THE TREASURY HUB Banking and Treasury Markets July 2021 Bulletin
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THE TREASURY HUB
Banking and Treasury Markets
July 2021 Bulletin
Disclaimer:
All statements presented in the bulletin are based on the opinion of the
author and facts. The author cannot be held responsible for any action
taken on items discussed in the bulletin.Banking and Treasury Markets Report
1.2 Markets in a Table: what’s up and what’s
1. Executive Summary down?
Table 1. Key Metric Movements: 2021
1 Executive Summary 2
Heading Metric YTD move From To
Interest 3-m euribor 0.0030% -0.5460% -0.5430%
2 Foreign Exchange Review 3 Interest EUR 3-year 0.1220% -0.5400% -0.4180%
Interest GBP 3-year 0.4437% 0.0813% 0.5250%
3 Interest and Economic Review 5 Interest USD 3-year 0.2570% 0.2330% 0.4900%
FX EUR/GBP -4.6242% 0.8937 0.8542
4 Wealth Management 7 FX EUR/USD -3.2802% 1.2248 1.1859
Equities ISEQ 10.8595% 7376 8177
5 Macroeconomic Review 8
Equities FTSE 100 10.2941% 6460 7125
Equities Nasdaq 15.4330% 12888 14877
1.1 Introduction Commodities Brent Crude 45.483% 51.80 75.36
Welcome to the latest edition of THE TREASURY Commodities Gold -4.719% 1896.49 1807
HUB Banking and Treasury Markets Bulletin of
2021. Domestically and internationally, apart from Gilts IE 10-yr 0.3720% -0.300% 0.072%
the continuing focus on the economic recovery, Gilts GB 10-yr 0.4310% 0.207% 0.638%
inflation is increasingly pushing up the agenda as
Gilts US 10-yr 0.4294% 0.930% 1.359%
the debate on whether the current increases are
temporary or permanent. Please note that the % moves are in green if the
metric has moved upwards and in red if it has moved
downwards. It is NOT a statement as to whether this
There appears to be a lot of corporate activity - is a positive or negative move as one could be a
buying and selling of business – across many borrower or depositor, a seller or buyer of currency,
sectors with significant private equity funding etc. Also, the % move for interest rates is in absolute
available. The non-bank lenders having retreated terms while for currency and equities it is expressed
somewhat from the market in Q2 2020 as the in relative terms.
pandemic struck have funds available again.
Please get in touch if you are thinking of
buying or selling a business as, through The We continue to keep the report short and focused on
Treasury Hub, we have an ability to trawl the key aspects that companies need to manage from a
country for suitable sellers and buyers. financial perspective.
Insolvency work remains subdued but we expect
that to change in Q4 as the consequences of Covid
materialize with the withdrawal of supports. The most volatile markets that we watch continue to
be the various asset classes and indices. Oil remains
a strong performer over the past month and now
On the currency front, GBP has continued to hold trades at over $75 per barrel. This, of course, is also
around the 86p level. However, USD has had a contributing to higher inflation rates…which may
month of strengthening as the US economy result in higher interest rates in due course. So, the
continues to “roar” ahead. Interest rate moves in impact of Oil is much more widespread than simply
the past 4 weeks have been interesting: the short looking at the returns available through investing it as
end of the curve has risen while the longer end has an asset class.
fallen slightly resulting in interest rate curves
flattening. Economic data, in general, continues to
improve. On the macroeconomic front, the focus is on
inflation and, increasingly internationally, on
house prices. Both of these require careful
From an investment perspective, the NASDAQ has attention as increases in the former is against a
shrugged off a period of weakness while the ISEQ backdrop of no material inflation for well over a
and FTSE are treading water a little more but are decade while the danger with the latter is the
both in double digit growth territory for 2021. creation of property bubbles so soon after the
pandemic and the last financial crisis. Could be a
bumpy road ahead.
Section 5 is a half-year review.
