Live Markets: Looking for real (estate) trouble? Try big U.S. cities!

Ladder Capital

29/03/2023 13:30

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      STOXX 600 up 0.8%
    

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      Tech top gainer, banks up
    

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      Ermotti returns to UBS
    

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      U.S. stock futures rise
    

  
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    LOOKING FOR REAL (ESTATE) TROUBLE? TRY BIG U.S. CITIES! (0825 GMT)
    With markets on alert for the next shoe to drop, commercial real estate is under intense
scrutiny.  Analysts are working around the clock to figure out CRE loan exposures for banks and
what are the risks associated with office owners refinancing at higher rates, just as credit
conditions tighten and property prices face downward pressure.
    Keefe, Bruyette & Woods spoke with Brian Harris, CEO at Ladder Capital  LADR.N , a
commercial mortgage REIT, to cocnclude that big U.S. cities are where to find trouble.        
    "In LADR's view, larger CRE loans in larger cities (i.e., gateway markets) will face the
most trouble due to lower liquidity, office uncertainty and slow return to work, increased
social issues (crime, homelessness), and broader interest rate and cap rate pressures," writes
KBW in a note.
    "Markets of concern include San Francisco, Seattle, Portland, Chicago, Minneapolis,
Philadelphia, and Washington, D.C. (which management believes will have a long recovery due to
lack of government return to work)," KBW adds.
    Other takeaways: CRE valuations are expected to decline to 2015-2016 levels with big city
office peak-to-trough declines of 40%; Banks represent nearly 50% of CRE debt financing and
regional banks account for the majority of this 
    
    Read more from LIVE MARKETS:    
    Europe's $1.5 trillion real estate loans: who's exposed?
    Do small banks face a real estate "doom loop"?
    European real estate at relative record low
    Europe's real estate faces 50% potential downside - Citi
    European property: equity raises coming?
    
    (Danilo Masoni)
    *****
    
    
    EUROPE'S $1.5 TRILLION REAL ESTATE LOANS: WHO'S EXPOSED? (1119 GMT)
    It's not 2008 but it's a good time to take stock of European banks and their exposure to
commercial real estate (CRE), a sector that has come under high scrutiny following the recent
bank failures in the United States and Europe.
    European banks have 1.4 trillion euros ($1.5 trillion) out on loan to commercial real
estate. That makes 8% of their loan book, while non-performing loans (NPL) represent 4% of the
CRE portfolio, according to Goldman Sachs.
    The Nordic region has the highest exposure, with CRE accounting for 15% of total loans.
Svenska Handelsbanken  SHBa.ST  tops the list, with nearly a third of its loan book exposed to
the sector, although NPL ratio is almost 0%.
    Germany also has a relatively higher exposure, with CRE accounting for 12% of the loans.
Heavyweights Deutsche Bank  DBKGn.DE  and Commerzbank  CBKG.DE  have a 7% and 5% exposure,
respectively, broadly in-line with average for major European banks. 
    Italy's exposure hovers near the European average at 9% but its NPL ratio, also at 9%, sits
at the upper end. Total lending at French and Spanish banks is at a below-average 5%, although
NPL ratio at Spain's BBVA  BBVA.MC  and Banco Santander  SAN.MC  is around 8%, double that of
the European average.  
    Europe's real estate index  .SX86P  has shed about 25% since hitting a year high in February
and was last trading near a five-month low as concerns about rising interest rates are
compounded by fears about a possible credit crunch hurting the highly leveraged sector. 
    
    (Sruthi Shankar)
    *****

    
    WHY A NEW EUROZONE DEBT CRISIS WON'T HAPPEN (1035 GMT)
    The spectre of a systemic credit event roiling markets is now top worry among global
investors following months of dominance by the inflation scare, but there's still no consensus
view over the potential source of financial instability.
    European sovereign debt is clearly closely watched. This month's BofA fund manager survey
ranked Europe's debt as the fifth most likely source of credit stress with a 5% chance. 
    But is a sovereign debt crisis still possible in the euro zone, following the one in
2010-2013 that hit peripheral countries and threatened the currency bloc's very existence?
    Patrick Artus, senior economic advisor at Natixis, doesn't think so. He has three good
reasons as to why he sees a low probability of a new debt crisis happening. Here you go:
    1. Current account deficits, which triggered a balance of payments crisis and the sovereign
debt
crisis in 2010 when Germany and the Netherlands stopped financing peripheral countries, have
disappeared or became small
    2. The ECB would act quickly to avoid an abnormal widening of yield spreads between
euro-zone
countries, in particular by using its new instrument (the "Transmission Protection Instrument"),
which enables it to buy the public debt of a country in difficulty 
    3. The ECB’s monetary policy is acting much more cautiously than in 2010-2011 to combat
inflation

    The BofA chart below shows the seven most likely sources of a credit event.
    
