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All right, let's get back to the market's here. So equities continue to roll over. Bond market quite interesting. You had a sell off right when those CPI numbers hit. You had a spike in the two year yield, and then once the cash market opened for the equity market, bonds continued to really roll over, with yields moving significantly lower. Now, Ira Jersey, Bloomberg Intelligence Chief US interest rate strategist, it joins, us I shouldn't say significantly lower, but compared to where
they were, it was quite a move. What are we making of the move today?
Yeah, so, you know, after the CPI report came out, the market was thinking, oh, well, maybe the Fed is less likely to do a fifty basis point rate cut next week, and so we're going to readjust that front end yield. Once the you know, equity started to roll over, you also have seen a pretty big rally in European rates this morning our time, in the afternoon their time.
And I think that that treasuries of have you know, one, have a flight to quality bid from the risk off in the US markets, but also are being pulled down a little bit by the global rate environment as well. So again, not huge moves on a day on day basis, but like you said, Alex, you know the fact that we were off by six basis points in two year
yields and then you know, now we're essentially unchanged. You know, I think that's meaningful enough that the market is, you know, not one hundred percent sure right now and certainly has certainly been not priced for, you know, just the twenty five basis point cut next week.
So how do you think our friends at the Federal Reserve will read this inflation data today?
Yeah, So our view is is that this solidified the idea that a twenty five basis point rate cut is in the cards. You know, again, fifty is not impossible, and certainly the market doesn't think so either. But at the same time, you know, point two in point two
percent inflation print is still above the Fed's target. So even though they want to cut interest rates because they're worried that the economy is starting to slip, and you know, certainly they've been focused more on employment than inflation in recent months, that they can start a slow rate cut cycle.
I know some some houses on the street think that they could go twenty five and then fifty basis points for a couple of meetings there after, I suspect at the end of the day they're going to go twenty five basis points at every meeting. So the market maybe has gotten a little bit ahead of itself when you look at pricing for say January FED funds futures, or even two year yields for that matter.
Yeah, So it seemed like what happened is once they got the print that that fifty bases point potential cut moved more to December. Rather than pricing it out, it just kind of pushed it off a little bit. Does that need to be pushed out even more and or is it taken out all together?
Well?
I think as a base case in the way that I'm thinking about how the economy might develop, and then what the FED reaction function and therefore the jusuring markets reaction function to that new economic news is that the economy is going to continue to slow, but not very quickly.
So therefore the Federal Reserve will be able to be patient and go in twenty five basis point increments and then maybe at some point it might do a fifty, but I don't think that the Fed necessarily wants to because and certainly as a first and we've been saying this for months now, is that if the Federal Reserve were to start with a fifty basis point in rate cut, you know, that would be like a shock and awe
kind of event. And I think that would show, you know, the market and maybe just that you know, main street main street businesses and households, that the fedce panicked and they see something maybe that's much weaker than most of the economic data that's coming in suggests. So I think that that would show some panic. And that's another reason to think, hey, they'll go twenty five's unless and until you wind up having you know, negative payroll print or
even fifty thousand person payroll print. What would be enough for them to say, hey, the economy's you know, not growing anywhere near potential, so we really have to cut interest rates significantly. But until we get to that point in the data, I think that the Fed's going to go twenty five basis points. And you know, look, this is all like short term interest rate trader minutia quite frankly, and for the I think for the broader markets, you
have to say, Okay, the Fed's an easing mode. The question is how fast and how far not necessarily are they going to be cutting rates?
A right about thirty seconds left here the election.
The treasury market, I don't think I heard the yield curve mentioned last night at the debate. But how do you guys frame out kind of the political risks here?
Yeah, so we put out our We put out a note on what we thought the big impactful things for the treasury market will be based on the election. Most of those are not expecting a big reaction on election day one way or the other, but nuanced things like who's the next FED share going to be that's going to matter if President Trump wins election again, it won't be Powell. Maybe for Kamila Harris it will be Powell, and if not, or probably someone else, and who was
maybe a Biden appointee to the Fed. So those are the types of things that matter. And then of course, things like budget deficits. Neither of these candidates is likely to be a deficit hawk, so therefore you're likely to continue with relatively large budget deficits, and that obviously has an effect on pricing in the treasury market.