Page 2Banking and Treasury Markets Report
1.2 Forward-looking Indices 2. Foreign Exchange
Forward-looking indictors known as Purchasing
Manager Indices or PMIs are useful to monitor the
economic outlook for Ireland and the UK. Readings
above 50 indicate expansion while below 50 2.1 EUR/GBP
denote contraction. May readings in Ireland were
very strong with Manufacturing reaching a new Earlier this year we had considered if GBP
record high while Services was at its highest since might strengthen more against EUR on the
March 2016. In the UK, the trend is similarly basis of problems with vaccine deliveries in
positive with June Manufacturing just off the May Europe versus strong rollout in the UK.
record high. The Construction number is the
highest since June 1997. As section 1.4 highlights, the gap continues to
close and the prevalence of the Delta variant in the
Table 2. Irish and UK PMI readings UK has also had some impact on the UK although
it looks like Boris Johnson will fully open on July
Variable Ireland UK 19.
Manufacturing PMI 64.0 63.9
The 2021 trend is obvious from Graph 1 – having
Services PMI 63.1 62.4
peaked around EUR/GBP0.8700 towards the end
Construction PMI 66.5 66.3 of April, GBP has steadily strengthened since and
has stayed below 86p since the start of this month.
1.3 Macroeconomic Outlook The average rate for June was also marginally
below EUR/GBP0.8600 (compared to
The global outlook is generally positive. GDP EUR/GBP0.9059 in December 2020.
growth figures for 2021 show Ireland and USA at
the forefront of international trends with readings of This trend has been very beneficial to exporters
7.8% and 6.4% respectively. We will look at this and has helped offset some of the increased costs
data in more detail in Section 3. experienced elsewhere.
1.4 Vaccines In Graph 2 overleaf, we have departed from the
normal format in order to look at how the average
Vaccines doses per 100 residents EUR/GBP rate has trended over the years since
2015. What is notable is that since July 2016, the
Ireland: 95.9 average rate has been below EUR/GBP0.8500 for
European Union: 91.2 five months only with the average for the period
UK: 121.0 since 2015 (which includes a period of very strong
US: 100.6 GBP in 2015 and 2016 up to the Brexit vote) at
Israel: 120.7 EURGBP0.8473. The conclusion would appear to
be that any rate around or below EUR/GBP0.8500
(Source: Financial Times) is good value in that recent historic context.
We promised to include this data for a few Graph 1. EUR/GBP: 2021 trend
months. Total global doses now stands at 3.47 Daily EURGBP= 01/01/2021 - 22/07/2021 (GMT)
billion. Line, EURGBP=, 13/07/2021, 0.8549, +0.0007, (+0.08%) Price
GBP
0.9
0.895
0.89
0.885
0.88
0.875
0.87
0.865
0.86
0.855
0.8549
0.85
04 11 18 25 01 08 15 22 01 08 15 22 29 05 12 19 26 03 10 17 24 31 07 14 21 28 05 12 19
Jan 21 Feb 21 Mar 21 Apr 21 May 21 Jun 21 Jul 21
Page 3Banking and Treasury Markets Report
Graph 2. EUR/GBP: 5-year trend
2015-21 EUR/GBP average rate
0.95
0.90
0.85
0.80
0.75
0.70
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Apr-21
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
2.2 EUR/USD
Decided to revert back to the 5-year trend in EUR/USD just to put the current rate in that context. The 2020
weakening was material but USD has bounced back strongly with the July to date average being
EUR/USD1.1853 versus EUR/USD1.2047 in June.
The rate has been supported by both very strong US economic data and ongoing speculation around
inflationary pressures being permanent leading to interest rate hikes and or a reversal of the printing of
money by the Fed. Exporters have benefited from the recent trend but its too early to say if this will continue
so remain alert for now.
Graph 3. EUR/USD: 5-year trend
Daily EUR= 14/07/2016 - 18/10/2021 (GMT)
Line, EUR=, 13/07/2021, 1.1795, -0.0064, (-0.54%) Price
USD
1.24
1.22
1.2
1.18
1.1795
1.16
1.14
1.12
1.1
1.08
1.06
1.04
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018 2019 2020 2021
Page 4Banking and Treasury Markets Report
3. Interest and Economic Review
3.1 EUR/GBP Graph 5. EUR 3-year swaps: 5-year trend
Daily EURAB6E3Y= 14/07/2016 - 18/10/2021 (GMT)
Line, EURAB6E3Y=, 13/07/2021, -0.4200, 0.0000, (0.00%) Price
3.1 EUR Short-term Rates EUR
0.05
The Euribor rate that we continue to monitor for the 0
-0.05
purposes of this bulletin (as it is the most relevant
-0.1
one for variable rate debt) is the 3-month rate.
