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Financial Services Roundup: Market Talk

19 May 2018 8:20 am

The latest Market Talks covering Financial Services. Exclusively on Dow Jones Newswires at 4:20 ET, 12:20 ET and 16:50 ET.

1854 GMT - Government rules meant to cool Canada's overheated housing market could slow bank lending in areas such as commercial real estate says National Bank of Canada analyst Gabriel Dechaine. Canada's banks start their 2Q reporting season next week, and investors will be watching mortgage lending to gauge how Canada's housing market is holding up. Dechaine notes housing starts during the first quarter were down an annualized 8.4% from 4Q, "which may be an indication of a weaker mortgage market outlook." Much of banks' CRE lending is tied to residential construction, and a decline in housing demand and supply could hurt a major bank earnings driver, Dechaine says. (vipal.monga@wsj.com; @vipalmonga)

1800 GMT - Boston Fed leader Eric Rosengren made waves a couple of years ago when he flagged commercial real estate prices as an area of concern for him in an otherwise healthy economy. His concern was such it helped turn his dovish rate outlook hawkish. Goldman Sachs says today the situation isn't much improved. They say prices are 10% to 16% over fair value, and if market yields go the way they think, the sector risks hitting levels seen just ahead of the financial crisis. Goldman says this situation is another reason to support rate rises. (michael.derby@wsj.com)

1643 GMT - U.K. regulators are likely to step up their scrutiny of insurance companies' illiquid investments and their effect on solvency positions, says Deloitte. The accountancy and consultancy firm highlights a speech from David Rule of the Bank of England's Prudential Regulation Authority which stressed that insurers may be increasing their exposure to the U.K. housing market at a dangerous moment in the economic cycle, as they look to match assets to annuities. Deloitte notes that illiquid assets make up around 25% of assets backing annuities currently, but this is expected to increase to 40% by 2020. (adam.clark@dowjones.com)

1639 GMT - Shares of chip makers Qualcomm and NXP Semiconductors rise on optimism that their slow-moving $44B merger is rolling toward closure. The deal, announced in late 2016, has been held up by China's competition authority amid rising trade tensions with the US. But prospects brightened as China yesterday green-lighted Bain Capital's $18B purchase of Toshiba's chip unit, and earlier this week cleared Microchip Technology's $8.3B acquisition of Microsemi -- hopeful signs for chip deals in China as trade talks in Washington DC enter their second day. Qualcomm in midday trading rose 1.3% to $57.71, while NXP jumped 3.7% to $110.55. (ted.greenwald@wsj.com)

1545 GMT - European shares drop as investors take profits ahead of the weekend and as continued geopolitical tensions weigh. The Stoxx Europe 600 falls 0.3%, or 1.12 points to 394.67. The price of a barrel of Brent crude falls back below $80 on worries about U.S. policy towards Iran and China, though it edges up 0.01% to $79.31 in late-afternoon trading. "Dealers are worried about future oil supply, as the U.S. looks to reintroduce sanctions on Iran--one of the biggest oil producers in the world," says David Madden at CMC Markets. Italian banks fall as populist parties agree a program of government for Italy. Milan's FTSE MIB drops 1.5% while Germany's DAX falls 0.3% and France's CAC-40 is down 0.1%. (philip.waller@wsj.com)

1444 GMT - Shares in hedge-fund manager Man Group are near their peak valuation, despite lagging performance in its computer-driven AHL business, Exane BNP Paribas says as it cuts its rating on the stock to neutral from outperform. Man Group says the relative underperformance at AHL means Man Group's performance fees are lower quality, being driven by divisions with higher costs. "We see better value elsewhere in the space," Exane says as it lowers its target price to 190 pence from 200 pence. Shares are down 1% at 193 pence. (adam.clark@dowjones.com)