Airah, Always a pleasure, Always great to catch up with you. Ira Jersey joining us. He is Bloomberg Intelligence, a senior US interest rate strategy.
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So we got through the risk events, we got through the debate, we got through CPI, We were headed towards the FED. It looks like markets are now pricing in that twenty five basis points in September. So what do you do in that scenario? Nicole Webb Senior vice president, Financial advisor at Wealth Enhancement Group, and she joins us. Now, Nicole, does this take fifty off the table or does it push the fifty out to like a November or December.
You know, we were of the camp that the FED probably wasn't going to step into this cutting cycle with fifty basis point cut, and so for us, the CPI today was largely in line with expectations obviously across the board, and for us it just didn't bear terribly much weight in the short term.
So what are the key drivers here then, do you think of these markets going forward? Again, as Alex was just mentioned, we've gotten through a number of kind of external events here. What do you look to be kind of a driver for markets going forward?
Yeah, Paul, I think you know, the market response over the last couple of weeks has really been and I would say even maybe this is some of what you're seeing this morning after the CPI, which, as I just mentioned, was.
Largely in line.
But it's this need for all of the fundamentals to hold up in support of equities. And so when you think of part of that being the disinflation story, part of that being the release of the pressure valve on the consumer, and then also you layer in the need for policy to go the right direction, corporate earnings, you know,
to continue to perform. It really just puts a lot of weight on the market where you have valuations, high consensus, long equity, and then you also have a cooling economy, not just here but also globally, and so it's just going to be a lot of digestion we expect over the next couple of weeks, if not months.
Yeah, talking about globally. I was talking to an oil trader today and he was at a conference over in Singapore. Yeah, no, it's a shocker, and he was saying that everyone used to think that China was just going to be a property issue, and now everyone, even the Chinese, are like, oh no, no, this is a real broader economic problem in China, just to talk about the weaknesses there. So what's the playbook, Nicole.
Yeah, I think when you have a market that's digesting, to your point, Alex, the why it begs a question why are we slowing?
And then does it change? And China's not a.
Quick reversal, so that likely isn't changing in the short term, and we know that they're greater than fifteen percent of global GDP.
That has a big ripple effect.
And then you think of the restrictive policy landscape in the US, even a normalization of rates. To your point about not knowing exactly what that neutral rate is, it's going to take some time.
And then you have excess savings declining.
And so the last leg of that then being my fourth point, which is all doesn't sound overly optimistic, but you have the acceleration of earnings from the mega technology
companies as they continue to increase that cap spent. And so when you think then about where we're going to invest money, still under this long bold thesis, we really are looking for places where you can expect earnings acceleration forward looking, where it's an environment that isn't necessarily in demand of global growth accelerating, but instead, if we normalize or we're okay with on trend, what are those pockets?
And so you're already hearing this a lot that healthcare pocket, utilities pocket, the rep pocket, all of that votes favorably in the forward looking landscape over the next six months.
You know, yesterday we had some big moves into the downside for some banking stocks led by JP Morgan and JP Morgan's.
Week again today.
So I guess calling into question a lot of industry leaders at a recent conference about the profitability for the upcoming quarter for the banks, how do you think about the financials as a whole.
Here, Yeah, I think first when we think about the banks, we have to remember that it was only a couple of weeks ago that we were at fresh fifty two week high on bank stocks, and so.
Know that in and of itself, again going back to kind.
Of where we are from evaluation and consensus perspective, the conversation around ANII, you know, it's expected to deteriorate. So the response there to some of the comments yesterday was, you know, again kind of to be expected and perhaps shouldn't have.
Been new news.
And then again curiosity around even though we were talking about delinquencies, there has been a consistent flatlining to delinquencies.
We're not seeing an acceleration and growth and delinquency. And so again I think this goes back to where I kicked things off today, which is that we need a lot of fundamentals to stay in support of equities, and anything that looks like it's a deterioration of any of those fundamentals when you do have valuations as high as they are is going to put pressure both on sectors and on the index as a whole.
Was really that decline yep, that's been in that decline was really confusing, Like we knew we knew it was going to be happening with rates, which was so odd. Tech last two days has been the quote unquote outperformer. That's safety trade, if I can say that right, you had the bit into bonds yesterday, you had the dollar moving hire as well, and you had that bit into tech. Is tech going to be that safety rotation trade?
