Looking for real (estate) trouble? Try big U.S. cities!
STOXX 600 up 0.8%
Tech top gainer, banks up
Ermotti returns to UBS
U.S. stock futures rise
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LOOKING FOR REAL (ESTATE) TROUBLE? TRY BIG U.S. CITIES! (0825 GMT)
With markets on alert for the next shoe to drop, commercial real estate is under intense scrutiny. Analysts are working around the clock to figure out CRE loan exposures for banks and what are the risks associated with office owners refinancing at higher rates, just as credit conditions tighten and property prices face downward pressure.
Keefe, Bruyette & Woods spoke with Brian Harris, CEO at Ladder Capital LADR.N, a commercial mortgage REIT, to cocnclude that big U.S. cities are where to find trouble.
"In LADR's view, larger CRE loans in larger cities (i.e., gateway markets) will face the most trouble due to lower liquidity, office uncertainty and slow return to work, increased social issues (crime, homelessness), and broader interest rate and cap rate pressures," writes KBW in a note.
"Markets of concern include San Francisco, Seattle, Portland, Chicago, Minneapolis, Philadelphia, and Washington, D.C. (which management believes will have a long recovery due to lack of government return to work)," KBW adds.
Other takeaways: CRE valuations are expected to decline to 2015-2016 levels with big city office peak-to-trough declines of 40%; Banks represent nearly 50% of CRE debt financing and regional banks account for the majority of this
Read more from LIVE MARKETS:
Europe's $1.5 trillion real estate loans: who's exposed?
Do small banks face a real estate "doom loop"?
European real estate at relative record low
Europe's real estate faces 50% potential downside - Citi
European property: equity raises coming?
EUROPE'S $1.5 TRILLION REAL ESTATE LOANS: WHO'S EXPOSED? (1119 GMT)
It's not 2008 but it's a good time to take stock of European banks and their exposure to commercial real estate (CRE), a sector that has come under high scrutiny following the recent bank failures in the United States and Europe.
European banks have 1.4 trillion euros ($1.5 trillion) out on loan to commercial real estate. That makes 8% of their loan book, while non-performing loans (NPL) represent 4% of the CRE portfolio, according to Goldman Sachs.
The Nordic region has the highest exposure, with CRE accounting for 15% of total loans. Svenska Handelsbanken SHBa.ST tops the list, with nearly a third of its loan book exposed to the sector, although NPL ratio is almost 0%.
Germany also has a relatively higher exposure, with CRE accounting for 12% of the loans. Heavyweights Deutsche Bank DBKGn.DE and Commerzbank CBKG.DE have a 7% and 5% exposure, respectively, broadly in-line with average for major European banks.
Italy's exposure hovers near the European average at 9% but its NPL ratio, also at 9%, sits at the upper end. Total lending at French and Spanish banks is at a below-average 5%, although NPL ratio at Spain's BBVA BBVA.MC and Banco Santander SAN.MC is around 8%, double that of the European average.
Europe's real estate index .SX86P has shed about 25% since hitting a year high in February and was last trading near a five-month low as concerns about rising interest rates are compounded by fears about a possible credit crunch hurting the highly leveraged sector.
WHY A NEW EUROZONE DEBT CRISIS WON'T HAPPEN (1035 GMT)
The spectre of a systemic credit event roiling markets is now top worry among global investors following months of dominance by the inflation scare, but there's still no consensus view over the potential source of financial instability.
European sovereign debt is clearly closely watched. This month's BofA fund manager survey ranked Europe's debt as the fifth most likely source of credit stress with a 5% chance.
But is a sovereign debt crisis still possible in the euro zone, following the one in 2010-2013 that hit peripheral countries and threatened the currency bloc's very existence?
Patrick Artus, senior economic advisor at Natixis, doesn't think so. He has three good reasons as to why he sees a low probability of a new debt crisis happening. Here you go:
Current account deficits, which triggered a balance of payments crisis and the sovereign debt crisis in 2010 when Germany and the Netherlands stopped financing peripheral countries, have disappeared or became small
The ECB would act quickly to avoid an abnormal widening of yield spreads between euro-zone countries, in particular by using its new instrument (the "Transmission Protection Instrument"), which enables it to buy the public debt of a country in difficulty
The ECB’s monetary policy is acting much more cautiously than in 2010-2011 to combat inflation
The BofA chart below shows the seven most likely sources of a credit event.
US BANKING RISKS FAR MORE WORRISOME THAN THEY MAY SEEM? (0907 GMT)
Risks to the U.S. banking system are far more serious than regulators are letting on, according to Nikhil Bhatnagar, executive director and head of capital markets at Auerbach Grayson.
"Far too much lending has happened to areas that cannot afford 5% policy rates, excluding credit spreads, and added to that, there has been risky behaviour by a large part of the system actively engaged in inflating startup valuations through easy venture debt," Bhatnagar told the Reuters Global Markets Forum.
"Bank risk can devolve into venture debt risk and eventually private credit markets -- is the Fed going to guarantee venture debt and private credit funds as well? It will be politically unfeasible. But there may be a few more dominos to collapse here," he said.
