To try and paint a comprehensive picture of whats happening on the Global Economic stage, I submit the following;
First, understand whats been happening since Sunday/Monday Hedge Fund mom/pop investors in the UK have finally realized that the whole system is imploding and they are desperate to try to get their money OUT of the mostly commercial real estate funds that they're in, after the more astute institutional investors (pension, insurance funds) had already liquidated their positions. Unbeknownst to any, and while these CRE hedge funds are SUPPOSED to be "24% liquid" - they invested that by buying bonds in the exact same asset-class they represent...AND, now low and behold - that has rapidly declined 25-30% as of late...thereby reducing their "liquidity" SO....here's whats happening (and for me, its a rerun from '07)
The Dominoes are Falling -
"It's probably nothing...
Domino #1: *STANDARD LIFE INV PROPERTY DROPS 15%; TRADING IN FUND SUSPENDED
In a stark flashback to the catalytic event that ultimately brought down Bear Stearns in 2008, and subsequently unleashed the greatest financial crisis in history, last night we reported that Standard Life, has been forced to stop retail investors selling out of one of the UK’s largest property funds for at least 28 days after rapid cash outflows were sparked by fears over falling real estate values.
As we further noted, citing an analyst, “given the outflows the sector seems to be experiencing, this could well put downward pressure on commercial property prices,” said Laith Khalaf, senior analyst at Hargreaves Lansdown. “The risk is this creates a vicious circle, and prompts more investors to dump property, until such time as sentiment stabilises.”
As we concluded, whie Brexit is not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together, it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead. And, indeed, if Standard Life was the first domino, moments ago the second domino also tumbled when as Bloomberg reported that Aviva Investors Property Trust is as of this moment "frozen" citing "extraordinary" market conditions.
Domino #2: *AVIVA SUSPENDS TRADING ON AVIVA INVESTORS PROPERTY TRUST
As the FT adds, Aviva Investments said it had prevented retail investors from selling out of its £1.8bn UK Property Trust since Monday afternoon.
Cited by Bloomberg, Aviva said in an email that "market circumstances, which are impacting the wider industry, have resulted in a lack of immediate liquidity" adding that "we have acted to safeguard the interests of all our investors by suspending dealing in the fund with immediate effect.... Suspension of dealing will give Aviva Investors greater control in managing cash flows and conducting orderly asset sales in order to meet our obligations to investors.”
Domino #3: *M&G SUSPENDS TRADING IN M&G PROPERTY PORTFOLIO FUND
As Bloomberg reports, M&G suspends trading in property portfolio, feeder funds, according to statement on website.
"Investor redemptions in the fund have risen markedly because of the high levels of uncertainty in the U.K. commercial property market since the outcome of the European Union referendum.
Redemptions have now reached a point where M&G believes it can best protect the interests of the funds’ shareholders by seeking a temporary suspension in trading."
Domino #4: *HENDERSON SUSPENDS UK PROPERTY PAIF & PAIF FEEDER FUND
Henderson temporarily suspends all trading in the Henderson U.K. Property PAIF and the Henderson UK Property PAIF feeder funds to safeguard the interests of all investors, according to statement.
Decision due to “exceptional liquidity pressures” after Brexit and recent suspension of other direct property funds
Domino #5: COLUMBIA THREADNEEDLE SUSPENDS PROPERTY FUND: FT
As The FT reports,
Columbia Threadneedle, the £323bn asset manager, has also confirmed it had suspended redemptions from its Threadneedle UK Property fund, blaming uncertainty in the UK property market following the referendum. The company said in a statement:
We have not been immune to the recent trend of retail outflows from the sector and so far these requests have been met from the cash balance retained within the Threadneedle [fund].
However, it is expected that these requests to sell will continue for the time being due to uncertainty in the market following the UK referendum result, therefore the temporary suspension of dealings allows sufficient time for the orderly sale of assets, and protects the interests of all investors.
Prices were already tumbling before they halted trading...
And now Domino #6: *CANADA LIFE SUSPENDS U.K. PROPERTY FUND, PA REPORTS
Canada Life said it suspended dealing in its £222 million property fund to "protect the interests of all investors in the property funds".
It added in an alert to financial advisers: "We did not take this decision lightly as we understand how this may affect you and your clients. We will endeavour to lift the deferral as soon as practically possible."
Canada Life said it would be deferring requests for withdrawals from its commercial property fund from 3pm on Tuesday, for up to six months.
Other firms are expected to follow suit as the investor exodus picks up.
But the Investment Association has sought to allay concerns, saying earlier this week that the ability to suspend trading "prevents fund managers from being forced to sell, in this case property interests, too rapidly and helps them achieve a better outcome for all their clients".