-0.15
-0.2
Key Observations
-0.25
-0.3
The graph below shows how the rate has trended -0.35
since the first lockdown in March/April 2020. -0.4
-0.4200
Despite the increase in the rate of inflation, this -0.45
rate remains remarkably subdued so even if we -0.5
have seen the bottom of this interest rate cycle, the -0.55
upward pressure remains minimal. The ECB also Auto
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
published is revised monetary policy strategy which 2016 2017 2018 2019 2020 2021
basically set its inflation as 2% (not above or below
it) and will use HCIP with this to be adjusted for the 3.3 Summary
cost of housing rent over time. Bit of a non-event
really it would appear. The key variable to watch when monitoring interest
rates is inflation. Eurozone inflation, which jumped
Graph 4. 3-month Euribor: 12-month trend to 2% in May eased back to +1.9% in June. In the
Daily EURIBOR3MD=X 14/07/2020 - 31/07/2021 (UTC)
UK, the June figure of +2.1% was up by 0.6% over
Line, EURIBOR3MD=X, 12/07/2021, -0.543, N/A, N/A Price the May equivalent. We remain of the view that it is
EUR difficult not to see significant price inflation in
-0.44 certain areas given shortage of supply of certain
-0.45 inputs, higher and energy transport costs, etc..
-0.46
-0.47
3.3 UK and US Interest Rates
-0.48
Both UK (and US) longer-term interest rates moved
-0.49
in the same manner in the past month: higher at
-0.5
the short end of the curve but lower at the longer
-0.51
end. This is being interpreted as a possible interest
-0.52 rate increase in response to inflationary pressures
-0.53 but no long-term hiking trend. Note US inflation
-0.54 was +5.4% in June.
-0.543
-0.55
-0.56 Graph 6. GBP 3-year swaps: 5-year trend
16 01 16 01 16 01 16 01 16 01 16 02 16 01 16 01 16 01 16 01 16 01 16 01 16
Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 21 Daily GBPSB6L3Y= 14/07/2016 - 18/10/2021 (GMT)
Line, GBPSB6L3Y=, 13/07/2021, 0.5258, +0.0044, (+0.84%) Price
GBP
3.2 EUR Medium-term Rates 1.3
1.2
3-year swap rates (i.e. fixed rate before lending
margins) have climbed in a more pronounced way 1.1
off the bottom of the cycle over the past few 1
months. The 5-year trend is included in Graph 5 to 0.9
highlight the fall and rise again both sides of the 0.8
pandemic. However, it remains well below zero at 0.7
-0.40%
0.6
0.5258
0.5
In one positive development, Avant Money
introduced fixed rate mortgages for 15 to 30 years 0.4
which is a major departure in the Irish Market. It 0.3
has been very difficult to date for either corporate 0.2
or personal borrowers to get any real benefit from 0.1
the ultra-low interest rate environment. Auto
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018 2019 2020 2021
Page 5Banking and Treasury Markets Report 2021
Graph 7. USD 3-year swap rates: 5-year trend The key challenge for the UK government going
forward remains the level of government
Daily USDAM3L3Y= 14/07/2016 - 18/10/2021 (GMT) borrowing. While the May figure was
Line, USDAM3L3Y=, 13/07/2021, 0.5370, +0.0190, (+3.67%) Price substantially better than forecast, the increase
USD in borrowings of GB£24.3bn for the month was
3 almost 29% higher than the May 2019 figure
and the total borrowing for the year to the end
2.7 of March 2021 was just shy of GB£300bn!
2.4 Strong economic rebound for the rest of the
year should improve the revenue side but the
2.1 annual borrowing of just under GB£300bn was
the largest since official records began in 1946.
1.8
1.5 3.5 US Economic Outlook
1.2
US unemployment continues to fall from 14.7% in
0.9 April 2020 to 5.9% in June 2021 but there remains
complaints from employers about labour shortages
0.6
0.5370 and the labour participation rate is only 61.6%
0.3 compared to the (much higher) UK figure. PMIs are
Auto
well into expansion territory while business and
consumer confidence readings are good.
