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FRANKFURT (Reuters) – Soured credit, cybercrime and Brexit are among the biggest risks facing euro zone banks in 2019, the European Central Bank said on Tuesday, as it set out its supervisory priorities for the year ahead.

The euro zone’s growth has reduced overall economic uncertainty, but global risk factors from protectionism to a hard Brexit and emerging-market turmoil are growing and warrant closer monitoring, the central bank said. It keeps watch over 118 of the biggest euro zone banks.

“Compared to last year, there has been a substantial decrease in risks stemming from economic and fiscal conditions in the euro area, mostly due to a favourable cyclical momentum,” the ECB said in a regular risk assessment exercise.

“At the same time, geopolitical uncertainties and risks of repricing in financial markets have increased. Advances in digitalisation exacerbate the risks related to banks’ legacy IT systems and cyberattacks.”

Other notable risks include a repricing in financial markets and the impact of record-low interest rates on bank profitability, it added.

With regard to Brexit, the ECB stressed that banks need to be ready for any outcome, since no agreement has been reached just months before Britain is due to exit the European Union.

“Banks’ preparedness for Brexit remains a high priority for ECB Banking Supervision,” the ECB said. “ECB Banking Supervision will further prepare to take over the direct supervision of a number of institutions that are newly identified as significant owing to the Brexit-induced relocation of activities.”

It added that it will continue to press banks to reduce their stock of non-performing loans after notable progress this year and will also scrutinize lending practices to mitigate potential risks.

It will also conduct a targeted review of banks’ internal models for calculating risk to reduce unwarranted deviation from its own expectation.

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NEW YORK, Oct 5 (Reuters) – The U.S. bond market’s gauges on investors’ inflation outlook rose on Friday as government data showed a steady rise in wages and the jobless rate hitting a 49-year low in September, hinting at some building in price pressure.

The latest labor figures reinforced the view that domestic wage inflation is accelerating, which would allow the Federal Reserve is keeping raising short-term borrowing costs gradually in an effort to keep the economy from overheating.

The upbeat payrolls report also spurred selling in the bond market for a third straight day, propelling the 10-year Treasury yield to a seven-year peak near 3.25 percent.

“You are seeing some wage acceleration so it’s natural you see some people selling,” said Robert Tipp, chief investment strategist at PGIM Fixed Income in Newark, New Jersey. “I think it’s overdone,” he said of the market rout.

Average hourly earnings grew 0.3 percent in September, bringing their year-over-year increase to 2.8 percent.

This compared with a similar monthly rise in August and an annual gain of 2.9 percent which was its largest yearly increase in over nine years.

Moreover, the unemployment rate fell to 3.7 percent, which was the lowest level since December 1969.

While the bond market took another beating on Friday, some investors increased their holdings of longer-dated Treasury Inflation Protected Securities based on evidence of further wage growth.

The yield spread between 10-year TIPS and regular 10-year Treasuries, or the 10-year inflation breakeven rate, was 2.17 percent, the highest level since May and up 0.90 basis point from Thursday, according to Tradeweb data.

However, the five-year TIPS breakeven rate weakened marginally to 2.06 percent, just below 2.07 percent set on Wednesday, which was the highest level since July 13. (Reporting by Richard Leong Editing by Tom Brown)

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LONDON, Oct 23 (Reuters) – An ugly start to European trading pushed world shares towards their lowest level in a year on Tuesday, as negative drivers from Saudi Arabia’s diplomatic isolation to worries about Italy’s finances and trade wars piled on the pressure.

Selling escalated from Wall Street into a heavy selloff in Asia before hitting Europe, which was facing a fifth day of uninterrupted declines.

The tech sector posted the worst performance after chipmaker AMS plunged 17 percent as its outlook triggered alarm bells, but there was a broader force at play.

The pan-European STOXX 600 was near a two-year low with almost half of its stocks now in bear-market territory — down 20 percent from their peak.

Germany’s DAX also fell to late 2016 lows, London’s FTSE was down near April lows, and MSCI’s world share index was just two points of a one-year low.

“This morning weaker stocks in Asia raised some eyebrows and overall sentiment is suffering from trade tensions, Italy to Brexit; a concoction of concerns,” said ING strategist Benjamin Schroeder.

The euro also fell towards a two-month low and Italian bonds struggled before a European Commission meeting that could see Brussels take the unprecedented step of demanding changes to Italy’s recently laid out budget plans.

That has bred some doubt about the European Central Bank raising interest rates next summer, leaving the euro at $1.4390 . Doubts about Britain’s prime minister, mired in a stalemate over Brexit, kept the pressure on sterling.

All that contributed to the risk-averse mood, with the safe-haven Japanese yen and Swiss franc strengthening while higher-yielding currencies like the Australian and New Zealand dollars fell.