We are less sure that this will 'calm' anything and as Laith Khalaf, a senior analyst at Hargreaves Lansdown cited above, put it, “the dominoes are starting to fall in the U.K. commercial property market, as yet another fund locks its doors on the back of outflows precipitated by the Brexit vote. It’s probably only a matter of time before we see other funds follow suit."
The signs are everywhere - if you choose to look - Europe's banking system is collapsing (no matter what Draghi has to offer). From record lows in Deutsche Bank and Credit Suisse to spiking default risk in Monte Paschi, the panic in Europe's funding markets (basis swaps collapsing) is palpable.
Tumbling to a fresh post-Brexit low, Europe's Stoxx 600 Bank Index is testing EU crisis lows...
With Credit Suisse smashing to record lows...
and Deustche Bank crashing towards the inevitable Lehman moment...
As it seems the most systemically dangerous bank in the world is liquidating aggressively (via Reuters)
Deutsche Bank is looking to sell at least $1 billion of shipping loans to lighten its exposure to the sector whose lenders face closer scrutiny from the European Central Bank, sources told Reuters.
While the oil tanker trade has picked up, the container and dry bulk shipping industries are struggling with their worst downturn due to a glut of ships, a faltering global economy and weaker consumer demand.
Banking and finance sources familiar with the matter said Germany's biggest lender was initially looking to offload at least $1 billion.
"They are looking to lighten their portfolio and this includes toxic debt. It makes commercial sense to try and sell off some of their book," one finance source said. "They are not looking to exit shipping."
Deutsche Bank, which has around $5 billion to $6 billion worth of total exposure to the shipping sector, declined to comment.
Senior and Sub CDS are widening dramatically today with Italy's short-sale ban on Monte Paschi shares sparking a 10% bounce in the stock but CDS are unchanged implying a 66% chance of default.
Notably BMPS shares are leaking back lower after the opening ramp (desk chatterof takeover rumors have been dismissed) and the rest of the Italian banking sector is catching its cold (as we warned it would when Consob instigated the short-sale ban)
Which helps explain the crisis in Europe's funding markets as USD demand smashes higher (-9bps to -49bps in EUR-USD basis swaps)...
With counterparty risk concerns growing in Sterling banks...
"And The Biggest Loser From The UK's "Falling Dominoes" Is...
(LEGEND = RBS - Royal Bank of Scotland, CRE - Commercial Real Estate, GBP - Great Britian Pounds, BOE - Bank of England, AUM - Assets Under Management )
Now that not just 3 (as of last night) but 6 UK property funds, of clueless asset managers who have no idea how to factor in liquidity mismatch during market stress, have "frozen" their assets and gated investors from accessing assets, concerned traders are wondering how far the downstream effects of this domino chain will go. Luckily, overnight analysts at Morgan Stanley, JPM and SocGen did the math and found what they believe is (are) the most impacted bank(s) from UK's commercial real estate troubles.
Here is the verdict, first from SocGen:
RBS exposure to CRE is GBP26b, most of U.K.’s major banks, and equivalent to 63% of tangible equity Lloyds 2nd most exposed at 46% of tangible equity, Santander 3rd at 24%, Barclays 4th at 23% and HSBC 5th at 17% U.K. banks debt financing of CRE is down 34% since 2008 to GBP168b, according to De Montfort University Says watch out for other banks, challenger banks have relatively high proportion of more highly leveraged CREs on books Lloyds is most preferred, will be able to absorb Brexit bumps; RBS is least preferred
Next, from JPM:
RBS, Lloyds and Bank of Ireland are more exposed to risks from U.K. commercial property prices than Barclays, HSBC and Standard Chartered RBS, Lloyds TNAV sensitivity in stress scenario may be up to 5.5% with CT1 sensitivity at 90bps-100bps Major U.K. banks’ exposure is GBP69b Is “cautious” on U.K. domestic-exposed banks U.K. lenders exposure is GBP86b down from GBP150b in 2011 Flags BOE remarks that U.K. challenger banks have high proportion of more highly leveraged commercial real estate loans Says BOE research shows 10% drop in U.K. CRE prices leads to 1% drop in economy-wide investment
Finally, Morgan Stanley is outright negative on everything:
Morgan Stanley analysts see potential for further stress with GBP25b-40b of AUM in property funds, or 2-5% of total U.K. mutual fund assets, according to note. Outflows are always high when REIT discounts are wide, whilst Henderson, Aberdeen and Schroders have some exposure among asset managers Number of redemption requests normally correlated with discount to NAV for listed property stocks, currently close to historical wides Fund suspensions designed as circuit-breakers, but sentiment generated can still drive negative feedback loop similar to that seen during last financial crisis Liquidity mismatch the main concern: Liquidity of investment funds is a significant concern for global regulators, particularly where illiquid underlying investments are being sold in daily dealing fund structures to retail investors
* * *
The conclusion: Italy has Monte Paschi, Germany has Deutsche Bank, and the UK is now saddled with RBS.
