Dec 5 (Reuters) – Ratings agency Moody’s cut its outlook on China’s government credit ratings to negative from stable on Tuesday, in the latest sign of mounting global concern over the impact of surging local government debt and a deepening property crisis on the world’s second-largest economy.
The downgrade reflects growing evidence that authorities will have to provide more financial support for debt-laden local governments and state firms, posing broad risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.
“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” Moody’s said.
China’s blue-chip stocks slumped to nearly five-year lows on Tuesday amid worries about the country’s growth, with talk of a possible cut by Moody’s denting sentiment during the session, while Hong Kong stocks extended losses.
China’s major state-owned banks, which had been seen supporting the yuan currency all day, stepped up dollar selling very forcefully after the Moody’s statement, one source with knowledge of the matter said. The yuan was little changed by late afternoon.
The cost of insuring China’s sovereign debt against a default rose to its highest since mid-November
“Now the markets are more concerned with the property crisis and weak growth, rather than the immediate sovereign debt risk,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.
The move by Moody’s was the first change on its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt.
While Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings on Tuesday, it said it expects the country’s annual GDP growth to slow to 4.0% in 2024 and 2025, and to average 3.8% from 2026 to 2030.
Analysts say the A1 rating is high enough in investment-grade territory that a downgrade is unlikely to trigger forced selling by global funds. The other two major rating agencies, Fitch and Standard & Poor’s, rate China A+, which is equivalent to Moody’s. Both have a stable outlook.
China’s Finance Ministry said it was disappointed by Moody’s decision, adding that the economy will maintain its rebound an positive trend. It also said property and local government risks are controllable.
“Moody’s concerns about China’s economic growth prospects, fiscal sustainability and other aspects are unnecessary,” the ministry said.
STRUGGLING FOR TRACTION
Most analysts believe China’s growth is on track to hit the government’s target of around 5% this year, but that comapres with a COVID-weakened 2022 and activity is highly uneven.
The economy has struggled to mount a strong post-pandemic recovery as a deepening crisis in the housing market, local government debt concerns, slowing global growth and geopolitical tensions have dented momentum.
A flurry of policy support measures have proven only modestly beneficial, raising pressure on authorities to roll out more stimulus.
Analysts widely agree that China’s growth is downshifting from breakneck expansion in the past few decades. Many believe Beijing needs to transform its economic model from an over-reliance on debt-fuelled investment to one driven more by consumer demand.
Last week, China’s central bank head Pan Gongsheng pledged to keep monetary policy accommodative to support the economy, but also urged structural reforms to reduce a reliance on infrastructure and property for growth.
DEEPER IN DEBT
After years of over-investment in infrastructure, plummeting returns from land sales, and soaring costs to battle COVID, economists say debt-laden municipalities now represent a major risk to the economy.
Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China’s economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund (IMF).
In October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) in sovereign bonds by the end of the year to help kick-start activity, raising the 2023 budget deficit target to 3.8% of gross domestic product (GDP) from the original 3%.
The central bank has also implemented modest interest rate cuts and pumped more cash into the economy in recent months.
Nevertheless, foreign investors have been sour on China almost all year.
Capital outflows from China rose sharply to $75 billion in September, the biggest monthly figure since 2016, according to Goldman Sachs.
($1 = 7.1430 Chinese yuan renminbi)
Reporting by Gnaneshwar Rajan in Bengaluru and Kevin Yao in Beijing; Editing by Tom Hogue and Kim Coghill
Our Standards: The Thomson Reuters Trust Principles.
[1/2]A house-for-sale sign is seen inside the Washington DC Beltway in Annandale, Virginia January 24, 2016. REUTERS/Hyungwon Kang/Files/File Photo Acquire Licensing Rights
BENGALURU, Nov 30 (Reuters) – U.S. existing home sales are forecast to remain subdued next year and beyond as high mortgage rates force homeowners to stay put, according to a Reuters poll of analysts, who also expected house prices to edge higher.
The rate on the popular 30-year fixed-rate mortgage hit a more than two-decade high just under 8% last month, leading to a 4.1% drop in U.S. existing home sales last month alone to the lowest annualized rate since 2010, 3.79 million units.
