By Neil Wilson, ETX Capital
UK and European banking stocks jumped on the open after regulators in the US gave the greenlight to higher dividends and buybacks, whilst the hints of a shift in tone from central bankers towards tightening is spurring hopes of higher interest rates again.
HSBC (LON:HSBA) led the FTSE 100, rising nearly 4% at the start of play. Standard Chartered (LON:STAN) rose 2%, while Barclays (LON:BARC), Lloyds (LON:LLOY) and RBS (LON:RBS) were all up more than 1%. HSBC got a double perk up after Morgan Stanley (NYSE:MS) raised the stock to overweight with an 850p price target. With a big index weighting that HSBC boost powered the FTSE 100 higher, while gains for mining stocks as metal prices firmed also supported. Meanwhile cable is flirting with $1.30 again following those hawkish comments from Bank of England governor Mark Carney.
The boost seems to have been the halo effect from the US, as all the major banks passed stress tests, which means they can now significantly raise shareholder returns. The Fed has effectively green-lighted up to $100bn in dividends and buybacks. US banks rose in after-hours trading as a result.
Banks are also profiting from a shift in central bank language that suggests the decade-long pursuit of easy money policies could be ending. Whilst there has been some degree of confusion stemming from nuanced comments from Mario Draghi and Mark Carney, there does appear to be a shift. The Fed may soon be joined by other central banks as stimulus is dialled back.
The Bank of Canada may be closest to hiking, with policymakers definitely steering the market to expect a rate increase this summer, possibly as early as this month.
The Reserve Bank of Australia may also be mulling a rate hike. The RBA has forecast inflation returning to target and economic growth to surge to 3% as the global economy picks up. Former board member John Edwards recently weighed into the debate by suggesting the bank could raise rates as many as eight times in the next two years.
The Bank of England is openly divided by the split itself marks a significant shift. Carney, previously a consensus-building dove, is now tilting towards a possible hike if wages and business investment can pick up. Accelerating inflation is forcing the Bank’s hand.
The ECB has offered mixed signals but the market has taken recent comments as fairly hawkish. There is certainly a shift in language but lacklustre Spanish and Italian inflation data for June highlights the task at hand.
Central banks are going to be ultra-cautious in their approach, and rates are likely to be materially lower than historic averages for a fair while yet. But there is just the merest hint of a concerted and loosely coordinated effort to normalise policies at a global level. After a decade of ultra-low rates, banks and their investors should be pleased by the development.
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