Global Daily – Pressure on bank margins, but results still solid

by: Tom Kinmonth , Maritza Cabezas

European Financials: Earnings season kicks-off, with pressure of margins still apparent, but results sound – The European earnings season kicked-off today, with results released from Banco Santander and the Swedish lender, Svenska Handelsbanken. Both banks beat analysts’ expectations, and in response the funding costs for both institutions decreased by roughly 2-3bps today. Interestingly, in the home markets of the banks, both net interest income and loan volumes were down. This indicates the pressure that European banks are still under. Indeed, net interest pressure should still be part of the narrative for this year, however as yield curves steepen, the banks should be positioned well to see the benefit. Furthermore, the European macro picture is slowly improving, default rates remain at all-time lows while, and cost management has been enhanced. For the upcoming European bank results, we expect slightly improved quarterly results, with an overall solid picture from the European institutions. We expect the results to continue to support the bank bond market, which is trading at some of the lowest yields of the year. (Tom Kinmonth)

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US Macro: The gap between hard and soft data – The first quarter has been characterised by a widening gap between soft data, including (surveys) and hard data (such as retail spending). Soft data, which was already trending up, rebounded after the US presidential elections. Consumer confidence, manufacturing and services surveys, as well as confidence indicators for small businesses and homebuilders, have shown a considerable improvement. However, much of the hard data has not yet caught up with this optimism. This divergence is leading to some scepticism among investors about the strength of the rebound in economic momentum. Historical data suggests that consumer surveys have a limited correlation with hard data, such as retail sales, a proxy for consumption. In general, retail sales growth is quite volatile even when consumer confidence surveys are improving. However, manufacturing and business surveys generally do track hard data well, though they tend to be coincident  rather than leading. This time has been no different as hard data, such as manufacturing-related indicators and the growth of capital goods orders have been picking up. Indeed, weakness in consumer spending rather than in manufacturing and exports have been a big driver of the weak Q1.We think that the weakness in hard data is only temporary. Consumers are better off than they were in recent years. Household net worth has been rising and the labour market is strengthening. Furthermore, the global recovery should support exports, while business investment seems set to recover. For more please see note: US Watch – Mind the gap: hard vs soft data (Maritza Cabezas)