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US banks signal post-Covid optimism

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US banks signal post-Covid optimism

JPMorgan Chase, Citigroup and Wells Fargo have released more than $5bn of pandemic-era loan loss reserves in a sign of optimism for the economic outlook even as the US reels from the latest wave of Covid-19.

The move helped three of America’s biggest banks end the year on a high and reflects the lenders’ confidence that their clients will make good on debts despite the fallout from the pandemic.

“It’s not like we’re bragging, we’re not,” said Jamie Dimon, chief executive of JPMorgan, who added that the decision to release the reserves was driven in part by “positive vaccine and stimulus developments”.

But he also highlighted the risks to the world economy posed by coronavirus, noting that “our credit reserves of over $30bn continue to reflect significant near-term economic uncertainty”.

As US consumer sentiment fell and investors studied details of president-elect Joe Biden’s proposed $1.9tn additional stimulus, oil prices and Wall Street stocks dropped, including for banks, in a gloomy end to the week after disappointing US retail sales data.

Markets

Column chart of weekly flows into US municipal bond funds ($bn) showing investors ploughing into municipal debt after Democratic party’s victories

Investors have piled into US municipal bonds since Democrats clinched control of the Senate last week, as money managers positioned themselves for billions of dollars of aid to cash-strapped local governments. EPFR estimated $2.5bn had been placed into funds that invest in municipal debt, the largest inflow in at least a decade.

The pandemic has accelerated the trend among investors towards using alternatives to national accounts data in measuring macroeconomic performance, writes James Sweeney, chief economist at Credit Suisse. Nominal gross domestic product does not cover at-home production and free goods that comprise internet services, and is biased by inflation.

Private debt investors face a shakeout, fund managers have warned, after a decade-long boom propelled the sector’s assets to about $900bn. They warn that less stringent lending standards before the pandemic will mean a reckoning in the next couple of years, notably in retailing, leisure and hospitality that have been hit hard by pandemic restrictions.

Business

Line chart showing global bookings for all travel periods as a year-on-year % change, seven-day moving average

While leisure travel may bounce back once borders reopen, business travel faces a severe crisis and may not recover — raising concerns for hotels and airlines, which depend on it for up to 75 per cent of their revenue. The uptick in virtual gatherings, a greater focus on sustainability and post-pandemic cost-cutting at financially straightened companies risk long-term consequences.

Sales of low and no-alcohol drinks have held up during the pandemic even as global alcohol sales dropped almost 10 per cent as bar and restaurant closures cut social drinking. Demand remains modest but quality is improving. “Heineken 0.0 tastes like a beer, looks and smells like a beer,” said Edward Mundy, analyst at Jefferies.

Hundreds of thousands of UK businesses have won the right to claim on insurance for Covid-19 linked losses after the country’s top court ruled that many policies should pay out because of coronavirus and the government’s lockdown measures. About 700 types of insurance policies issued by 60 different insurers could be affected by the ruling from the Supreme Court.

Global economy

The UK economy risks entering a double-dip recession after shrinking for the first time in six months in November. The latest contraction was less severe than expected and much milder than in the spring. UK output fell 2.6 per cent compared with October, the first contraction since April’s lockdown, data from the Office for National Statistics showed.

Bar chart of general government gross debt as % of GDP (forecast for 2021) showing Latin America has the developing world’s highest debt levels

Latin America is the world’s worst-hit region by the coronavirus pandemic and its economy faces a slow and painful recovery, with a growing risk that worsening poverty and inequality will trigger political upheaval, economists have warned. Challenges for 2021 include the continuing spread of the virus, constraints on the amount of fiscal stimulus the region can afford and lack of political support for structural reforms to boost growth.

China’s trade surplus hit its highest ever monthly level in December, driven by higher demand for medical products and lockdown-related goods at a time when global trade has come under intense pressure. Exports rose above expectations at 18.1 per cent in dollar terms, while imports increased 6.5 per cent, pushing the trade surplus to a record $78bn.

Have your say

In response to Health and tech groups aim to create digital Covid ‘vaccination passport’, FT reader Euthydemus writes:

This digital passport infrastructure sets a dangerous precedent, which undoubtedly will be abused for other purposes in the future

The essentials

After the initial shock of the pandemic, those on the glide path to retirement are more mindful about their financial health, prompting many to seek professional financial advice. Money aside, planners are encouraging people in their fifties and sixties to do a better job of mapping out retirement goals by considering what they missed the most in the pandemic and what it made them reassess.

Final thought

Stephen Foster has advised on the books on show in films ranging from Disney to Bond
Stephen Foster has advised on the books on show in films ranging from Disney to Bond © Stephen Foster/Evening Standard/eyevine

The man who curates shelves in films has advice for Zoom users who want to improve the look of their on-screen libraries. “The key is authenticity,” says Stephen Foster, who has advised on books on show in movies from Disney to Bond. “If I have a bugbear, it’s the people who are trying too hard — turning the book so the front board is out.” The worst offenders? Politicians.

We would really like to hear from you. Please send your reactions or suggestions to covid@ft.com. Thanks



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How traders might exploit quantum computing

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If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

izabella.kaminska@ft.com



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Martin Gilbert returns to dealmaking fray with Saracen acquisition

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Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”



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Wall Street stocks bounce back after inflation scare

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Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.



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