Staley out, stocks up ahead of massive test for central bankers

So, farewell Jes Staley. You ran a good investment bank but are not as Teflon-like as it seemed. Back in February 2020, when news of the investigation into his historic links to Jeffrey Epstein broke, I commented how anything relating to the disgraced financier was surely toxic and said Staley should probably go. It was a reputational thing for Barclays and Staley did not have an immaculate record. After the whistleblower incident and KKR thingy with his brother-in-law it seemed the cat was on his last life; it seemed a question of judgment, or lack of it. I said: “It turns out he’s being investigated by the FCA over his known links to Jeffrey Epstein. The board says he’s been transparent enough, so he has their backing. Coming after the whistleblowing fine, it’s looking like the cat may be running out of lives. I wonder if he can survive this.” 

Today Barclays says Staley is out. It all hinges on his “characterisation to Barclays of his relationship with the late Mr Jeffrey Epstein and the subsequent description of that relationship in Barclays’ response to the FCA”. It appears his characterisation of the relationship is not exactly how the FCA and PRA see it. The board thought Staley was “sufficiently transparent” to keep his job last year – a statement at the time that already hinted a bit of a rift between CEO and board. Having seen the preliminary findings of the FCA and PRA report, either they think he wasn’t that transparent enough and/or just don’t want a mucky fight with the regulators to distract, since Staley will contest the findings. It should also be pointed out that “the investigation makes no findings that Mr Staley saw, or was aware of, any of Mr Epstein’s alleged crimes, which was the central question underpinning Barclays’ support for Mr Staley following the arrest of Mr Epstein in the summer of 2019”, the statement from the company said. The FCA and PRA simply said they “do not comment on ongoing investigations or regulatory proceedings beyond confirming the regulatory actions as detailed in the firm’s announcement”. Barclays is right to pull the plug now. It probably could have done it earlier. As I said in February last year: “He’s got to go now as he risks tarnishing Barclays’ reputation.”

Shares in Barclays fell more than 1% after the announcement, whilst peers rose – Lloyds rallied about 2% and NatWest over 1%. CS Venkatakrishnan, previously head of global markets, will take the reins. A safe pair of hands but we probably need to see a bit more. Today’s release mentions that “the Board has had succession planning in hand for some time”, which if you had Jes Staley as your CEO would have been a prudent step to take.  

Stocks are higher in early trade on Monday, with the Stoxx 600 in Europe hitting a record high. The FTSE 100 trades up 0.5% or so amid a generally positive start to the session, the first of the month. Wall Street closed out Friday with its best month since November 2020 as all three major averages hit fresh all-time highs. Bets that central banks will raise rates to fight inflation may have caused a wipe-out in the shorter end of the bond market last week, but the gyrations are not affecting stock markets too much at the moment. Corporate earnings are strong with about 80% of US firms reporting delivering profits ahead of expectations. A slew of key central bank decisions this week has the potential to up-end the sense of calm but so far, we think policy moves are reasonably well telegraphed. Nevertheless, there are lots of questions facing the central bankers this week. 

The Bank of England faces a big test of credibility after a series of hawkish messages from key policymakers in recent weeks. As noted a couple of weeks ago, the situation is finely balanced. Senior policymakers like governor Bailey and chief economist Huw Pill have chucked some fairly hawkish words around. Others remain sensitive to what many believe would be a policy mistake in raising rates into a period of economic slowdown and higher taxes. The BoE will be keen to bill any hike as a dovish one that is designed to get ahead of the inflationary impulse and show it means business, but is not about to start an aggressive tightening cycle. It will be about reducing some of the distortions created post-pandemic and the need to act early before inflation expectations are off the leash and inflation itself becomes more persistent. Sterling is struggling to catch much in the way of a lift from the BoE’s apparent hawkishness and now GBPUSD looking to turn lower with a bearish MACD on the daily chart.

The Federal Reserve looks set to announce tapering of bond purchases but will be leaning hard on any notion that tapering is tightening. Powell is likely to reiterate that “a different and substantially more stringent test” is required for interest rates to move up. The team sticky and team transient inflation match is still happening, though team sticky is clearly winning easily and the referee should call it off shortly. On Friday data showed US inflation running at its hottest in 30 years – headline PCE at 4.4% and core at 3.6%.

The Reserve Bank of Australia will need to figure out if it wants to abandon yield curve control. Last week saw a broad bond market selloff that saw the yield on Australian 3-yr paper jump above 1.25%, miles above the 0.1% target. It’s all but given up on this, it seems, though the RBA has still been active in 5- and 7-year paper to drive down yields. The question is whether the ditching of YCC begets a change in forward guidance – does it surrender to market expectations and signal it will likely raise rates before 2024?