The 30-year mortgage rate has since retreated a bit to levels last seen in late September, but is expected to average 6.5% throughout next year, according to the poll, not averaging below 6% until 2025.
Home resales, which account for the bulk of U.S. housing transactions, were expected to average a little over 4 million units next year. That is a far cry from an average 6 million in 2021 during the pandemic housing boom and the 5.3 million average over the past quarter century.
While interest rate cuts are on the way next year, they may not be enough to significantly alter the trend. The Federal Reserve will cut rates by 75 basis points by the end of 2024, with the first cut in the second quarter, a separate Reuters poll found.
Despite those cuts, mortgage rates are likely to be too high to entice existing homeowners to put property up for sale, analysts said.
“Existing home sales have been constrained by the lack of resale inventory available in the market,” said Crystal Sunbury, senior real estate analyst at RSM, a U.S.-based consulting firm.
“We may see more resale units come into the market, as mortgage rates ease. But resale inventory is not expected to climb substantially, as over 80% of current homeowners are estimated to have mortgages under 5% and the vast majority will not be willing to trade up their mortgage for a higher rate.”
Existing home sales were forecast to average 3.84 million annualized units this quarter, followed by 3.90 million, 4.03 million, 4.20 million and 4.38 million units over the next four quarters.
Meanwhile, property developers are cranking up housing supply to take advantage of the demand-supply mismatch. Residential investment rebounded in the third quarter after contracting for nine straight quarters.
An overwhelming 83% majority of analysts, 20 of 24, said supply of affordable homes over the coming two to three years will improve. But only five said the improvement would be enough to keep up with demand.
Poll medians showed average house prices as measured by the S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rising 2.7% this year and 1.8% in 2024. That was an upgrade from a September survey where prices were forecast to flatline in both years.
Low single-digit price rises would represent a more stable outlook in the housing market, which in the pandemic years alone soared nearly 45%. But for most first-time buyers, the average home price is already prohibitively high, requiring a huge deposit before purchase.
“The housing market continues to experience a tug of war between buyers who are priced out due to high mortgage rates and owners who are locked in to their existing mortgages,” said Cristian deRitis, deputy chief economist at Moody’s Analytics.
“Limited supply of homes available for sale will continue to support prices in the short term.”
In the meantime, many young families who can’t afford to put down a deposit or take out mortgages at these rates will have to continue renting, which has been extremely expensive in recent years. Rents are only now starting to decline more broadly.
A slight majority of poll respondents, 13 of 22, said the proportion of home ownership to renters will increase somewhat or increase significantly over the coming five years. The remaining nine said it would decrease.
(Other stories from the Reuters quarterly housing market polls)
Reporting by Hari Kishan; Polling by Anitta Sunil and Prerana Bhat; Editing by Ross Finley and Jonathan Oatis
Our Standards: The Thomson Reuters Trust Principles.
Canada’s Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland walk holding the 2023-24 budget, on Parliament Hill in Ottawa, Ontario, Canada, March 28, 2023. REUTERS/Patrick Doyle/File Photo Acquire Licensing Rights
OTTAWA, Nov 21 (Reuters) – Following are some of the commitments the Canadian government made in its Fall Economic Statement released on Tuesday.
*invest an additional C$15 billion in new loan funding, starting in 2025-26, for the Apartment Construction Loan Program, for a total of more than C$40 billion in loan funding. This investment will support more than 30,000 additional new homes, bringing the contribution to more than 101,000 new homes supported by 2031-32.
*invest an additional C$1 billion over three years, starting in 2025-26, for the Affordable Housing Fund. This investment will support non-profit, co-op, and public housing providers to build more than 7,000 new homes by 2028.
*help remove barriers to internal labor mobility, including by leveraging federal transfers, and other funding, to encourage provinces and territories to cut the red tape that impedes the movement of workers, particularly in construction, health care and child care
*deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals. It will also deny income tax deductions when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements.
*propose to spend C$50 million over three years, starting in 2024-25, to support municipal enforcement of restrictions on short-term rentals.