    (Danilo Masoni)
    *****
    
    
    US BANKING RISKS FAR MORE WORRISOME THAN THEY MAY SEEM? (0907 GMT)
    Risks to the U.S. banking system are far more serious than regulators are letting on,
according to Nikhil Bhatnagar, executive director and head of capital markets at Auerbach
Grayson.
    "Far too much lending has happened to areas that cannot afford 5% policy rates, excluding
credit spreads, and added to that, there has been risky behaviour by a large part of the system
actively engaged in inflating startup valuations through easy venture debt," Bhatnagar told the
Reuters Global Markets Forum.
    "Bank risk can devolve into venture debt risk and eventually private credit markets -- is
the Fed going to guarantee venture debt and private credit funds as well? It will be politically
unfeasible. But there may be a few more dominos to collapse here," he said.
    Still, today’s risks look different from the 2008 financial crisis as the sector hasn’t
extended into the venture capital market as much as the housing sector had in the previous
crisis – but systemic risks loom large, Bhatnagar said.
    "While the system can be defended if required, it comes at a time of entrenched inflation
and not a deflationary scenario, which can have a domino effect on the currency if the message
has to be reversed later this year."
    As turmoil unfolds in global markets, traders now bet the Fed has reached or is near the end
of its rate hiking cycle. But much of the 'stagflation' in the current environment is out of the
Fed’s reach since the policy errors have already been made by keeping rates too low, he added.
"Sooner or later, they will have to save the system and abandon the inflation bogeyman."
    
    (Savio Shetty and Anisha Sircar)
    *****
    

    TECH LIFTS STOXX 600 (0827 GMT)
    Europe's STOXX 600  .STOXX  is on the up, rising 0.6% as the general mood improves and bank
jitters recede.
    Tech names  .SX8P  are the biggest winners on a sector basis, up 1.6%, while retail  .SXRP 
is a drag, down 1.4%. 
    Reflecting the improved mood, a gauge of European volatility  .V2TX  briefly hit its lowest
level since March 10, the day of SVB's collapse, and was last down 1.3 points at 20.8. 
    Ex-dividend Maersk  MAERSKb.CO  shares are down 27% at the bottom of the index, while OCI
 OCI.AS  is at the top, rising 12.5% after activist investor Jeff Ubben's Inclusive Capital
Partners urged the Dutch fertilizer to explore strategic options and said the is worth nearly
double its 5.54 billion euros market value.
    Infineon  IFXGn.DE  shares are up 6.6% after the German chipmaker raised its outlook both
for second quarter and the whole of 2023. Switzerland semiconductor company STMicroelectronics
 STMPA.PA  is also up 5.2%.
    
    (Lucy Raitano)
    *****
    
    
    ALIBABA FIRES UP MARKET MOOD (0638 GMT)
    Just as investor angst over U.S. and European banking troubles eases, the potential end of
China's multi-year regulatory crackdown on the tech sector is also cheering up markets.
    An unprecedented revamp of Chinese tech conglomerate Alibaba Group, which analysts believe
to have the blessings of local regulators, pushed up Alibaba's U.S.-listed stock, and then its
Hong Kong shares on Wednesday.
    Companies in China's internet, private education and property sectors have lost billions of
dollars in market value in recent years as the country's regulators cracked down on their
operations.
    Although a lacklustre 0.6% rise in Asia's main stock market gauge, led by Hong Kong tech
names, shows that animal spirits haven't returned yet, there's hope for investors who have been
left licking their wounds from recent market declines, especially in bank and tech stocks.
    Global investor confidence remains fragile, with the European Central Bank (ECB) saying that
recent volatility highlights the need for greater regulatory scrutiny.
    As U.S. banking contagion worries ebb, some investors are scouting for shares of
fundamentally strong regional lenders that were swept up in this month's epic sell-off.
    Overnight, a survey showed that U.S. consumer confidence unexpectedly increased in March
despite recent financial market turmoil, but Americans still expect inflation to remain elevated
over the next year.
    Bloomberg News reported that Credit Suisse Group investors are being urged to vote against a
share-based transformation award for executives and ratifying the actions of the board of
directors and management at the upcoming annual general meeting. 
    Meanwhile, U.S. prosecutors unveiled a new indictment against Sam Bankman-Fried, accusing
the founder of the now-bankrupt FTX cryptocurrency exchange of paying a $40 million bribe to
Chinese officials so they would unfreeze his hedge fund's accounts.
    And in Asia, geopolitical tensions are heating up with China threatening to retaliate if
U.S. House Speaker Kevin McCarthy meets Taiwan President Tsai Ing-wen during her planned transit
of the United States, saying any such move would be a "provocation".

    Key developments that could influence markets on Wednesday: 
    European economic data: Spain flash March CPI, Germany March CPI, Euro zone March
business/consumer sentiment
    Speakers: ECB board member Isabel Schnabel
    
    (Anshuman Daga)
    *****
    
    EUROPEAN FUTURES TICK HIGHER(0628 GMT)
    European futures are flashing green this morning, supported by receding jitters around bank
stocks. Those on the STOXX 50  .STXEc1  and DAX  FDXc1  are up 0.4%-0.5%, while FTSE  FFIc1 
futures are lagging, up 0.1%. U.S. futures are up 0.6%. 
    Markets may be getting a small lift as fears of more banking turmoil fade, but they are also
reflecting that recession fears are still lurking. 
    German consumer sentiment was seen nudging up in April as energy prices have relented
somewhat from record highs, though a full recovery is not in sight anytime soon, showed a GfK
institute survey on Wednesday.
    UBS's  UBSG.S  massive takeover of neighbour Credit Suisse  CSGN.S  remains at the
forefront, with news this morning that UBS has rehired Sergio Ermotti as CEO. 
    Shares in German chipmaker Infineon  IFXGn.DE  jumped 4.6% in pre-market trade after it
raised its outlook both for second quarter and the whole of 2023.
    
    (Lucy Raitano)
    *****


($1 = 0.9213 euros)

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Alibaba's struggles    https://tmsnrt.rs/3TRYiRH
credit event bofa    https://tmsnrt.rs/3KqNC9X
Europe commercial real estate    https://tmsnrt.rs/3lVBAeX
NPL ratio    https://tmsnrt.rs/3G18QIR
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