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018 2019 2020 2021 Consumer credit rose by a record high of $35bn in
the month of May. Housing trends remain very
strong with housing supply very tight. House prices
As already mentioned, US interest rates have been per the Case-Shiller 20-city index are up +14.9%
impacted upon by rising inflation figures. To put them in year on year to April 2021.
perspective, inflation is up from +1.4% in January to 5.4%
in June. A very significant increase over 5 months and the The big news in the US over the past few days has
highest level seen since before the 2008 financial crash. been inflation. Annual inflation rate to end June
2021 jumped to +5.4% (highest since August
Government bond yields have stabilised, but the 10-year 2008). Largest increases were in used cars
rate in both the US and UK has increased by 0.40% since (+45.2%!) and gasoline (+45.1%).
the start of the year.
The debate as to whether such hikes are
3.4 UK Economic Outlook permanent or transitory continues to rage. The
argument for the latter is that the big hikes are
Q4 GDP was revised upwards to +1.3% (from the either attributable to a shortage of new cars (due to
estimated +1.0%) and while Q1 was -1.6%, the British semiconductor shortages) or price rises off a low
Chambers of Commerce are forecasting a 2021 annual base for oil and that these will wash through the
outturn of +6.8% which would be the strongest since system in due course.
official records began in 1949.
However, we are not so sure. The Biden
The June inflation rate just released was +2.5% which is administration appears to be intent on closing
above the Bank of England target. Retail sales fell by - inequality gaps and that could mean higher base
1.4% in May but this was partly due to strong April figures wages and/or greater State spending …which
as lockdown eased. Within the figure, food sales were requires higher revenues (hence the drive to raise
down but non-food and fuel were up! Unemployment eased corporation tax rates). Traditionally periods of large
back up by 0.1% to 4.8% but the Labour Force levels of Government spending/borrowing have
Participation Rate remains high by the standard of its been followed by inflation. The deflationary
international peers holding up at 78.9% while average pay environment of the past decade or more (three
was up +7.3% between March and May. As already decades in Japan) is leading many to believe that
covered in Section 1, Services, Manufacturing and this time it is different. Where have we heard those
Construction PMI readings are all well above 60 (where a words before?
reading above 50 signals expansion).
What is certainly true is that we are getting
significant asset price increases, especially in
housing, globally. It’s not just an Irish phenomenon.
And we knows what follows bubbles.
Tread cautiously is the message.
Page 6Banking and Treasury Markets Report 2021
4. Wealth Management 4.3 Equity Markets
Equity markets having suffered something of a Q1
correction have since regained momentum. ISEQ
4.1 Oil and FTSE are both 10% higher over the year while
NASDAQ has moved from being an
Graph 8. Oil prices: 5-year trend underperformer to outperformance again, up 15%
in the year to date. But the nervousness around
Daily LCOc1 14/07/2016 - 15/10/2021 (LON)
Line, LCOc1, 13/07/2021, 75.36, +0.20, (+0.27%) Price (artificially?) high prices hasn’t gone away.
USD Purchase of a floor on an index might be a wise
Bbl
80
move to consider at least?