*introduce a new Canadian Mortgage Charter, which outlines how financial institutions are to work to provide tailored relief and ensure payments are reasonable for borrowers.
*the Canadian Radio-television and Telecommunications Commission will conduct a prompt investigation of international mobile roaming charges, and will provide an update and concrete next steps in 2024.
*work with the Canadian Transportation Agency to ensure that airlines seat all children under the age of 14 next to their accompanying adult at no extra cost
*explore removing the rule that restricts Canadian pension funds from holding more than 30% of the voting shares of most corporations. It also proposes to require large federally-regulated pension plans to disclose the distribution of their investments, both by jurisdiction and asset-type per jurisdiction, to the Office of the Superintendent ofFinancial Institutions
*begin buying up to C$30 billion of Canada Mortgage Bonds, starting as early as February 2024
(Reporting by Steve Scherer and David Ljunggren)
(steve.scherer@thomsonreuters.com; +1-647-480-7889)
Keywords: CANADA BUDGET/FACTBOX
Our Standards: The Thomson Reuters Trust Principles.
A sign reads “new tenant wanted” in a window of a commercial building in Frankfurt, Germany, July 19, 2023. REUTERS/Kai Pfaffenbach/File Photo Acquire Licensing Rights
FRANKFURT, Nov 21 (Reuters) – The euro zone’s commercial real estate market could struggle for years, leaving bank loan books, investment funds and insurers exposed, the European Central Bank said on Tuesday.
Economic weakness and high interest rates have depressed real estate prices over the last year, reducing real estate firms’ profitability and even challenging the commercial property market’s business model.
The sector is not big enough to create a systemic risk for lenders but could increase shocks across the financial system and greatly impact the financial firms, from investment funds to insurance firms, collectively known as shadow banks.
“While the relatively limited size of bank commercial real estate portfolios implies that they are unlikely on their own to lead to a systemic crisis, they could play a significant amplifying role in the event of broader market stress,” the ECB said in a Financial Stability Review article.
Residential mortgages make up about 30% of bank loan books, while commercial real estate accounts for about 10%.
“A negative outcome of this type would also drive large losses in other parts of the financial system which are significantly exposed to CRE, such as investment funds and insurers,” it added.
Commercial real estate transactions were down 47% in the first half of 2023, compared with the same period a year earlier.
That makes it hard to say how far prices have dropped, but the bloc’s largest listed landlords are trading at a discount of over 30% to net asset value, their largest such discount since 2008, the ECB said.
It said a sample of bank loans to real estate firms implies the recent rise in financing costs may cause the share of loans extended to loss-making firms to double to as much as 26%.
If the tighter financing conditions persist for two years as markets expect, and firms are required to roll over all maturing loans, this number would increase to 30%.
“There are substantial vulnerabilities in this loan book, particularly when considering that it is expected that both higher financing costs and reduced profitability will persist for a number of years,” the ECB said.
“Business models established on the basis of pre-pandemic profitability and low-for-long interest rates may become unviable over the medium term.”
Reporting by Balazs Koranyi; editing by Barbara Lewis
Our Standards: The Thomson Reuters Trust Principles.
[1/2]A logo of Brazil’s state-run Petrobras oil company is seen at their headquarters in Rio de Janeiro, Brazil October 16, 2019. REUTERS/Sergio Moraes/File Photo Acquire Licensing Rights
HOUSTON/BRASILIA/RIO DE JANEIRO, Nov 17 (Reuters) – Brazil’s leftist President Luiz Inacio Lula da Silva pressed the head of state-run oil firm Petrobras (PETR4.SA), Jean Paul Prates, to modify the company’s 2024-2028 investment plan to prioritize local job creation, five sources told Reuters.
Lula’s requests to Prates may raise fresh fears of political interference in the company, which under previous administrations has come under pressure to boost Brazil’s economy over the concerns of private investors.
In a Nov. 9 meeting in Brasilia, Prates presented Lula with a draft of the investment plan, which is due to be unveiled at the end of this month, the sources said.
They said Lula complained about Petrobras’ lack of planned investments in Brazil’s shipbuilding industry, a sector that has long been close to his heart and which he hopes to revitalize.
