Graphic: What could break as interest rates rise?
30/06/2023 01:01
(Repeats story published on Thursday with no change to text)
LONDON, June 29 (Reuters) - Markets are on the alert to
which sectors will buckle under the sharpest jump in interest
rates in decades, with big rate moves this month in Britain and
Norway a reminder that the tightening is not over.
Central banks may need longer to lower inflation and a fresh
bout of financial turbulence could make the process even more
protracted, the International Monetary Fund warns.
Stability has returned since March's banks turmoil, but
warning lights are flashing elsewhere and tensions in Russia
provide another possible trigger for stress.
Here is a look at some of the pressure points.
1/ REAL ESTATE: PART 1
Just as hopes for an end to Federal Reserve rate hikes boost
the U.S. housing market, European residential property is
suffering under rate hikes.
UK rates have jumped to 5% from 0.25% two years ago and 2.4
million homeowners will roll off cheap fixed rate mortgages onto
much higher rates by end-2024, banking trade body UK Finance
estimates.
Sweden, where rates rose again on Thursday, is one to watch
with most homeowners' mortgages moving in lockstep with rates.
London Business School economics professor Richard Portes
said, euro zone housing markets appear to be "freezing up" as
transactions and prices fall. "You can expect worse in 2024 when
the full effects of rate hikes come forth," he said.
2/ REAL ESTATE: PART 2
Having taken advantage of the low rates era to borrow
aplenty and buy up property assets, the commercial real estate
sector is grappling with higher debt refinancing costs as rates
rise.
"The single most important thing is interest rates. But not
just interest rates; what it is equally important is the
predictability of rates," said Thomas Mundy, EMEA head of
capital markets strategy at real estate firm JLL.
"If we were settled on an interest rate, real estate prices
could adjust. But at the moment, the lag in the adjustment to
real estate pricing is creating an uncertain environment."
In Sweden, high debts, rising rates and a wilting economy
has produced a toxic cocktail for commercial property.
And HSBC's decision to leave London's Canary Wharf for a
smaller office in the City highlights an office downsizing trend
rocking commercial real estate markets.
3/ BANK ASSETS
Banks remain in focus as credit conditions tighten.
"There is no place to hide from these tighter financial
conditions. Banks feel the pressure of every central bank,"
said Lombard Odier Investment Managers' head of macro Florian
Ielpo.
Banks hold two types of balance sheet assets: those meant
for liquidity and those that work like savings meant to earn
additional value. Rising rates have pushed many of these assets
10%-15% lower than their purchase price, Ielpo said. Should
banks need to sell them, unrealised losses would emerge.
Most at risk are banks' real estate assets. Federal Reserve
chief Jerome Powell says the Fed is monitoring banks "very
carefully" to address potential vulnerabilities.
Lending standards for the average household are also a
concern. Ielpo expects consumers will stop paying loan payments
in the third and fourth quarters.
"This will be the Achilles heel of the banking sector," he
added.
4/ DEFAULT
Rising rates are taking a toll on corporates as the cost of
their debt balloons.
S&P expects default rates for European sub-investment grade
companies to rise to 3.6% in March 2024 from 2.8% this March.
Markus Allenspach, head of fixed income research at Julius
Baer, notes there were as many defaults globally in the first
five months of 2023 as there were during 2022.
French retailer Casino is in debt restructuring talks with
its creditors. Sweden's SBB has been fighting for survival since
its shares plunged in May on concern over its financial
position.
"We are starting to see distress building up in the
corporate space, especially at the low end where you have most
floating rate debt," said S&P Global Ratings' Nick Kraemer.
5/ RUSSIA AFTER WAGER MUTINY
The Wagner mutiny, the gravest threat to Russia's Vladimir
Putin's rule to date, might have been aborted, but will long
reverberate. Any changes to Russia's standing - or to the
momentum behind the war in Ukraine - could be felt near and far.
There's the immediate fallout for commodity markets from
crude oil to grains, the most sensitive to domestic changes in
Russia. And knock on effects, from inflation pressures to risk
aversion in case of a major escalation, could have far reaching
consequences for countries and corporates already feeling the
heat from rising rates.
"Putin can no longer claim to be the guarantor of Russian
stability and you don't get that kind of fragmentation and
challenges to the system in a stable and popular regime," said
Tina Fordham, geopolitical strategist and founder of Fordham
Global Foresight.
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Banking sector price to earnings ratio https://tmsnrt.rs/3PA8T3L
The race to raise rates https://tmsnrt.rs/444CQ08
Growing strains on the European housing market https://tmsnrt.rs/3NcHAdb
UK real estate sector's woes https://tmsnrt.rs/3pvWB1J
S&P estimates corporate default rate to rise by 2024 https://tmsnrt.rs/3NTa90L
Russia fallout https://tmsnrt.rs/3JCwgGh
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(Reporting by Chiara Elisei, Naomi Rovnick, Nell Mackenzie and
Karin Strohecker, Graphics by Vincent Flasseur, Kripa Jayaram,
Sumanta Sen and Pasit Kongkunakornkul, Editing by Dhara
Ranasinghe and Alison Williams)
((Chiara.Elisei@thomsonreuters.com;))