Still, today’s risks look different from the 2008 financial crisis as the sector hasn’t extended into the venture capital market as much as the housing sector had in the previous crisis – but systemic risks loom large, Bhatnagar said.
"While the system can be defended if required, it comes at a time of entrenched inflation and not a deflationary scenario, which can have a domino effect on the currency if the message has to be reversed later this year."
As turmoil unfolds in global markets, traders now bet the Fed has reached or is near the end of its rate hiking cycle. But much of the 'stagflation' in the current environment is out of the Fed’s reach since the policy errors have already been made by keeping rates too low, he added. "Sooner or later, they will have to save the system and abandon the inflation bogeyman."
(Savio Shetty and Anisha Sircar)
TECH LIFTS STOXX 600 (0827 GMT)
Europe's STOXX 600 .STOXX is on the up, rising 0.6% as the general mood improves and bank jitters recede.
Tech names .SX8P are the biggest winners on a sector basis, up 1.6%, while retail .SXRP is a drag, down 1.4%.
Reflecting the improved mood, a gauge of European volatility .V2TX briefly hit its lowest level since March 10, the day of SVB's collapse, and was last down 1.3 points at 20.8.
Ex-dividend Maersk MAERSKb.CO shares are down 27% at the bottom of the index, while OCI OCI.AS is at the top, rising 12.5% after activist investor Jeff Ubben's Inclusive Capital Partners urged the Dutch fertilizer to explore strategic options and said the is worth nearly double its 5.54 billion euros market value.
Infineon IFXGn.DE shares are up 6.6% after the German chipmaker raised its outlook both for second quarter and the whole of 2023. Switzerland semiconductor company STMicroelectronics STMPA.PA is also up 5.2%.
ALIBABA FIRES UP MARKET MOOD (0638 GMT)
Just as investor angst over U.S. and European banking troubles eases, the potential end of China's multi-year regulatory crackdown on the tech sector is also cheering up markets.
An unprecedented revamp of Chinese tech conglomerate Alibaba Group, which analysts believe to have the blessings of local regulators, pushed up Alibaba's U.S.-listed stock, and then its Hong Kong shares on Wednesday.
Companies in China's internet, private education and property sectors have lost billions of dollars in market value in recent years as the country's regulators cracked down on their operations.
Although a lacklustre 0.6% rise in Asia's main stock market gauge, led by Hong Kong tech names, shows that animal spirits haven't returned yet, there's hope for investors who have been left licking their wounds from recent market declines, especially in bank and tech stocks.
Global investor confidence remains fragile, with the European Central Bank (ECB) saying that recent volatility highlights the need for greater regulatory scrutiny.
As U.S. banking contagion worries ebb, some investors are scouting for shares of fundamentally strong regional lenders that were swept up in this month's epic sell-off.
Overnight, a survey showed that U.S. consumer confidence unexpectedly increased in March despite recent financial market turmoil, but Americans still expect inflation to remain elevated over the next year.
Bloomberg News reported that Credit Suisse Group investors are being urged to vote against a share-based transformation award for executives and ratifying the actions of the board of directors and management at the upcoming annual general meeting.
Meanwhile, U.S. prosecutors unveiled a new indictment against Sam Bankman-Fried, accusing the founder of the now-bankrupt FTX cryptocurrency exchange of paying a $40 million bribe to Chinese officials so they would unfreeze his hedge fund's accounts.
And in Asia, geopolitical tensions are heating up with China threatening to retaliate if U.S. House Speaker Kevin McCarthy meets Taiwan President Tsai Ing-wen during her planned transit of the United States, saying any such move would be a "provocation".
Key developments that could influence markets on Wednesday:
European economic data: Spain flash March CPI, Germany March CPI, Euro zone March business/consumer sentiment
Speakers: ECB board member Isabel Schnabel
EUROPEAN FUTURES TICK HIGHER(0628 GMT)
European futures are flashing green this morning, supported by receding jitters around bank stocks. Those on the STOXX 50 .STXEc1 and DAX FDXc1 are up 0.4%-0.5%, while FTSE FFIc1 futures are lagging, up 0.1%. U.S. futures are up 0.6%.
Markets may be getting a small lift as fears of more banking turmoil fade, but they are also reflecting that recession fears are still lurking.
German consumer sentiment was seen nudging up in April as energy prices have relented somewhat from record highs, though a full recovery is not in sight anytime soon, showed a GfK institute survey on Wednesday.
UBS's UBSG.S massive takeover of neighbour Credit Suisse CSGN.S remains at the forefront, with news this morning that UBS has rehired Sergio Ermotti as CEO.
Shares in German chipmaker Infineon IFXGn.DE jumped 4.6% in pre-market trade after it raised its outlook both for second quarter and the whole of 2023.
($1 = 0.9213 euros)
credit event bofahttps://tmsnrt.rs/3KqNC9X
Europe commercial real estatehttps://tmsnrt.rs/3lVBAeX
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