Lula told Prates that Petrobras should commission 25 ships to be built in Brazilian shipyards, instead of the four currently planned.
He also complained about Petrobras hiring foreign suppliers, arguing it should instead focus on using Brazilian firms, the sources said.
Additionally, Lula asked for Petrobras to push forward completion of a fertilizer factory in Mato Grosso do Sul state by two years, so it is finished before his term ends in 2026.
Another of Lula’s suggestions was to kickstart projects currently listed in the plan as under preliminary analysis.
When asked for comment, Petrobras referred Reuters to a Nov. 8 statement, in which it said it is still finalizing its investment plan. Any eventual changes to its spending plans would follow the strategic guidance approved by the company’s board, the statement said.
Brazil’s presidency did not immediately respond to a request for comment.
Last week, Reuters reported that Petrobras’ plan will include around $100 billion in investments that the firm is both analyzing and those it has already committed to. In the previous 2023-2027 plan, Petrobras projected $78 billion in investments.
The sources said Lula’s requests will likely complicate completion of the plan before the end-November deadline. Prates is due to meet the president next week to discuss alterations.
The plan has yet to be presented for approval by Petrobras’ board.
Reporting by Sabrina Valle, Lisandra Paraguassu, Rodrigo Viga Gaier; Additional reporting by Marta Nogueira; Writing by Fabio Teixeira; Editing by Roberto Samora, Gabriel Stargardter and Marguerita Choy
Our Standards: The Thomson Reuters Trust Principles.
LONDON, Nov 16 (Reuters) – World stocks fell for the first time in five sessions, oil slipped and the dollar saw a slight lift on Thursday, as markets continued to acclimatize to falling borrowing costs after nearly two years of relentless gains.
Europe’s moves saw the STOXX 600 (.STOXX) slip from a more than one-month high, Wall Street look set for an early dip, and Taiwan’s dollar rise after China’s President Xi Jinping and U.S. counterpart Joe Biden agreed to reopen key military communications channels between the two superpowers.
Xi also underscored the point by saying China would not “fight a cold war or a hot war with anyone”.
Global markets have rallied sharply this month as inflation data out of the United States and parts of Europe, such as Britain, have reinforced hopes that major central banks are now done raising borrowing costs.
Robust U.S. retail sales figures on Wednesday were a reminder that it might not be a straight line move, however, with the focus now squarely on weekly U.S. jobless claims data later and a monthly euro zone inflation print on Friday.
“If you don’t get confirmation of the slowing economic direction from every single piece of data every single day we risk running out of momentum on the big trades,” Societe Generale FX strategist, Kit Juckes, said.
“Until we get to the point where rate cuts are just around the corner, everything is going to be very stop-start. The dollar sell-off is stop-start, the bond market rally is really stop-start and the equity market is all over the place.”
Key government bond market borrowing costs resumed their broad downward trend on Thursday, driven by increasing confidence that rate cuts are coming next year.
Germany’s 10-year bond yield dipped to 2.62% but held above the previous day’s two-month low of 2.568%, while sterling sank to a six-month low against the euro as dealers in London inched closer their predictions on when the Bank of England (BoE) will start cutting rates. EUR/GVD
Many now think it might be as soon as May although BoE policymaker Meg Greene warned on Thursday that investors are missing the message that central banks have been pushing recently that interest rates will remain higher for longer.
“I think markets globally haven’t really clocked on to this,” Greene told Bloomberg Television, adding that the BoE was not talking about cutting rates.
CHINA PROPERTY
Asian stocks fell overnight as new Chinese data showed continued weakness in its problem-hit property sector which dented recent optimism about a recovery in the world’s second-largest economy.
While data this week showed China’s industrial and retail sectors are now making a comeback, figures have also shown a sharp drop in property investment and weak home prices, underscoring the ongoing drag the sector is having.
There was mixed news from Japan too, where exports grew for a second straight month in October but at a sharply slower pace due to slumping China-bound shipments of chips and steel.
“The weak economic data from both countries indicate the fact that the global economy is slowing down, highlighting ongoing macro headwinds that businesses face,” said Tina Teng, market analyst at CMC Markets.
