Symax Fintech Daily Market Insights 15.01.24

For all the pain the Federal Reserve’s rapid rate hikes caused for many regional lenders, it was a boon for the biggest banks. In 2023, the four giants raked in $253 billion in net-interest income — the difference between what it earns on its assets and what it pays on its debts — about $80 billion higher than 2021’s total. Now, most banks see rate cuts coming, all while they have to pay more on deposits or risk losing customer savings to higher-yielding options. BB

The US economy is set for an unexpected fiscal boost if lawmakers back a potential deal for $70 billion worth of tax breaks for businesses and families. Congressional negotiators are locked in talks over renewing expired business tax breaks and boosting the child tax credit. While the extra cash would boost consumer spending, it would also risk reigniting inflation pressures — complicating prospects for the Federal Reserve to lower interest rates this year, economists warned. BB

While this week started with expectations that inflationary pressures around the world were abating, an escalation in geopolitical tensions in the Middle East quickly changed those calculations. The US and UK launched airstrikes on Houthi targets in Yemen to stop its attacks on ships in the the Red Sea, actions the group says are in retaliation for Israel’s bombing campaign in Gaza. Many companies have rerouted their ships away from the waterway—which links to the Mediterranean Sea via the Suez Canal—forcing vessels on much longer routes around southern Africa. The disruptions in the Red Sea have roiled global supply chains and pushed up freight costs. The Houthis have pledged a “big” response to airstrikes, and oil prices—a key driver of inflation—have ticked up.

The military action also underscores the deepening fallout from the Israel-Hamas war: US President Joe Biden has been working since the Oct. 7 attacks in Israel to prevent a wider conflict — but the airstrikes did, in fact, expand it. “If anything has changed, it’s that the Red Sea may be on its way to becoming a war zone,” Marc Champion writes in Bloomberg Opinion, arguing that the strikes play into the hands of the Houthis and their backer, Iran. Biden didn’t rule out more strikes.

The ECB will make four 25-bp cuts to rates this year starting in June, a Bloomberg poll found. That’s more conservative than the six, starting April, that investors are pricing. Cutting rates too early may be self defeating, Philip Lane told Corriere della Sera. BB

Turkey and Saudi Arabia expressed concern, while Russia and Iran strongly condemned the attacks. The confrontation pits the US against another Iranian proxy, with US forces in recent weeks launching attacks in Syria and Iraq against Iranian-supported militias that have targeted American bases. It’s a strategy Iran has been scripting for years as it assembled what’s been called its “axis of resistance” to Israel and the US. Despite the escalating aggression, the strikes on Yemen will probably have a limited impact on the global economy, according to Bloomberg Economics. But the added costs of recalibrating shipping routes and upward pressure on energy prices are, at a minimum, a thorn in the side of central banks trying to bring inflation to a 2% target. BB

Even if Germany’s economy finally begins expanding again in 2024, it’ll struggle to shake off the funk behind one of its weakest annual performances in a generation. Beset by energy woes and creaking infrastructure, hit by a downturn in global demand, and lagging in the EV race, the country was probably in recession as it ended 2023. BB

The moment Chinese President Xi Jinping’s prospects fell apart for a favorable outcome in Taiwan’s election came not this weekend, but at a luxury hotel in Taipei, one Thursday evening in November. That’s when opposition figures who favor restarting talks with China met to hammer out a joint ticket to give them a better chance of winning the election. The deal imploded, leaving’s Xi’s Taiwan strategy in tatters and elevating this man — who Beijing has branded as “instigator of war” — to power. Following the vote, US President Joe Biden continued on the path of strategic ambiguity and said America did not support independence for Taiwan. Despite the statement, a delegation of former top US officials visiting the island is bound to further test China’s patience. BB

The seemingly relentless decline in prices of Chinese goods amid tepid consumer demand is denting expectations that corporate earnings can revive the flagging stock market. From EVs to fast food, companies are engaging in a battle of promotions aimed at luring customers who are spooked by dim job prospects and have seen a persistent property slump hurt wealth creation. Consumer prices fell for a third-straight month in December, the longest streak since 2009, while exports dropped for the first time since 2016. BB

Donald Trump’s campaign wants a blowout win in Monday’s Iowa caucus, possibly knocking out Florida Governor Ron DeSantis and putting pressure on a rising Nikki Haley. But Trump aides fear that some voters, seeing his dominance, could stay home on a frigid night in Iowa — and that a less-imposing margin of victory will prolong the primary fight. The GOP field did narrow as Chris Christie dropped out of the race, potentially helping Haley’s chances in the New Hampshire primary. As a reminder of the threat posed by the 91 criminal charges the former president faces — not to mention the 14th Amendment challenge to whether he will be allowed to run again because of his role in the Jan. 6 uprising—Trump spoke at his fraud trial in New York, saying he is “an innocent man.” BB

Taiwan elected Lai Ching-te as president with 40.1% of the vote, but deprived his DPP of control of the legislature. Lai, branded a “separatist” by Beijing, pledged to keep the peace. The results bode well for markets.  Lai is seen as US-friendly, but Joe Biden was quick to assuage China’s concerns by saying the US doesn’t back the island’s independence. A delegation of former top US officials is set to visit Taiwan. China downplayed the results, which observers called a failure of Xi Jinping’s strategy, and clamped down on social media chatter. BB

South Korea’s financial regulator said it found $41 million worth of illegal short selling of domestic stocks by two global investment banks, ratcheting up its crackdown on the trading strategy that has been unpopular among retail investors. The Financial Supervisory Service will “promptly” launch the process of imposing penalties, according to a statement that didn’t identify the banks. The banks breached rules for several months in 2022, and in 2023, by conducting naked short selling, the practice of selling shares without borrowing them first, the FSS said. BB

The year 2023 was the first full year since 2020 in which the German economy contracted. According to a just-released preliminary estimate by the German statistical office, the economy shrank by 0.3% year-on-year. Based on a very tentative first estimate, the economy shrank by 0.3% quarter-on-quarter in the fourth quarter of 2023. However, don’t forget that this estimate was derived without any hard economic data for the month of December and could still be subject to revisions, probably rather to the downside than the upside.

We expect the German economy to shrink again in 2024

The year 2023 was another turbulent one, with the economy in permanent crisis mode. In fact, since 2020, there has been a long list of crises and challenges facing the German economy: supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy, China’s changing role from being a flourishing export destination to being a rival that needs fewer German products, and several structural shortcomings. A combination of geopolitical risk events, cyclical headwinds but also homemade deficiencies. In light of so many challenges, some take comfort in the fact that the economy is “only” stuck in stagnation and has avoided a more severe recession. And, indeed, things could have been worse. But this should be no reason for any complacency. On the contrary, even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty.

In fact, looking ahead, at least in the first months of 2024, many of the recent drags on growth will still be around and will, in some cases, have an even stronger impact than in 2023. Just think of the still-unfolding impact of the European Central Bank’s monetary policy tightening, the potential slowing of the US economy, new uncertainty stemming from recent fiscal woes or new supply chain frictions as a result of military conflict in the Suez Canal. A recent illustration of the longer-term impact of energy prices, higher interest rates and changing economic structures is the gradual increase in insolvencies since mid-2022. On a more positive note, what could lift economic sentiment and growth are positive real wage growth, a rebound in Asia and further down the road some rate cuts from the European Central Bank. Also, a turn in the inventory cycle could bring some relief in early 2024, although this turn has not yet happened and would probably only be short-lived.

All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one. ING