a conference call with reporters Tuesday.

Royal Bank wasn’t necessarily waiting for this precise opportunity. “We didn’t know [the HSBC Canada sale] was going to happen, or the timing,” he said. But sometimes executives get lucky. And having all that excess capital allowed RBC to splurge on what Mr. McKay called a “more sure-footed transaction” relative to rivals’ deals.

He didn’t go into specifics, but based on its financials, Bank of the West is a fixer-upper for BMO. It is also based in a state where BMO has almost no footprint. First Horizon, meanwhile, may not have even been TD CEO’s first choice for its most recent U.S. retail banking deal, after TD was reported to be in the auction for Bank of the West just a few months prior. HSBC, by contrast, is a very profitable bank, with a 14-per-cent return on equity over the past 12 months, rather healthy by global standards.

What RBC will have to prove now is that it hasn’t overpaid. Just because it had the cash to burn doesn’t mean it needs to use it all.

The bank’s executives are stressing that after making some adjustments, it’s paying about nine times HSBC Canada’s forward earnings, which is below the long-term average trading multiple for Canadian lenders. However, bank deals are also priced off of a multiple of the target’s book value, and at 2.5 times HSBC Canada’s, RBC is paying a healthy premium.

That isn’t necessarily a bad thing. In fact, during Mr. McKay’s tenure, it’s become a bit of a standard. When RBC bought City National, it paid 2.6 times book value, and at the time, almost everyone on Bay Street wondered if the bank overpaid. All those fears have subsided over the past seven years.

What’s become clear is that RBC is willing to pay up for quality. Some bankers chase cheap assets, and may get lucky and find a diamond in the rough. RBC, though, has tried that before, and it resulted in a disastrous acquisition of North Carolina-based Centura Banks Inc. in 2001. Unwinding the deal took a decade, and when RBC ultimately sold the division in 2012, it took a $1.5-billion charge in the process.

“We bought a franchise that had to be transformed and changed – it wasn’t the ‘Tier 1′ franchise,” Mr. McKay said about Centura in a 2015 interview with The Globe and Mail. “Our biggest [lesson] from that failed venture was that you have to buy the highest-quality franchise and build on it.” Sound familiar?

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Royal Bank of Canada to buy HSBC Bank Canada for $13.5 billion – Financial Post

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Deal is expected to close by late 2023

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Royal Bank of Canada has entered an agreement to buy HSBC Holdings PLC’s Canadian business in a $13.5-billion cash deal that will pad RBC’s lead as Canada’s largest bank, assuming regulators give the transaction the green light.

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As part of the deal, which is slated to close by late 2023, RBC will acquire all of HSBC Canada’s shares at a price that works out to 9.4 times the unit’s adjusted 2024 earnings of $1.4 billion, RBC said.

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The bank projects the deal will lead to $740 million in annualized pre-tax synergies, while RBC will foot roughly $1.4 billion in total acquisition and integration costs. All of HSBC Canada’s earnings from June 30 will accrue to RBC.

HSBC Canada had $134 billion in assets as of Sept. 30 and has approximately 130 branches and 4,200 employees. Its banking segment holds about two per cent of Canadian deposits and mortgages.

“(HSBC Canada) is a fantastic franchise that operates in our home market in businesses that we are very good at, while also adding complementary products and a differentiated client base,” RBC president and chief executive officer Dave McKay said during an analyst call following the announcement.

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“It’s also a strong cultural fit for both our clients and employees,” McKay added. “The transaction is financially compelling as it also creates immediate value for the strategic deployment of excess capital, highly achievable expense savings, and a well-understood revenue cross-sell opportunity.”

During the call, McKay said 50 per cent of HSBC Canada’s commercial banking clients were “globally connected” and that the transaction thus positioned RBC to be the “bank of choice” for clients with international banking and wealth management needs, as well as for newcomers to Canada.

Neil McLaughlin, RBC’s group head of personal and commercial banking, said they would be working with HSBC Canada to ensure access to HSBC’s global platform would be maintained.

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“At the bottom line, we are committed to make sure that conveniences that our customers have now, and value propositions that they’re used to, remain,” he said.