1402 GMT - Volatility in the forex market has reduced in the past year compared to 2016. According to Deutsche Bank Currency Volatility Index, which is the average of the three-month level of implied volatility for all the major currency pairs, between 2Q17 and 2Q18 volatility was between 6.8% and 8.8%. In 2016, volatility was between 9.2% and 12.4%. "As an FX specialist, I would love to see an increase in forex volatility and longer trends," says Kurt vom Scheid, global head of foreign exchange at Saxo Bank in an interview with Dow Jones Newswires. Mr. vom Scheid says monetary policies are the reason for low volatility and short-term trends. Central bankers, as they start to raise interest rates, have tried to communicate their actions beforehand in such a way to avoid market surprises, keeping volatility at bay. (olga.cotaga@wsj.com; @OlgaCotaga)

1401 GMT - The European Securities and Markets Authority (ESMA) has recently suggested a 50% margin close-out rule on a position-by-position basis, rather than on an account basis. The latter "appears to make it harder for investors to understand how the rule operates and to understand their exposure to each individual CFD [contract for difference] position," according to ESMA. This contributes to the global forex code, which apart from other things, looks at leverage levels retail traders take on the margin close out policies they trade under. "What's more important than leverage level itself is that they've normalized the margin closed out," says Kurt vom Scheid, global head of foreign exchange at Saxo Bank. A margin close out is when the broker liquidates all open positions in the account where the minimum margin required was not met. (olga.cotaga@wsj.com; @OlgaCotaga)

1400 GMT - Part of the focus of the global forex code is to reduce the amount of leverage forex retail traders take on. It is important to educate retail investors about the appropriate amount of leverage, says Kurt vom Scheid, global head of foreign exchange at Saxo Bank in an interview with Dow Jones Newswires. "Higher leverage will multiply your profits, but also your losses," Mr. vom Scheid says. Some firms are offering leverage of 1,000 or 2,000 to 1, and such large leverage can be sufficient to move EUR/USD "by a few points," he says. Saxo Bank, a Danish investment bank specializing in online trading and investment, usually offers leverage of 100 or 50 to 1, according to Mr. vom Scheid. (olga.cotaga@wsj.com; @OlgaCotaga)

1400 GMT - A margin close out is when the broker liquidates all open positions in the account where the minimum margin required is not met, meaning that losses are too high relative to the amount a trader has put down as collateral. Retail traders' profitability is affected by how a broker defines the margin close out. "Everytime the client needs to liquidate at a loss is going to affect their profitability," says Kurt vom Scheid, global head of foreign exchange at Saxo Bank in an interview with Dow Jones Newswires. That's why the forex global code aims at normalizing the margin close out, which would "reduce the amount of number of times the account could be liquidated," Mr. vom Scheid says. Brokers and forex trading platform providers may benefit from clients liquidating at a loss "because that would cristalize their profits."(olga.cotaga@wsj.com; @OlgaCotaga)

1359 GMT - After scandals a few years ago, market participants partnered with central banks from all around the world to form a global forex code. This is "a set of global principles of good practice in the foreign exchange market," according to Global Foreign Exchange Committee, the body that resulted from this partnership. The code's guidelines "promote the integrity and effective functioning of the wholesale foreign exchange market" as well as "a robust, fair, liquid, open, and appropriately transparent market." (olga.cotaga@wsj.com; @OlgaCotaga)

1358 GMT - Lines have become blurred between retail and institutional forex trading. Retail traders theoretically trade smaller amounts of money. But family offices, for instance, are able to put on the table substantial amounts, says Kurt vom Scheid, global head of foreign exchange at Saxo Bank in an interview with Dow Jones Newswires. Retail traders also use trading platforms, but "larger participants are using the same technology," he adds. "What is classified as the retail segment has become much more significant in terms of the risk warehouse," says Mr. Scheid. With banks not being able to do proprietary trading because of the Volcker rule, the retail side has absorbed the risk. Proprietary trading is when a bank invests for its own direct gain instead of earning commission by trading on behalf of its clients. (olga.cotaga@wsj.com; @OlgaCotaga)

(END) Dow Jones Newswires

May 19, 2018 04:20 ET (08:20 GMT)

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