Deutsche Bank’s shares rose 10% on Wednesday. Is the panic over Germany’s biggest bank over? Well, a quick bounce in the share price is a useful start but any other reaction would have been alarming given the force of the verbal counter-offensive.
Chief executive John Cryan had declared Deutsche to be “absolutely rock-solid” and Wolfgang Schäuble, the country’s finance minister, was obliged to lend a hand by saying he had “no concerns” about the bank. Even after these proclamations, Deutsche’s shares are still down 33% since the start of the year and the bank is priced at half its book value. So, no, the crisis is not over – not for Deutsche and not for the wider banking sector.
There are specific worries about Deutsche – the cost of litigation and restructuring, and possible write-offs from bad loans to energy companies – but the deeper worry for all banks is simple. Are their business models damaged if we are tip-toeing towards a world of negative interest rates?
In the old world of near-zero interest rates there was an easy way for banks to generate capital: borrow some of that cheap money and park it a safe long-term asset, such as a respectable government bond, offering a higher yield. But those opportunities are rapidly evaporating in the weird world of negative rates in which short- and long-term yields are falling in tandem. Some $6tn worth of government debt – mostly in Japan and the eurozone – is now calculated to be trading at a negative yield.
That financial upset is clearly dramatic, but nobody knows the consequences if it lasts for long. If the European Central Bank, desperately trying to generate inflation and stimulate lending, takes a further step into negative territory at its meeting next month, would the woes of Deutsche and the banking sector deepen? It seems entirely possible if the outlook for the global economy is still weakening.
Morgan Stanley’s analyst yesterday quoted the view of Axel Weber, chairman of UBS, from last month on the challenges presented by ultra-low and negative rates. “The side-effects of the medicine are getting stronger and stronger, the curative effects are getting weaker and weaker,” said Weber.
Fair comment.
Arm reaches for the future
The microchips we design aren’t just bought by Apple, and they aren’t found only in smartphones. Arm Holdings has been singing this tune for a while, but with little effect on its share price. The UK’s finest technology company has been a wonderful investment on a 10-year view but the stock has gone roughly sideways for the past three years, even as profits have risen from £364m in 2013 to £511m in 2015.
Perhaps the latest variation on the theme will do the trick. Cars as “supercomputers” certainly sounded more compelling than past lectures on the wonders of the internet-of-things, an idea that always seemed just a little too loose.
The big idea is that the average vehicle will soon be carrying $150 worth of chips. That is easier to understand because we can see the evidence: modern cars come packed with aids for drivers and elaborate entertainment systems. The computing power in each vehicle is set to increase a hundredfold, says Arm, which seems as good a prediction as any. In terms of the automotive market as a whole, the company reckons it’s looking at an increase from $10bn to $15bn in five years.
That’s an opportunity for the medium term. In the short term, investors will continue to fret about China, Arm’s exposure to a saturated smartphone market (still 45% of its business), and a possible slowdown in consumer spending that would slow royalty receipts. Take a step back, though, and another decade of growth for Arm seems assured as the licensing deals continue to flow. Few would describe a valuation of 30 times last year’s earnings as cheap – but, by tech standards, that’s not bad.
Friction over oil
The idea that Russia and Saudi Arabia would agree to co-ordinate cuts in oil production always seemed fanciful. And here comes Igor Sechin, chief executive of Kremlin-controlled Rosneft, to throw more cold water on the notion.
Sechin, as well as taking a side sweep at “robot traders” – traditional bogeymen in tough times – blamed Middle Eastern producers for deliberating creating the current position of low oil prices and then sticking to the policy. It’s not the sort of thing you would say if were trying to lay the groundwork for a deal and turn on the charm.
From a mechanical point of view, the joint removal by the Saudis and the Russians of 1m barrels a day of production would probably bring the oil market into balance. But, without a thawing in the political relationship, it’s not going to happen. The International Energy Agency had it right earlier in the week when it said: “Persistent speculation about a deal between Opec and leading non-Opec producers to cut output appears to be just that: speculation.”
The economic incentives for both countries might change if $30-a-barrel oil became $20. At the moment, though, everyone is wedded to their view that $50-ish will be seen by the end of this year as rising demand for oil meets lower investment. If that’s their genuine view, there’s no Russian/Saudi deal.