75.36
75
70 Graph 10. ISEQ 5-year trend
65 Daily [.ISEQ List 1 of 35] .ISEQ 14/07/2016 - 14/10/2021 (DUB)
60 Line, .ISEQ, 13/07/2021, 8,177.130, -16.020, (-0.20%) Price
EUR
55
8,177.130
50 8,000
45
7,500
40
35 7,000
30
6,500
25
6,000
Auto
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 5,500
2016 2017 2018 2019 2020 2021
5,000
The graph above shows how volatile this asset
4,500
class is from an investor perspective and how
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
strongly the price has bounced back from the 2016 2017 2018 2019 2020 2021
March 2020 lows. As per Table 1, Brent is up 45%
in the year to date. The market continues to
bounce between worries of oversupply and Graph 11. FTSE 5-year trend
undersupply. The former driven by US (shale) Daily [.FTSE List 1 of 102] .FTSE 14/07/2016 - 14/10/2021 (LON)
Line, .FTSE, 13/07/2021, 7,124.12, -1.30, (-0.02%) Price
production, the latter by OPEC. UAE has been GBP
threatening to break away from OPEC cartel caps 7,800
on production (show me a government that doesn’t 7,500
require more revenues), but consensus is probably 7,200
7,124.12
going to be reached. So, Oil prices above $70 6,900
looks like a reasonable outlook…for now. But the 6,600
graph shows how quickly views (and prices) can 6,300
change. 6,000
5,700
4.2 Gold Price Trends 5,400
5,100
Graph 9. Gold prices: 5-year trend Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Daily XAU= 14/07/2016 - 18/10/2021 (GMT) 2016 2017 2018 2019 2020 2021
Line, XAU=, 13/07/2021, 1,807.8600, +1.9826, (+0.11%) Price
USD Graph 12. NASDAQ 5-year trend
Ozs
Daily [.NDX List 1 of 103] .NDX 14/07/2016 - 13/10/2021 (EST)
1,900 Line, .NDX, 12/07/2021, 14,877.891N/A, N/A Price
USD
14,877.891
1,807.8600
1,800
14,000
1,700
13,000
1,600
12,000
1,500
11,000
1,400 10,000
1,300 9,000
1,200 8,000
1,100 7,000
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018 2019 2020 2021 6,000
5,000
Gold has been trading in a $1,700 to $1,900 range
for 2021. Its value as a “hedge” against a slowing Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2016 2017 2018 2019 2020 2021
economy, continues to remain given the concern
that asset prices are due a correction. We won’t Page 7
ditch it as a variable to watch just yet.Banking and Treasury Markets Report 2021
5. Half Year Review
5.1 Ireland
General
• GDP growth has been very resilient, backboned by FDI/multinational performance
• Unemployment falling but difficult to get an accurate picture of this until PUP stops
• Consumer demand remains strong with high levels of savings
• But housing market looks very (too?) hot
• And public finances remain under pressure.
Risks
• Supports have delayed the inevitable raft of insolvencies and hidden the true unemployment rate
• Slow return of tourism impacts disproportionately on rural areas
• A stock market correction would impact negatively on sentiment
• Housing bubble being created?
• Impact of move to minimum global tax rate.
Opportunities
• Flexibility and quality of life priorities makes “non-city” locations even more attractive places to work
• Multinationals accept that they must pay higher corporation tax rates and the incremental cost of a move
from 12.5% to 15% is a gap that could be bridged (happened in 1990’s with move from 10% to 12.5%
• UK market still offers potential to grow/acquire businesses
• Post-Brexit shakeout proves broadly positive
• Interest rates remain remarkably low and outlook is for no change..unless inflation stays high
• GBP has stabilized/strengthened giving some “padding” against cost hikes to exporters
• Benefit of a global macroeconomic shift towards more regionalization/local focus and away from single
integrated global supply chain.
5.2 Global
General
• Intervention of “Big Government” globally drives growth and, also, could reduce inequality
• Rebalancing towards regionalization
• Infrastructure spend by government has a strong multiplier effect in the short-term and obviously a long-
term benefit. In many countries this has resulted in the start of a “catch up” phase of such spending
• Climate change is now a high priority focus
• Geopolitics is also changing
• The 2008 financial crisis and Covid has increased income inequality globally
• Is there a push back against big business (or just Big Tech)?
Risks
• Climate change – everything from cost of addressing it to falling birth rates (next generation contemplating
have less/no kids due to poor outlook) to insurance impact to large migration patterns
• Geopolitical shifts (holiday read suggestion is “The power of geography” by Tim Marshall)
• Housing and stock market bubbles (not just an Irish issue)
• Cyber crime. Nations don’t have to physically cross a border to create chaos!
• Government debt levels globally are huge by historic standards (although some say it’s not really an issue
ref Modern Monetary Theory)
Opportunities
• Climate change!
• Regionalistion/localisation could help to address a lot of problems
• Reduction of inequality gaps would have very large social as well as economic dividends.
Conclusion
It is difficult not to conclude that climate change and geopolitics will be the key drivers of business life over the
remainder of the decade. Government “intervention” will be central to this so Big Government is back. I have
said before that prevention is cheaper than cure. Ireland faces big threats but also huge potential
opportunities. Which prevails, time will tell.
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