It's hard when you see pullbacks in the tech area where I mean we've been talking now for a few weeks that they were no longer the leader for calendar year twenty twenty four. That does look like an opportunity to be a buyer.
In that space.
Yes, we don't know in the short term what that return on invested capital is or how quickly we start to see those earning surprises to the upside on that investment made. But if you have a long thesis, if you are a long term investor, not a trader, these pullbacks do look like a time to deploy fresh money into that sector.
Fixed income here we've had yields pulling pretty dramatically just on the tenure. We've gone from five percent to now today around three points six percent. Here, what are you doing in fixed income space? Are you taking credit risk?
Yeah?
You know, when it comes to fixed income, I think the probably the thing that we have spent the most time on recently is just are you almost better off
on a one year staying in a money market? So if you don't believe there's going to be an acceleration to cooling and that the FED doesn't necessarily have to go into a rate cutting cycle as we think of it traditionally, but more into kind of this shaving rates down as we normalize the interest rate environment on a twelve year or a twelve year twelve month forward, you know, could you actually outperform a one year treasury sitting in a money market? And so there's kind of some of
this playing around. But fixed income, we do think is going to continue to be a really valuable part of the portfolio, and we also expect to see a lot
of flows into that sector. When you think just about where the concentration of wealth is in this country and the ages, it seems like a period in time in which you're going to see flows start to move away from some of that shorter duration investment into some of these longer including credit exposure areas of fixed income, and so from a flows perspective also, we think that will be favorable.
It's interesting. Paul JP Morgan talked about how you won't see the money move from money market fens until the FED starts cutting more aggressively, like until they're deeper into the rate cutting cycle. So we're all like waiting for that rush. We might have to wait a little bit until that happens. For you, what's the next catalyst? Is it just gonna be the FED meeting or is there something else that you're looking at?
Yeah, I mean to us, the first catalyst, Alex to your point would be, you know, post FED meeting, and is the dot plot? So what do we see, you know from members in terms of the trajectory of the rate cutting cycle we're entering. So if it is our first cut, what does that look like, you know, on the next twelve months?
And I think even more importantly.
Is how the FED speaks about the economy following the meeting. And what I mean by that is there's so much weight right now on is it twenty five, is it fifty? Is the second cut fifty basis points? And a lot of that has to come from how they talk about the setup of the economy beneath these cuts, and I think there will be a big fear response if you know, they aggressively start cutting, which really does signal that we are far too restrictive and the economy requires stimulation versus
we're we're on a trajectory of normalization. And so you know that piece of it. And then the response from the housing sector in accordance to how the cuts go. We know we're under supply and housing. That's a huge catalyst for expansion in the markets if we do start to see a drive towards equilibrium in supply versus on going demand for housing.
And so those.
Two things have a pretty high correlation, we expect, and kind of we'll kind of handle the sentiment of investors as we enter the end.
Of the year.
Very good, Nicole web Thank you so much for joining us. Nicole Webb, senior vice president, financial advisor with Wealth Enhancement Group, joining us from New York via zoom.
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Joining us now is Henry Detris, a managing partner and director of Economic policy at Beta Partners. She's joining us. She's in New Orleans. Actually, so hey, just real quick, are you safe? Is it okay? Is the storm coming?
Like?
Are you bracing for it?
Probably right when I get off here, it'll come just at the end of this interview. It's expected to hit tonight, but it won't be too much of a big deal. So I'm not surprised that oil stocks aren't moving too much. We're used to this. This is what we prepare for.
Okay, fair enough, all right, so we got that part done. Clearly. You were up late watching the debate with the spin and all the like, what's your pitch? What's your two minute, two minute, one minute, two sentence takeaway?
I think that Harris clearly ran away with the debate. Trump missed a number of opportunities to stick to a script and stick to policy, and I think that was a mistake for him, and he could potentially have to correct it with the second debate. I doubt one will take place, but if the polling data starts to turn against him, as Kamala Harris's sort of appeals to moderate voters last night, should that work, he may have to commit to another debate.
Henry, I'm just reading through your notes here, and you make a point here about ninety five percent of the electorate has already decided how they'll vote in November.
Did I read that right? And if so, is that normal or is that crazy?
Yeah?