RBC estimates that the transaction will add six per cent to earnings per share in 2024, as well as provide a 14 per cent internal rate of return. The deal comes eight months after RBC acquired U.K.-based Brewin Dolphin Holdings Plc. For $2.6 billion in cash in March.

“I am pleased that we have reached an agreement with RBC,” said HSBC Group chief executive officer Noel Quinn in a press release. “The deal makes strategic sense for both parties, and RBC will take the business to the next level. We look forward to working closely with RBC’s leadership team to ensure a smooth transition for our clients and colleagues.”

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Linda Seymour, president and chief executive officer at HSBC Canada, said in a LinkedIn post that there will be no change for now with the company’s operations. In a note to customers, HSBC Canada noted there would be a transition period spanning several months as the businesses converge.

HSBC Holdings PLC is expected to record a US$5.7 billion pre-tax gain as a result of the deal.

One issue that could stand in the way of a seamless transaction is competition concerns, said National Bank of Canada analyst Gabriel Dechaine, who also noted the purchase price was about 30 per cent greater than his team expected.

“The transaction is, of course, subject to regulatory approvals,” Dechaine said in a Nov. 29 note. “A big question facing (RBC)’s pursuit of HSBC Canada is feedback from the Competition Bureau. We estimate (RBC) will be increasing its current 21 per cent domestic market share in loans and deposits by about 200 (basis points) each.”

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Dechaine doesn’t expect RBC will have to issue shares to cover the transaction, given its substantial excess capital.

John Aiken, senior analyst and head of research at Barclays Bank PLC, called the transaction a “once in a generation acquisition in Canadian retail banking” as it brings significant upside to RBC’s earnings and profitability.

“The only fly in the ointment is that, as the largest player, there could be some regulatory concerns with the Competition Bureau,” Aiken wrote. “While we believe that the deal will ultimately be approved, there is a risk that it may not ultimately be consummated in its current form.”

Aiken added that he expects the earnings accrual to RBC to negate any impact that a regulator delay may bring.

RBC’s robust capital position had made the bank Bay Street’s most likely candidate to win the bidding for HSBC Canada, even though all of the Big Six reportedly looked under the hood when the U.K.-based financial services giant put the unit up for sale.

RBC shares traded flat Tuesday morning following the announcement.

• Email: shughes@postmedia.com | Twitter:

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Oil Prices Jump On Major Crude Draw – OilPrice.com

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Russia’s Pipeline Oil Exports To China Flat So Far This Year | OilPrice.com

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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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Russia’s pipeline oil exports to China via the Eastern Siberia—Pacific Ocean (ESPO) oil pipeline were flat between January and October compared to the same period of 2021, according to China National Petroleum Corporation’s (CNPC) Vice President Huang Yongzhang.

Russia sent 33.26 million tons of oil to China via pipeline in the first ten months of this year, Huang was quoted as saying by Russian news agency TASS at a Russia-China energy forum.

While pipeline oil deliveries were basically unchanged this year, China has significantly increased its seaborne imports of Russian crude as Beijing and India have now emerged as the top buyers of Russian oil after the Russian invasion of Ukraine, as Western buyers shun Russia’s crude and prepare for the EU embargo on imports of Russian oil as of December 5.

Just ahead of the ban and the G7-EU price cap on Russian oil, some Chinese buyers have been hesitant to purchase Russian cargoes, as they wait for details on how the price cap would be enforced.  

Yet, both China and India are now demanding huge discounts for the Russian oil they are willing to buy, Bloomberg oil strategist Julian Lee wrote in a recent analysis.

Currently, China and India account for around two-thirds of Russia’s crude oil exports by sea, and the Asian buyers are exercising the negotiating power they have over Russia, Lee notes. If Russia wants to continue selling its oil to its new top customers, it must contend with the deep discounts the two buyers demand.  

As of the end of last week, Russia’s flagship crude grade, Urals, traded at $52 per barrel—a $33.28 discount to Brent Crude. This compares with the 2021 average discount of Urals to Brent of $2.85.

The huge discount costs the Kremlin some $4 billion in lost revenues every month, according to estimates from Bloomberg’s Lee. 

By Tsvetana Paraskova for Oilprice.com 

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