10/27/2014 THE BIG PICTURE Capital shortfall of €25 billion at 25 banks, while twelve have already covered their capital needs The European Central Bank unveiled on Sunday that 13 out of 130 largest Eurozone banks will need to raise additional capital in order to survive another financial crisis. The results come less than two weeks before the ECB take over supervision of the major Eurozone banks on Nov. 4. A total of 25 banks technically failed the comprehensive assessment – which consisted of the asset quality review (AQR) and a forward looking stress test of the banks - , but most have already taken steps to solve their capital shortfall problem. The tests are part of an effort to restore confidence towards Europe’s financial system and to reassure investors and the public that the region’s lenders are on solid ground. At the same time, in another report, the European Banking Authority published the results of the 2014 stress test to assess the resilience of EU banks to adverse economic developments, where 14 out of 123 banks fall below the defined capital thresholds. Nevertheless, following the results several questions remain to be answered. ECB’s AQR showed the carrying values of banks’ assets as of 31 December 2013. Have the values changed since then? The stress test scenarios did not include the Eurozone’s deflation risk and thus the situation may be underestimated and more banks could need capital. Now that the majority of the banks passed the test, will there be more demand in the second LTRO (Long-Term refinancing operations) allotment in December? Will the banks start to lend in order to boost the region’s economic growth? And one of the most important questions yet to be answered is the size of the possible demand for those loans. The banks have no incentive to take the ECB loans unless they can use them to generate profit. Despite the remaining questions which could be answered in next week’s ECB meeting, the euro started the week with a very small gap up against the dollar as the results scaled back concerns about the health of the region’s banks. I believe that unless the uncertainty lessens, weakening fundamentals are expected to weigh on the currency. During early European morning the greenback was lower against almost all of the currencies we track except RUB, probably due to the fact that pro-western parties seems to dominate the country’s parliamentary elections Sunday. Today’s indicators: The main event will be the German Ifo survey for October. All three indices are expected to have declined, in line with the fall in the ZEW survey earlier this month. This could add to evidence that the German recovery is petering and may put down pressure on the common currency. Eurozone’s M3 money supply is forecast to have risen 2.2% yoy in September, from 2.0% yoy in August. This will push the 3-month moving average to accelerate if the forecast is met. The European Central Bank is expected to reveal how much it spent on covered bonds since the program began on Oct. 20. Later from the US, the preliminary Markit service-sector PMI for October is anticipated to have declined a bit but to remain in relatively high levels. The preliminary composite figure is also coming out. Pending home sales for September are anticipated to accelerate, a turnaround from August and in line with the yoy rate which is projected to rebound as well. The Dallas Fed manufacturing index is also released. As for the rest of the week, the highlight will be the FOMC rate decision and the projected announcement to end its asset purchases program on Wednesday. Following the comments by St. Louis Fed President James Bullard that the Fed should consider continuing with its bond-buying program it remains to be seen whether the Fed will end its QE program. On Tuesday, Sweden’s central bank meets to decide on its key policy rate. Following Riksbank’s unexpected 50bps rate cut in early July and given that the country’s economics haven’t improved, the Bank is expected to cut its main policy rate by another 15bps in order to boost the economy and fight deflation. Later in the US, durable goods for September are expected to take center stage and to rebound from their biggest drop. On Wednesday, despite the FOMC rate decision, the Reserve Bank of New Zealand meets to decide on its key interest rates. The Bank is anticipated to leave its policy rate unchanged at 3.5% and Governor Graeme Wheeler could reiterate the view that the exchange rate has yet to adjust materially to the lower commodity prices and that its current level remains “unjustified and unsustainable”. On Thursday the preliminary German CPI for October is forecast to rise from the previous month. As usual the drama will start several hours earlier when the CPI for Saxony is released ahead of the country’s headline CPI. From the US, we have the 1st estimate of GDP for Q3 which is expected to show a rise of +3.0% qoq SAAR, down from +4.6% qoq SAAR in Q2. The 1st estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have declined from the Fed’s 2% target. Finally on Friday, the Bank of Japan ends its two-day policy meeting. On Thursday, the Ministry of Finance sold 3-month T-bills at an average yield of -0.0037%, the first time that a government auction in Japan has resulted in a negative yield. This comes as a result of the massive easing program by the BoJ, which has created a shortage of paper in the market. Thus we could see further action from BoJ. As for the indicators, Japan’s national CPI for September is released, while usually not market affecting, if weak it could give extra reasons for additional stimulus from the Bank of Japan. In Germany, retail sales for September are due out. In the US, we get the personal income and personal spending for September, as well as the PCE deflator and core PCE for the same month.
Posted on: Mon, 27 Oct 2014 10:49:41 +0000
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