Europe’s Tottering Banks

Dark pool stock trading picks up as Europe debates new curbs

It has to be. There is no consolidation going on and no great consolidation hope,” Torbjorn Tornqvist, chief executive officer of trading house Gunvor told the Oil & Money conference this month. Diesel imports from Russia, Asia and the U.S. Gulf Coast reached a record 4 million tonnes in September, according to traders. “The trend of U.S. exporting products is going to continue, you’re going to see diesel coming from the United States to Europe for the foreseeable future,” the head of Glencore’s oil division Alex Beard said this month. 2013 may go down as one of the weakest in recent decades, as refining margins in the third and fourth quarter plummeted due to high crude costs and weak product demand. Total, Europe’s biggest refiner, said refining margins in the region had dropped to a near four-year low of $10.6 per tonne in the third quarter. Other than the old, simple East European refineries, plants in coastal areas such as Italy that are easily accessible for importing remain the most vulnerable. This year was set to go down as one of the worst for the European refining industry, with refinery utilisation slipping down to around 78 percent in 2013, according to JBC. The path taken by the Mantua refinery is not new. Last year, TotalErg, a joint venture between France’s Total and Italian refiner ERG, converted its 90,000 bpd refinery outside Rome to a storage hub.

Some investors are shifting business away from public exchanges because they feel these offer little chance to negotiate cheaper bulk buying or to sell without triggering sell-offs that can cut the price they fetch for their assets. “If you want to buy one suit or one car, you see one price. If you want to buy 100 suits or 100 cars, you approach the seller to discuss another price. Who benefits from that? The end investors,” Vincent Dessard, regulatory policy advisor at the European Fund and Asset Management Association trade body, said. Thomson Reuters and Markit data suggests the volume of dark trading rose for the fifth consecutive month in September, accounting for 5.84 percent of all European share trade, more than double the 2.8 percent volume recorded in September 2011. The rising popularity of off-exchange activity has sparked fresh debate over proposed caps on dark pool trading in the next revision of the European Union’s Markets in Financial Instruments Directive (MiFID), under discussion in Brussels. Policymakers want to cap daily dark trading at 4 percent of total trading in each stock in the EU, and total aggregated dark pool transactions at 8 percent of all European trade. They worry that transactions capable of destabilising markets could go undetected unless limits are introduced. They also fear users are draining liquidity from public exchanges, making it harder for other investors to value stocks accurately. Anyone can use these pools if they have membership and fees are typically lower than trading stocks using traditional stockbrokers. The biggest users of these networks are large fund managers and banks who regularly trade large volumes of stocks. Supporters of off-exchange trading say removing the option of buying and selling shares privately will make large portfolios more costly to manage and potentially hurt performance of investment funds and pensions. “This will hurt liquidity but more specifically, it will hurt European citizens.

Europe’s Car Sales Rally, Thanks To Discounts, Dealer Action

Reuters continues: Before the ECB takes over as supervisor late next year, it will conduct health checks of the roughly 130 banks under its watch. This is the nub of the problem facing finance ministers at the two-day talks. With the eurozone barely out of recession, a failure to put aside money to deal with the problems revealed could rattle fragile investor confidence and compound borrowing difficulties for companies, potentially killing off the meek recovery. In turn, that raises the question about who pays for the holes that are found in balance sheets in countries such as Spain and Italy. While Rome and Madrid would like easy access to the euro zone’s permanent bailout fund, the European Stability Mechanism, Germany, Finland and other strong countries say each country should pay for its own clean-ups. This time around, the task of cleaning up banks should not be quite as daunting as five years ago because shareholders, bondholders and wealthy depositors can expect to take some of the losses, as happened in the bailout of Cyprus in March. But if that is not enough, it will fall to governments to pick up the tab. Although technical, talks about banking union have sparked an acrimonious debate touching on fundamental questions such as rewriting basic EU law that risk dividing the European Union. (emphasis added) Judging from the state of the debate as of the Cyprus bailout, the new rule is that not only bondholders and shareholders, but also large depositors of failing banks must expect haircuts. Depending on how big such haircuts eventually become, they could actually end up shrinking the euro area’s money supply. Moreover, any bank that comes under suspicion of hiding large losses must expect a run on its deposits. All of this is actually as it should be – and it is only possible because the interests of the paymasters are not congruent with the interests of those hoping for bailouts. We don’t expect this principle to change, but on the other hand, the possibility that politicians in the euro area might get cold feet and opt for bailouts instead of haircuts cannot be ruled out. The trick will be in selling such a policy to the already overburdened tax cows. Political Risks Said tax cows have lately become rather restless, as inter alia shown by the municipal by-election that was recently won by Marine Le Pen’s Front National in France .

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These will eventually be sold on to the public at well below sticker price. The Brussels-based European Car Manufacturers Association, known by its acronym in French, ACEA, ( www.acea.be ) announced today that Western European car sales were up 5.4 per cent in September compared with the same month last year at just over 1.1 million, bringing the total for the year so far to 8.8 million. Thats a fall of 4.0 per cent on the first nine months of last year. Peter Fuss, partner at consultants Ernst & Young Ernst & Young s Global Automotive Center in Frankfurt, Germany, said the recovery in car sales was down to the improvement in Europes economic outlook, with the Euro currency zone pulling out of recession during the second half of 2013. But with factory use down to less than 65 per cent by manufacturers, according to Fuss, this underlines the chronic overcapacity in Europe, which remains unresolved because of pressure from unions and governments to resist rationalisation. The European industry is looking for a bailout along the lines of the U.S. intervention on behalf of bankrupt GM and Chrysler, to allow it to finally shut-down uneconomic factories. But given the financial crisis in the euro zone, this is simply unaffordable. Ernst & Young expects an overall decline of three per cent in Western Europe for the whole year, and only modest growth next year. This growth will continue to be artificial one that is driven by discounts and self-registrations. We estimate it will take at least two years for the market to witness the real sales recovery, driven by replacement demand. As a result, profits for automakers are likely to remain challenged at least until 2014 is out, Fuss said. According to ACEA, Volkswagen of Germany remains the market leader with just under 25 per cent of the market.

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