XI AND BIDEN
Australian shares (.AXJO) ended their day down 0.7% as strong wage data indicated that inflationary pressures there are still running high.
Japan’s Nikkei (.N225) dipped 0.3%, moving into reverse after it, along with the main MSCI Asian and emerging market indexes, all posted their biggest gains in a year on Wednesday.
Chinese stocks showed some disappointment at Xi and Biden’s first meeting in years, with Shanghai’s blue-chip CSI300 index (.CSI300) closing down 1% and Hong Kong’s Hang Seng index (.HSI) ending 1.3% lower.
While the two leaders agreed to resume military-to-military communications and cooperate on anti-drug policies, a sign ties are improving, some investors were disappointed at a lack of other breakthroughs in the talks.
The MSCI main 47-country global stocks index (.MIWD00000PUS) was down for the first time in five sessions after a near 8% surge this month.
Wall Street futures pointed to a slightly weaker start there too, although there was modest relief that the Senate had overwhelmingly approved a temporary funding measure to avert another U.S. government shutdown for now.
Money market traders have now fully priced in that the Federal Reserve will keep U.S. interest rates steady in December. They see the first rate cut of the cycle in May.
The yield on benchmark 10-year Treasury notes was back under 4.5% compared with its U.S. close of 4.537% on Wednesday. The two-year yield hovered at 4.88% compared with a U.S. close of 4.916%.
In currencies, the euro was flat at $1.0848, having gained 2.5% in a month, while the dollar index , which tracks the greenback against a basket of currencies of other major trading partners, was fractionally higher.
Oil traders, meanwhile, nudged U.S. crude down 0.3% to $76.55 a barrel. Brent crude was at $80.90 per barrel while safe-haven gold was slightly higher at $1,965 per ounce .
Additional reporting by Julie Zhu in Hong Kong; Editing by Christina Fincher and Mark Potter
Our Standards: The Thomson Reuters Trust Principles.
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, October 30, 2023. REUTERS/Staff/File Photo Acquire Licensing Rights
A look at the day ahead in European and global markets from Kevin Buckland
Chip stocks gave Asian equity investors some small bit of cheer to start the week, picking up where Wall Street left off while U.S. yields stayed subdued, which kept a lid on the dollar, too.
But elsewhere, bears were firmly in control.
A lot of that can likely be traced to China, rather than to the Moody’s downgrade to the outlook for the U.S. sovereign debt rating, which investors have taken in stride.
The Chinese consumer has so far refused to ride to the rescue of the world’s second-largest economy. Monthly retail sales data is due on Wednesday but the country’s Singles Day shopping extraganza over the weekend – equivalent to Black Friday sales elsewhere – recorded only meagre growth.
Looking across the region, Japan’s tech-heavy Nikkei managed to keep its head above water, buoyed by gains for its two biggest chip-related shares; Taiwan’s benchmark advanced 0.8%.
But Hong Kong flipped from early gains to a loss of about 0.15%. A sub-index of tech shares remained firmly positive but another of mainland property developers slumped more than 1%.
China’s blue chips fell 0.5%.
U.S. retail sales data is also due on Wednesday, preceded by CPI a day earlier. The figures could be key in helping the Federal Reserve to plot the path ahead for interest rates, including whether another hike is needed.
The Fed’s rhetoric has taken a hawkish turn recently, but markets so far are more focused on the data, particularly the soft non-farm payrolls numbers at the start of this month.
ECB President Christine Lagarde last week said that rates will stay restrictive at least for several quarters. Lagarde deputy Luis de Guindos has his say a little later today, giving the keynote speech to kick off Euro Finance Week.
Elswhere, Bank of England board member Catherine L. Mann will take the podium, after the bank’s chief economist, Huw Pill, said last week its projection that monetary policy will need to remain restrictive for an extended period should not be taken as a promise.
Key developments that could influence markets on Monday:
-ECB’s de Guindos, BoE’s Mann speak
-UK Rightmove house prices
-Sweden SEB housing
-New York Fed consumer expectations survey
Reporting by Kevin Buckland; Editing by Edmund Klamann
Our Standards: The Thomson Reuters Trust Principles.