“The prospect of a normalisation of (ECB) monetary policy was the main reason why the euro was able to appreciate over the past year. However, there is a rising risk that this support is now going to crumble,” Commerzbank analyst Thu Lan Nguyen said.

SAUDI TENSIONS

Markets were also waiting for Turkey’s president to reveal his country’s take on the killing of Saudi Arabian journalist Jamal Khashoggi at a Saudi consulate in Istanbul this month.

Saudi Arabia, a top crude oil exporter, faces international pressure to provide all the facts about an incident that has raised a global storm and added the threat of sanctions against the kingdom to a list of market concerns.

U.S. President Donald Trump said on Monday he was not satisfied with what he had heard from Saudi Arabia about the killing, but expressed reluctance to punish the kingdom economically.

Investors worry that may lead to Saudi retaliation through crude oil, although a Saudi pledge to play a “responsible role” and keep markets supplied held down crude prices on Tuesday.

Front-month Brent crude oil futures were at $79.51 a barrel, down 0.4 percent. U.S. West Texas Intermediate (WTI) crude futures were at $69.12 a barrel, dropping 0.35 percent.

Asia’s overnight tumble gave back some of the ground the region had clawed back over the last two sessions.

MSCI’s broadest index of Asian shares dropped 2 percent to a 1 1/2-year low, with declines in many of the region’s heavyweight bourses even more pronounced.

South Korea’s Kospi and Hong Kong’s Hang Seng both fell 3 percent and Japan’s Nikkei lost 2.7 percent.

“We’ve got a few negative factors when market sentiment was already fragile,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management. “And earnings from some Japanese companies were weaker than expected, with some starting to blame trade wars.”

The yen gained 0.4 percent amid the risk-off mood to 112.42 to the dollar.

The yuan was little changed but stood near Monday’s 21-month low of 6.9445 per dollar in the onshore trade on expectations China will pursue looser monetary policy to cope with pressure from U.S. President Donald Trump on tariffs.

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The underlying economic troubles in emerging markets surfaced recently with Turkey, Argentina and India making headlines as their markets tumbled.

Meanwhile, trade tensions between China and the United States have brought an even more cautious tone across international markets.

While the New Zealand stock market has been able to navigate most of these headwinds to date, concerns are growing over the contagion risk emerging markets pose to our economy.

China and emerging markets were, to a large degree, the saviours of the global economy during the depths of the financial crisis in 2008, as their ability to take on debt and stimulate demand helped to support the global recovery.

New Zealand’s connections with China also allowed us to largely sidestep the economic pain felt across the United States and Europe – as the nation became a more important regional trading partner, and credit creation from China and other emerging markets supported domestic property markets.

Now, looking to the future, it may not be trade tariffs that stand to be China’s biggest challenge – but this massive expansion of credit, and the extreme level of both personal and corporate debt it has created.

In an attempt to manage this problem, China’s government has continuously stepped in to stimulate growth, but there are tell-tale signs this has become unsustainable – as it now takes more than USD$4 of debt to generate just USD$1 of economic growth.

Overcapacity is a major issue and poses a significant deflationary risk to the rest of the world as China looks to export their economic imbalances. It’s this threat which has prompted the subsequent push-back from the United States in the form of increased tariffs.

Turning to the emerging markets, many see the growth in US currency and interest rates as the cause of their troubles. In reality, these markets had been showing signs of economic stress for some time before the USD started to strengthen – and the increasing value of the USD is not the cause but a consequence of weakening local emerging market economies and domestic currency imbalances.

Excessive government spending, the likes of which we’re seeing in Venezuela and Brazil, has led to dislocations and loss of investor confidence, followed by a flight of capital that has putting additional pressure on those currencies.

This in turn increases the cost of servicing debts denominated in foreign currencies, predominantly USD – increasing the demand for USD, and helping to drive its value even higher. This cycle feeds on itself and increases the domestic economic risks.

Ultimately, this has caused the breakdown of synchronised global economic growth, with emerging markets being unable to maintain the pace of growth set during the initial years of the current, decade-long global economic recovery.

This could be further amplified by the divergent monetary policies we’re seeing from the central banks of developed and emerging markets – which could further tighten financial conditions in emerging markets, benefiting the US dollar and seeing emerging market economies stagnate.

Domestically, we have seen the NZD devalue by over 15 per cent this year, from its January highs – and despite a cheaper currency, exports have not experienced a major lift, with our trade deficit widening in September.

Australia has experienced a similar depreciation, with the AUD down 15.8 per cent over the same period.

With the combination of this slowing global demand for Kiwi exports, coupled with a weaker NZD and stronger oil prices, this could mean challenging times ahead in the form of greater pressure on businesses and consumers.

While concerns over emerging markets are valid, the good news is that the New Zealand economy is unlikely to fall off a cliff anytime soon – but rather we may experience a period of stagnation as our major trading partners work through their overcapacity and saturated debt levels.