Daily Commentary

MarketMinder’s View: Eurozone officials are currently embroiled in a review of EU banking regulations surrounding capital requirements, aiming to simplify a morass they say makes their institutions less competitive globally with American, British and other banks outside their jurisdiction. One key issue under debate: How conflicting rules complicate capital requirements, to the point that even if an institution is judged to hold excess high-quality capital, it may not be able to boost dividends, lend more aggressively, etc., because that capital is also tabbed for another, conflicting capital requirement. Germany’s central bank, the Bundesbank, is pitching a controversial “fix” to this: Simplifying all capital rules into two sleeves, one for “going concerns” and one for “gone concerns”—to be used in winding down failed institutions. The issue? “The first bunch would only include capital that is easiest to absorb losses with, consisting largely of shareholders equity and retained earnings. The second bunch would include [Additional Tier 1] AT1 bonds along with other forms of subordinated debt such as Tier 2 instruments, which can have maturity dates. That has raised concerns that banks which rely on AT1 debt could face capital shortfalls to meet their so-called going concern requirements. But even countries where banks don’t use a lot of AT1 debt are pushing back, because the German proposal could end up forcing them to raise it to meet the requirements of the second pillar.” This would effectively change the definition of AT1 debt under regulatory rules, which has been a contentious point for many years in the bloc, highlighted when UBS’s acquisition of Credit Suisse in 2023 wiped AT1 bondholders before stockholders. This re-regulation is far from a done deal and may never happen. But it is worth monitoring the debate to see if an effort to boost eurozone competitiveness carries unintended consequences.

MarketMinder’s View: “Euro zone inflation stood at 2.2% in November, marking a slight rise from the previous month, flash data from data agency Eurostat showed Tuesday. The latest consumer price index reading is just a shade above the European Central Bank's 2% target. … Core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, was at 2.4% in November, unchanged from the previous month.” It is the slightest of rises, actually, with the year-on-year rate rising 0.1 percentage point while monthly prices fell, suggesting the titular rise is even more hollow than the tiny uptick itself suggests. While these figures are preliminary and offer little detail, there is nothing here that suggests inflation is a problem in Europe today. These rates more or less match the ECB’s 2% y/y target, and there are no tools to fine tune inflation to the decimal point. The speculation in the back part of this surrounding future policy and whether cuts are off the table is needless. Inflation is the last war in Europe, cuts are largely a fait accompli and there is little sign further tweaks are needed for growth and bull market to persist.

MarketMinder’s View: This piece focuses on UK politics, so please note MarketMinder is nonpartisan. We prefer no party nor politician over another and assess political developments for their potential market and/or economic effects only. While there aren’t forward-looking investment implications here, the analysis is worth a read for the history and background of the UK’s Office for Budget Responsibility (OBR), a nonpartisan fiscal watchdog with an outsized influence over the government’s Budget. Per UK law, the government must run a projected budget surplus within five years based on OBR forecasts, so the Treasury has to shape significant policy (e.g., tax changes, spending plans, etc.) on these estimates. But the OBR’s forecasts are rarely accurate, which is less a criticism of the OBR specifically and more a comment on the near-impossibility of predicting the future five years out with any sort of precision. As argued here, “There is also the simple fact that forecasts change. It is distinctly odd to be setting fiscal policy on the basis of the latest tweaks to the OBR’s forecast for economic outturns five years into the future. Indeed, it seems the type and scope of prospective Budget measures altered radically in the last few months in response to changing news about what numbers the OBR was going to present.” We agree! That said, for as much attention the Budget and OBR have received recently, most of the implications are political. Yes, the Budget can select winners and losers at a local or personal level, but the changes lack the scale to be a macroeconomic swing factor—worth keeping in mind for both our pals across the pond and global investors at large.