A man looks at an electric board displaying the Nikkei stock average outside a brokerage in Tokyo, Japan June 14, 2023. REUTERS/Kim Kyung-Hoon/File Photo Acquire Licensing Rights
SYDNEY, Nov 9 (Reuters) – Asian share markets rallied on Thursday and the dollar firmed, even as global investors again sold off the troubled mainland Chinese property sector.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was up 0.1%, and is up 4.3% so far this month.
The yield on benchmark 10-year Treasury notes reached 4.4902% compared with their U.S. close of 4.508% on Wednesday.
The two-year yield , which rises with traders’ expectations of higher Fed fund rates, touched 4.9277% compared with a U.S. close of 4.936%.
Australian shares (.AXJO) were up 0.26%, while Japan’s Nikkei stock index (.N225) rose 1.53%.
Hong Kong’s Hang Seng Index (.HSI) reversed an early gain and was down 0.25% in the afternoon while China’s bluechip CSI300 Index (.CSI300) was 0.1% higher.
China’s troubled property sector is being closely watched on Thursday after most major stocks rallied one day earlier following a Reuters report that Ping An Insurance Group had been asked by the Chinese authorities to take a controlling stake in Country Garden Holdings (2007.HK) .
A spokesperson for Ping An (601318.SS) said the company had not been approached by the government and denied the Reuters report that cited four sources familiar with the plan.
The Hang Seng Mainland Properties Index (.HSMPI) shed 3.73% on Thursday and the Hang Seng Properties Index (.HSNP), which covers Hong Kong developers, was down 0.7%.
“I think for equities investors, they are still shying away from Chinese property because there are so many unknowns,” said Jason Lui, BNP Paribas’s Head of APAC Equity & Derivative Strategy.
“It’s difficult to ask investors to go back to pre-property downturn days, fundamentally property is going to play a very different role in Chinese economic development going forward.
“Property needs to stop being a drag on GDP and sentiment so investors can move on to the real growth drivers.”
In early European trades, the pan-region Euro Stoxx 50 futures were up 0.1%, German DAX futures were down 0.05%, FTSE futures were down 0.16% at 7,401.5,
U.S. stock futures, the S&P 500 e-minis , were down 0.06% at 4,396.8.
Chinese inflation figures for October published on Thursday showed a 0.1% decline compared to September and a 0.2% fall from one year, according to official statistics.
The dollar dropped 0.03% against the yen to 150.93 . It is moving back towards its high this year of 151.74 on Oct. 31.
The European single currency was up 0.0% on the day at $1.0708, having gained 1.25% in a month, while the dollar index , which tracks the greenback against a basket of currencies of other major trading partners, was up at 105.51.
The dollar has rebounded from last week’s sharp sell-off on rising confidence the Fed has ended raising rates. There is less agreement on whether a rate cut is on the horizon with inflation still above the U.S. Federal Reserve’s 2% target.
On Wall Street, the S&P 500 (.SPX) rose 0.10% and the Nasdaq Composite (.IXIC) added 0.08%. The Dow Jones Industrial Average (.DJI) fell 0.12%.
The S&P 500 rose for the eighth consecutive day, extending its longest win streak in two years.
The Federal Reserve last week kept the benchmark overnight interest rate in the current 5.25%-5.50% range and the central bank is due to meet again mid next month.
The U.S weekly jobless claims published on Thursday will be closely watched as an indicator of the how the country’s labour market is performing. Economists predict claims will reach 219,000 after coming in at 217,000 last week.
Oil prices slid over 2% on Wednesday to their lowest in more than three months on concerns over waning demand in the U.S. and China.
In Asian trading Thursday, U.S. crude ticked up 0.15% to $75.44 a barrel. Brent crude rose to $79.68 per barrel.
Gold was slightly lower. Spot gold was traded at $1948.9332 per ounce.
Reporting by Scott Murdoch; Editing by Tom Hogue and Stephen Coates
Our Standards: The Thomson Reuters Trust Principles.