No, almost everybody has decided how they're going to vote. There's only about five percent of the electorate that's undecided right now. They're not you know, they're actively trying to ignore politics, but they're going to engage post debate. They're going to see clips from last night and start to make a call. There was, interestingly, fourteen percent of viewers last night thought that they maybe questioned their prior, their priors, They thought they might, you know, be willing to change,
but then ultimately only four percent of them did. So we have a really sticky, very partisan America and that's going to make this election close until.
The very end.
What do you think can move the needle now? I mean, in some ways, this was the public's first introduction to Vice President Kamala Harris. President Trump is still unknown. Quantity. But nonetheless, how do they then further this if there's no second debate?
Right twenty three percent of Americans are still looking to learn more about Kamala Harris's policies. Most of Americans already know all of Donald Trump's policies. The real uphill battle is on Kamala Harris's side right now. As my adds suggests, Trump is winning this race. The electoral College favors him in most swing states and within the margin of error
in every single swing state. So it's really up to Harris to convey her home buyer tax credit and her position on abortion, her thoughts on capital gains rates, corporate tax rates, and sell that message to the American public. And I would suggest that the onus is on her to get that done.
Just on Bloomberg Radio on television, Henriette, just before we came to you, we were listening to Canter Fitzgerald CEO Howard Lutnick, who is a strong Trump supporter, make the point that we've heard from a lot of folks that VP Harris should be more accessible to the media, should do interviews, should do town halls, press conferences.
What do you think about that?
I'm sure that she will as we go forward.
The next major event is not until October first, with the vice presidential debate.
I think there's twenty.
Some odd days between now and then for the Hires campaign to take a sit down with a major editorial board and do more live town halls. What I think Republicans want to see is her stand alone as opposed to with Tim Wallas, which is of course what the interview with Dada Bash on CNN was a few weeks back. So I expect that she'll get out there, and the fact that American voters want to know more about her policies means that it is in her best interest to do that as well.
What I also was noticing when I was reading a lot of takes on independence who just weren't clear, is that a lot of them are the people who go to the store, buy stuff, come home and like it's rough and economically it's really hard, and that the debate last night didn't speak to that didn't speak to that
inflation or the economics. And you take a look at the inflation data today, right, it's kind of a mixed bag for everyone, But some of those core things like eggs are still a lot higher, and those prices are still a lot higher. How do the candidates really tackle that in a meaningful way where people who are truly undecided can get some clarity.
This is why debates are so important for the challenger or the other candidate in this case, Donald Trump, to really hold her feet to the fire and say answer these questions speak to inflation, and Harris has to her credit, they will have a great track record to say it was seven eight nine percent two years ago and now it's down to under three percent. So there is a message that can be delivered from both sides, but they
just weren't sticking to that script last night. Another reason why I think Trump would benefit from a second debate is because he could hammer those points home, which he should have done last night. I do think also, just to speak to the inflation data, gas prices still being low, to bring it back to the beginning of our conversation, is really important here. Gas prices factor into the American psyche. I would say, more than the price of eggs, So that being low I think does help Harris.
So what is the role of the vice president candidates here? Did they move the needle all on a major election?
I mean usually not.
It's a much smaller audience that watches the vice presidential debate.
They're not viewed as the leader of the country.
We used to say that it's the least or the most like thankless job in DC. Obviously, Kamala Harris and Joe Biden's dynamic this year upended all of that. But in general, device presidential debate is not a blockbuster affair. They're usually pretty sleepy in fact, and a couple of cycles in the past few presidential election cycles you get fewer than fifty million or even thirty million viewers.
October surprise, it does happen? Could there be one?
Now?
Like, let's look ahead. If there's not another debate, you want everyone wants Kamala Harris to speak more. What could an October surprise be?
I think it would be ridiculous for anybody in a seat like mind to say that there won't be an October surprise in a year like this. I think at this point what I try to hone in on for investors is that it could very easily be foreign policy related. Israel Gaza, I think presents a stark opportunity for some sort of shock event that could be a problem, particularly for the Harris campaign since Joe Biden is the incumbent. I think the immigration data, the numbers have come down
so rapidly since December via executive order. I don't see that changing a government shutdown is probably something that should be on people's radar. Trump tweeted about this last night, supporting a government shutdown that could be disruptive, but historically Republicans get blamed for that, so I don't think it's in his best interest.
