Italian Mafia might rob global financial market

In the late 19th and early 20th century America saw emergence of Mafia in cities likes New York and other metropolitan due to Italian immigrations. (Italian mafia is also known as Sicilian mafia).Last week something similar happened in the global market, the Italian government released data for GDP, which declined by 0.2 percent in April-June quarter, sending negative sentiment across the financial world. Italy slipped into recession fomafia-guysr the third time since 2008.
Italian mafia is termed as “Cosa Nostra” (“our thing”). Thanks to globalisation, this poor GDP data from Italy can’t be termed Cosa Nostra for Italians as their problem is gong to be our problem.
Not only Italy but trade sanctions against Russia, poor factory orders from Germany, fresh statement from incoming European President Jean-Claude Juncker against Grecce debt write-off, French President Francois Hollande’s appeal to ECB on deflationary risk, Portugal’s $6.6 bln rescue plan for its troubled bank Banco Espirito Santo and ECB’s concern on euro zone recovery due to heightened Ukraine crisis, and no change in interest rate played major role in the financial market.
All the above mentioned events pushed U.S. treasuries price up (so, the yields fell). The safe haven investment demand was visible in Germany too, as investors clamoured for safe haven, sending German’s 10yr bunds yield to hit all-times lows.
On Friday, U.S. 10-year notes were down 1/32, yielding 2.43 pct, earlier in the day it fell to 2.35 pct meanwhile, 30-year bonds were unchanged to yield 3.24 pct, it also dipped a low of 3.18 pct during the trading hours.
There were some encouraging signs from U.S. economy, which helped the stock market. Weekly jobless claim fell, Purchasing Manager Index (PMI) for services were good, factory orders rose and Labor Department reported quite a pleasing data on labor productivity in second quarter which boosted investors confidence.
For the week, the Dow rose 0.4 pct, the S&P 500 gained 0.3 pct and the Nasdaq was up 0.4 pct.
The U.S. dollar was up for most of the week but lost all its gain and fell to one week low against all major currencies as escalated geopolitical tension laid down perfect opportunity for profit booking. The dollar was down 0.17 pct at 81.389 as of 4:30 pm EST, Friday.
Lets focus back on Italy. Why Italy is so important? Well Italy is world’s eighth largest and Europe’s third largest economy. Its GDP is about $2.6 trillion. The debt-to-GDP ratio is well above 120 percent. Thus, Italy has got enough butterflies in its belly to disrupt global financial recovery. Europe would be the obvious and worst hit if Italy falls into deep recession. And I won’t be surprise to see Sicilian Mafia migrating toward emerging markets; just to derail their growth story.

Disclaimer: I am not promoting Mafia neither influenced by Godfather (movie).


Fee-based income holds the key for Banking system

ImageIn the era of quantitative easing and significant market competition, maintaining profitability through interest-based income is becoming very tough for banks. In the last two decades, interest margins have come under tremendous pressure. In modern times, banks prefer non-interest income i.e. fee based income to drive profitability and return on capital.

The 2008 financial crisis was a big blow for banks, especially for those depending broadly on interest-based income. As the global economic recovery still looks fragile, banks are finding it hard to do loan- and mortgage-based business i.e. interest-based business. The ultra-low central bank interest rate regime was supposed to spur economic activity, as it (theoretically) supports more lending activity, but many banks are hesitant in lending due to potential bad loan losses and slow demand for loans. It would be worth to mention the ultra-low interest rate regime has also dampened savings account activities in banks.

Most of the fee-based incomes (advisory and management fees) are fairly risk-free, as these services don’t involve significant capital investment.

In recent times, banks have reported handsome revenues from fee-based income; thanks to the spur in M&A activities and private equity deals (mainly in US). Since we are living in a globalized society, there are no boundaries for banks and they can reach out to any corner of the world, thus making many potential M&A and private equity activities lucrative.

It would be pertinent to mention that fee-based driven income cushions banks against market competition. In coming days, implementation of new banking rules and regulations are going to take a paradigm shift (Dodd Frank rule, Basel III). This might curb the freedom of leverage banks take on their reserves and provisions, which in turn will leave banks with limited capital or liquidity to do the traditional business of loans and advances –further constraining interest-based income.

Fee-based income is more volatile than interest-based income, but a range of services like wealth management, transaction banking, treasury, and investment banking are covered under fee-based income. The wide spectrum of fee-based service provides room for banks to shuffle service strategies.

In the prevailing economic situation, banks would look for more fee-based income, but they won’t be able to ignore interest-based income completely. They have to build up modus operandi for various possible economic situations. For example, they will have to understand, what would be good for business if the Fed will increase the short-term interest rate or possible ‘tapering’ in coming months? How to benefit from the global corporate houses’ quest for M&A?