A view shows the logo of the European Central Bank (ECB) outside its headquarters in Frankfurt, Germany March 16, 2023. REUTERS/Heiko Becker/File Photo Acquire Licensing Rights
FRANKFURT, Nov 7 (Reuters) – Euro zone banks should factor in the risk of a further fall in property prices when they make provisions and plans about their capital, the European Central Bank’s chief supervisor Andrea Enria said on Tuesday.
The European property market has come under pressure from the ECB’s steepest and longest streak of increases in interest rates, which are now at record highs.
With real estate prices already falling in several countries, most notably Germany, where there had been a boom during the last decade of low interest rates, Enria told lenders to brace for more pain.
“The current higher interest rate environment could put further downward pressure on office and house prices, making it harder for commercial property owners and households to service their debt,” Enria told the European Parliament.
“Banks should account for these risks in their provisioning practices and capital planning.”
As the euro zone’s top banking supervisor the ECB sets capital requirements for banks, and has been known to push back on their plans to pay dividends or buy back shares.
Fuelled by low interest rates and massive ECB cash injections, billions were funnelled into property in the last decade, particularly in richer European countries such as Germany, France and the Netherlands.
A sudden surge in inflation over the past two years has forced the ECB to tighten the purse strings and put an end to the run in real estate prices, tipping developers into insolvency as bank financing dries up, deals freeze and prices fall.
Euro zone banks have been curbing access to credit, particularly mortgages, and demand from households and companies is also falling, ECB data shows.
Enria, an Italian, is set to step down as the chairman of the ECB’s Single Supervisory Board at the end of the year, when he will be replaced by Germany’s Claudia Buch.
Reporting By Francesco Canepa; Editing by Kirsten Donovan and Jan Harvey
Our Standards: The Thomson Reuters Trust Principles.
Two women walk next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz/File Photo Acquire Licensing Rights
A look at the day ahead in European and global markets from Tom Westbrook:
Bond markets have curbed a little of last week’s enthusiasm about a prospective peak in global interest rates, but still cheered a rate hike in Australia that looks to be the last of the cycle.
The Aussie dollar fell more than 0.8% and Australian government bonds rallied because the 25 basis point hike by the Reserve Bank of Australia came with a softening of language on whether further hikes would be needed.
The ASX200 (.AXJO) lifted from mid-session lows.
It was an otherwise quiet session in the absence of major updates that might have consequences for the interest rate outlook.
Gravity dragged South Korean shares back to earth, with the Kospi (.KS11), which soared 5.7% on Monday after a short-selling ban was re-imposed, falling 3%.
Three days of strong gains for the MSCI Asia ex-Japan index (.MIAPJ0000PUS) also came to an end.
Data showed Chinese imports unexpectedly grew in October, a welcome signal on domestic consumption, but exports contracted at a quicker pace than expected, giving a mixed picture overall.
Last week’s chaos in Chinese money markets has subsided but it left behind a glimpse of financial pressures beneath the surface and the challenges around China’s uneven recovery from the COVID-19 pandemic.
Read Reuters’ exclusive report on what happened here: Clashing priorities behind China’s rare money market distress.
British house prices, German industrial output and European producer prices are due later on Tuesday, as are earnings from UBS (UBSG.S).
Overnight news from the U.S. included the latest humbling of WeWork (WE.N), which sought bankruptcy protection. It expects to continue in business, but the move represents an admission by majority owner SoftBank that the office-space firm cannot survive unless it renegotiates its pricey leases.
Israeli Prime Minister Benjamin Netanyahu said his government would consider “tactical little pauses” in fighting to facilitate the entry of aid or the exit of hostages from the Gaza Strip, but again rejected calls for a ceasefire despite international pressure.
Without a Fight won the 163rd Melbourne Cup by two lengths.
Key developments that could influence markets on Tuesday:
Earnings: UBS
Economics: German industrial output, Euro zone producer prices, UK house prices, NY Fed household debt report
Speakers: Fed’s Waller, Logan and Schmid, ECB’s de Guindos and McCaul, BoC’s Kozicki
Reporting by Tom Westbrook; Editing by Edmund Klamann
Our Standards: The Thomson Reuters Trust Principles.