Thirty seconds, Henriette Taylor Swift endorsement. Does that mean anything?
I think it does.
We want to see his voter registration spikes, particularly in the twenty nine and under demographic.
We've already seen that go through the roof.
I believe it's eighty seven percent hyped up since twenty twenty, and of course you have three times higher registration rates for Black women, one hundred and forty seven for Latino women, and I think eighty seven percent is the number for all women. So that registration spike is what you'd want to watch, all.
Right, Henrietta, thank you so much. We appreciate that.
Heny toa Triz managing partner, a director of economic policy at Veda Partners joining us via Zoom from Louisiana again in the path of that incoming hurricane. So hopefully Henrietta and all the good folks down in that part of the world stay safe over the next twenty four hours.
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Alex Oopaul Sweening live here in on our Bloomberginner Actor Brokers studio. Streaming live on YouTube as well, So editver YouTube dot com and search Bloomberg Podcast, and that's where you will find us. As Charlie is just reporting, we've got some selling in the stock market here today, perhaps on the back up a little bit higher than expected core inflation.
Let's check it out with a professional here.
Kim Farst, founder and Chief Investment Officer of Bouquet Capital Partners, joining us from Pittsburgh, PA via that Zoom thinks again more technology.
How about that?
Kim, Thanks so much for joining us here.
Make of today's trading here and maybe the last two two or three days to trading been a lot of volatility.
Sure, yeah, I think you know, as always, investors are pulled between the two poles of fear and greed, right, and I think this year has taught us that even with ho hum kind of economic data, that the market can go higher. And I think that is what keeps the greed into the market right now, is that we look at our recent past and say, hey, you know, Nvidia eclipsed all other stocks and then dragged six other stocks with them, you know, starting somewhere in the second quarter,
and you know, portfolios turned out pretty good. But I guess wisely people are looking at the Fed and saying, are they too late?
Should?
You know, we know they're going to lower interest rates, that's pretty clear, but how much and how fast? And I think too fast would indicate that the Fed is seeing trouble ahead and on either one of its mandates that it's supposed to take care of, and that would be stable prices and full employment. So you know which you put those two together, you have the whole economy, right, what else is there in the economy? But no investors are afraid that the FED is too late, too slow,
and that we're going to get a hard landing. Now, as somebody who has seen a hard landing. In nineteen ninety three, Pittsburgh had a seventeen percent unemployment rate because of inflation and the steel market being forever changed. And I don't think we are headed for that kind of hard landing. Just to set expectations.
So, Kim, I hear you, and then I look at what's happening with bank stocks, and I'm confused. I mean, regional banks are getting really hit. Broader big banks also getting really hit by news that we already knew, right, Like, we knew that rates were coming down, and in theory, if they come down less quickly, that should be better for their net interest income. Right, So are banks telling us something else right now?
Well, I think they're really concerned about the consumer and borrowing, and specifically consumer borrowing. I don't know that regional banks
would be all that much affected by it. It's usually credit cards, and I don't think that would see a whole lot of you know, housing issues because most of the borrowers have very low interest rates, and the most recent borrowers, you know, they're they're as everybody's been pointing out, the housing market is slowing and has slowed, So I'm not quite sure why the smaller banks are being sold off.
Maybe it's you know, continuing commercial real estate issues, of which you know, nobody can pretend that they're not there. We don't to work five days a week anymore. You need less footprint. It's an issue, and it's something that remains unresolved.
So Morgan Stanley's Mike Wilson saying that the AI trade may be fading here in this market and calls into question what will be the leadership for this market?
How do you feel about that thought there?
Sure?
Well, I think it's a pretty good bet that most investors have overplayed their hand on the timeline of AI rollout and how deep and pervasive it is. You know, as somebody that is an ex technologist in AI, I don't see the killer app that are going to make Corporations and certainly not individuals pay for access to it. So right now it's a free service, but that could change in the future. It's probably going to change in the future, but we don't know how long of a timeline.
You know, Wall Street wants it yesterday, not tomorrow, so and it's a pretty few or pretty many tomorrow's and in the future where we think AI is going to be a player. But you're right, where is the next area? I would say that investors that need to put money work, money to work, and we all do because we're saving in our four to one case, they should look at the smaller companies, the unloved companies that have good products.
