01 Dec 2017

Market Brief: UK banks pass health checks

Kevin Musisi

Dealing team

The Bank of England began proceedings early today with the release of it biannual assessment of the resilience of the UK banking system.

Today's data release
  Key levels
14:00 US FHFA house price index   Support Resistance
14:45 US Powell testifies at confirmation hearing before Senate Banking Committee GBP/USD 1.3279 1.3405
15:30 US retail inventories GBP/EUR 1.1095
Market overview

The Bank of England (BoE) began proceedings early today with the release of it biannual assessment of the resilience of the UK banking system. Its top down assessment was that, Brexit aside, risks to UK banks are at a ‘standard level’. It did mention however that risks from global asset valuations and debt levels ‘remain material’. As previously announced, the BoE raised the level of capital that banks need to hold in addition to standard regulatory requirements to 1.0%, effective 28 November 2018. All banks passed the stress tests, but the BoE warned that RBS and Barclays would not have done so, had their capital levels remained at end-2016 levels. Rising consumer credit is becoming more of a focal point but the BoE has not taken specific action to tighten conditions in the sector but its report did point out that over the five year stress period, this type of lending would account for 40% of UK bank impairments. 

Sticking with the UK, the Prime Minister’s chances of getting a Brexit breakthrough in the coming days hinge on her convincing various parties, especially the Irish government, to accept the UK position on the Irish border. The frontier between the north and south of Ireland has emerged as the biggest threat to getting a deal next month that would allow the UK and European Union to start discussions on future trade. EU chiefs are expecting the PM to offer more money toward liabilities such as pension promises and infrastructure projects the UK had committed to but has yet to pay. Of course the DUP – which props up the government – is insisting that there are no special arrangements for Northern Ireland, with respect to a customs union type arrangement with the EU.

The day ahead

Elsewhere today, the confirmation hearing for Janet Yellen’s nominated successor as Fed Chair, Jerome Powell, is also due. Powell has said that in his hearing statement he will mention that he expects the central bank to continue raising its benchmark interest rate and trimming its balance sheet under his leadership.

Thought of the day

5 ½ months ago I wrote a thought about Bitcoin when it had reached a record high of $3,000 per Bitcoin! Unfortunately this is not a thought of the day to tell you I am retiring and that I’m off to the Caribbean. However, had you have been one of the lucky people to jump on the bandwagon in June you would have a made a nice 333% profit! If you had bought at the start of the year you would be looking at a 900%+ return on your investment. Suggestions are that Bitcoin is heading towards a bubble at $10,000 so watch this space… 5 ½ months ago GBPUSD was trading at 1.2750, 6 cents lower than today’s rate. Although this is only a 4.5% move, in real, tangible, cash terms this can mean a big difference to your company’s bottom line. With rumours of the divorce settlement being increased and upcoming EU summit (14-15 December) will Sterling be heading towards a road to recovery? If you are an exporter or receive foreign currencies have you thought about ways to mitigate your FX risk? Contact your Investec Dealer on 0800 055 6339 to discuss strategies that will protect your bottom line.

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