At this rate, all three will soon require taxpayer bailouts. Just remember: it's all Brexit's fault that 7 years after the financial crisis, not a single of Europe's most systemically important banks were actually "fixed."
A Furious Italian Prime Minister Slams Deutsche Bank As Europe's Most Insolvent Bank
"Several years ago, we were the first to point out the true "elephant in the room", namely Deutsche Bank's $75 trillion in derivatives which as we said at the time was about 20 times bigger than Germany's GDP, and 5 times bigger than the entire economic output of the Eurozone."
This was largely ignored by the "experts" because why bring attention to something which is fundamentally a devastating break in the narrative that "Europe is fine" and the financial crisis is now contained.
Fast forward to today when Europe is once again not fine, only this time one can't blame Europe's problems on Greece (instead the same "experts" are trying to blame everything in Brexit), when in a surprising admission of reality, none other than Italy's prime minister Matteo Renzi, "went there" and slammed Deutsche Bank as the true "derivative problem" facing Europe.
To be sure, Renzi has his own problems, chief among which is how to pass a banking bail out of his insolvent banks without implementing the dreaded bail in mechanism unveiled in 2016 as the only permitted European bank resolution mechanism. Alas, in his push to bail out rather than bail in Italian banks, Renzi has faced stiff resistance from the Germans, namely Angela Merkel and Wolfgang Schauble who have both strongly opined against this kind of backtracking. Just today, Wolfgang Schaeuble, speaking at a news conference in Berlin (just hours after Italy hinted once again at an imminent bailout of Monte Paschi), said his Italian counterpart Pier Carlo Padoan told him that Italy intends to stick to the banking-union rules. Perhaps not.
So it is not surprising that when faced with stiff resistance from the Germans, Renzi decided to call a spade a spade when, as Reuters reports, he said that the difficulties facing Italian banks over their bad loans are miniscule by comparison with the problems some European banks face over their derivatives.
One look at the chart above and it becomes clear just who he was referring to.
As Reuters adds, speaking at a joint news conference with Swedish Prime Minister Stefan Lofven, Renzi said other European banks had much bigger problems than their Italian counterparts.
"If this non-performing loan problem is worth one, the question of derivatives at other banks, at big banks, is worth one hundred. This is the ratio: one to one hundred," Renzi said
So just like that the Mutually Assured Destruction doctrine is activated, because now that Deutsche Bank's dirty laundry has been exposed for all to see, Renzi's gambit is clear: if Merkel does not relent on bailing out Italian banks, the collapse of Italian banks will assure the failure of Deutsche Bank in kind. And since in a fallout scenario of that magnitude DB's derivative would not net out, there will be no chance to save the German banking giant, bail out, in, or sideways.
And now the ball is in Germany's court: to be sure, traders everywhere will be curious to see just how this diplomatic escalation in which the fingerpointing at insolvent banks is only just beginning concludes, and most of all, they will follow every word out of Merkel's mouth to see if the Chancellor will relent and give in to what is the first tacit case of financial - and factual - blackmail.
Ironically, even the best possible outcome, namely another bailout of every insolvent European bank, will merely accelerate the same populist anger that catalyzed the Brexit-driven schism in the first place, and lead to even more anger at what will, inevitably, be yet another banker bailout until ultimately the war of words between the classes becomes all too literal."
And, WHILE I was putting this post together for you we have a NEW Domino - BIGGEST One, Yet
"Instead of suspending trading and implicitly disallowing redemptions, giant fund manager Aberdeen has forced investors in its UK Property fund to take a 17% haircut wiping hundreds of millions of dollars off its value. The fund stated that shareholders wishing to redeem will do so at a reduced price in order to reflect the current market environment and the fact that short term trading in the property market has "relatively penal consequences."
As Investment Week reports,
Aberdeen Asset Management has temporarily suspended trading in its £580m UK Property fund as well as reducing the price of the fund by 17%, joining a number of other groups in making property fund adjustments amid a post-Brexit rush to exit the asset class.
Trading in the fund, and the Aberdeen UK Property Feeder Unit Trust, has been suspended until 7 July at midday in order to allow shareholders who have placed trades have the option to withdraw if they wish.
The company said the action has been taken due to rapidly changing commercial property market conditions and to continue to provide liquidity in the fund reflecting those conditions...."