And I love the medium sized companies over a billion to maybe like twenty billion, because especially if they have great products and a stable balance sheet, they are able to live on through tough times. But also they are acquisition candidates, and as rates come down, we will see more mergers and acquisitions because the big need to have new products or the product growth, so they will do
it either organically or by acquisition. And I think it's a pretty good idea to look at smaller companies, but not the smallest companies for addition to your portfolio.
Okay, so the question where do you buy the dip?
Where do you buy the dip? Well, that's market timing, isn't it. And I think we're all warned about that. So I think it's on a case by case basis that you have to look at each company and say, is this a good deal? If it goes ten percent lower? Am I going to be angry about having bought it?
Right?
Give yourself some kind of wiggle room and understand that you know, companies can go lower on all sorts of news. So I think you have to do it on a case by case basis. And you know this wasn't in my note to you guys earlier, but maybe energy is an area as well. It seems to be especially selling off hard. And I would certainly put energy as even bigger companies as well as the small to medium sized companies on your list on your shopping list, and look at them daily and say, is today the day I'm
going to buy whatever it is? It is that simple, Kim.
How about valuation?
It's obviously it's important when you know in the securities business that you're in, But how do you employ valuation? How high is it on your list of you know, decision factors for buying or selling security?
Well, actually I don't look at it in just in isolation.
Right.
I'm a growth ish manager. I have growth at a reasonable price. So I'm always thinking that the company that I'm going to buy is going to grow, and it will grow more into its valuation, So I will look at pees that other value oriented managers probably will not. But that being said, you also have to understand in a declining rate environment, you should expect to pay a higher PE. And that's because of the math behind the whole discounted cash flow equation, which we're not going to
go into at this point. But I also think it's extremely important not to look at them in isolation, but to their competitors and to their industry, because each industry has a different PE profile where it's merited most because the balance sheets are completely different, right, Like a software company is different than I don't know, a cement making or a steel making company that has a lot of plant,
property and equipment. So those are the kind of things that change your perception of a PE, whether it's rich or you know, fairly valued.
And this is a great setup into talking about last night's debate because from the way you invest in stocks and how you look at structural trends, even in cyclical areas of the market, how do you think about who's going to be running the White House over four years? Like what are there areas that that actually impacts how Kim Forest looks at the market.
What does but slowly because I don't know. I have this quaint idea that the president, regardless of who it is, actually is the executive of the government, and that Congress gives them a budget. So things like I don't know, housing grants of twenty five thousand dollars that still has to go through a Congress, and that is a very slow process. So I am glacial, and I try to
look for bigger trends that eclipse politics. So I'm not terribly concerned about what's going to happen other than taxation. Taxation is one of those things that can come in fast, but any of the more spending of the government and areas in which they spend, it's more glacial than we ever want to consider.
All Right, Kim, thank you so much for joining us.
Kim Forrest, Founder and chief investment Officer, Boca Capital Partners from Pittsburgh, PA.
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We're broadcasting to you live from Interactor Broker Studio right here in Midtown Manhattan. The headline that truly truly caught my eye today was UniCredit finally making a move on Commerce Bank. This is something that I that I've heard rumors about four years and UniCredit building a nine percent stake in the German Bank and apparently has planned to enter into talks with the lender, raising the possibility of
a takeover that could truly reshape Europe's banking landscape. Joining us now for Morris Philip Richards, Bloomberg Intelligence Senior analyst for European Banks, Philip, would the German government let this happen?
Yeah?
Hi, it's an interesting one. As you say, this is not a new boomed deal. It's been going on for lit you well over a decade now. In terms of big cross boarded deal. The simplication mains any big cross bordered in transaction among European banks still hasn't happened in the last fifteen years since the crisis. So will it
happen now? Yes, it's possibility, but there's still a lot of hurdles I'm left in terms of the German government allowed specifically when it would flag is the German market is very different to all the other European markets, so it's got a very big cooperative or mutual society. They've got the Sparkas and the Landers banks. So actually the private banks Deutsche Bank and Commerce Bank are a much smaller part of the overall market, and therefore could they
take out the second biggest German bank? I think it is possible on that front.
Would it be a good deal for Unit Credit?
I guess what I'm asking is how good of a management team, how good of a franchise is UniCredit?
Well?
Is it a good deal? I mean that will come down to the price. And one good thing about Commerce Bank is is pricing is a low level. Even after rallying twenty percent about today, is still trading about half book value in terms of what you get for it. Yes, the earnings have been very, very weak for the last fifteen years, one of the low return and equity of all banks in Europe, but they have increased massively with
rate risers across Europe. Of course, the flip pide to that, of course is great interstrate's now going down, So the question becomes what will happens to Commerce Bank's earning is going forward? And frankly they're probably going to be going down and therefore that's where the pressure on them will lie. So are they getting a good deal or they're paying almost at the top and terms of their earning potential?
What what company would that make UniCredit like, would this be a giant investment bank and a giant retail bank.
Well, they will become the third largest European bank if they did the deal in terms of a market cap basis. Obviously Commerce Bank is almost entirely now a retail and commercial bank is sold or the investment banking operations that had after the financial crisis, So this is amount of case of expanding in terms of that retail commercial space.
UniCredit have a big presence in Germany already through hyper Variants Bank, so one of the attractions sort of deal for them would be combining that so Commerce Bank and hyper Ryans and therefore trying to get the cost and neues out of them. But say it's lament on a commercial retail side rather than invest in banking.
So Philip talked to us about I mean just the German banking market right now in general from a competitive landscape that does there need to be consolidation.
Does they?
Yes?
I mean it's probably the least consolidated market in Europe in terms of as you said, you've got this huge number of cooptive banks or sparkasms, et cetera. So it is a very difficult and diluted market. But the fact is, you know, Commerce Bank yourself has got a sub ten percent market share. So even if you've got it, did buy it and combined hypervides with them, they're still probably just getting over about that ten percent mark. So will
it change the dial in Germany? Not at all, you know, because we're only talking in a thirty percent subsector in terms of the private banks, with seventy percent or so off the market you know, is in this mutual side.
So you were talking earlier that this has been rumored for ten years. I remember talking about this at least six plus years ago. Also, why do you think that now could be actually the moment?
Well you asked us about you know, what they get into Commerce Bank. We heard last night actually the CEO of Commerce Bank said he were not renew as tenor which miss farres at the end of next year, so you know that does open a hole at the top of the bank would obviously be in traction for them.
There's one potential way of doing it. Who would have bought Commerce Bank given the excessive risks they had, say three or four years ago, where we had the commercial real estate risks, we had the bank trading at point three times book value. We had earnings are very very low, So in a way the risk has gone away a lot of Commerce Bank because simply because the earnings are
much stronger now because of those rate rises. Also, the German state government took a big stake in the bank, so as they sell that further and further down, that's part of the way Munichledate built their state. Today that obviously becomes more and more attractive because it comes more into the private sector. So there are a number of more reasons why it could happen, but doesn't mean anything will happen then.
No, is this going to ignite maybe a little bit more discussion about more across M and A trades just broadly defined across Europe.
Without any doubt it will trigger more EMINECE spectation today and I think The fact that you said the temperate stake and yet the share then rally twenty percent shows that the market doesn't think this is the end of the story, and there's going to be more of a deal and the potential by bid for Commerce Bank is possible. That said, you know, why has there been no big m and a across the sector now for fifteen years?
And because a number of the regulary hurdles are main You know, there's not a single rule book across Europe, government interference, people don't want to leave their biggest banks and be taken over by a foreign institution, et cetera. All these hurdles and nothing's actually changed on that front. That's all the still the same today. So you know, no big deals have happened. Could this be the first, Yes, but it's by no means certain it will thirty seconds.
If the deal does happen, would the bank be able to like, lend more and do stuff.
I think I would have said yes three years ago just because of the week of financial position that Commerce Bank was in. I think because of the eight hikes, now is in a much stronger position. It's got a service capital position itself, so there's no real barriers in terms of the supply side, their potential to lend more. What's restraining them from growing Actually more the week at Germany econmy and we're hearing more about that over the press in the last few days, and that's what's being
hold them back. And thrankly nothing changes with this unique credit deal there those heard will still remain. So no, I don't think this would really help in terms of the lending or the growth potential. It's much more think about the synergies in terms of the cost takeout potential.
So maybe that like the framing of the deal could have changed versus like six years ago. All Right, thanks a lot, Philip Richards, Bloomberg Intelligence, Senior analyst for European banks, on that nine percent stake the UniCredit now has in Commerce Bank.
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