Sunday, 19 August 2018

Who's crowing over the AQR?

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Anthony Peters on stress tests, worries over ECB ABS buying and oil’s rebound.

So we have the results of the Asset Quality Review. I shall desist from going into details I am sure that those who need to know them will this morning be swamped with research notes which all say the same thing while those who don’t need to know can rest assured that all is well in the garden.

Although 25 banks failed the review, capital raised by 12 of them since the snapshot of their balance sheet was taken is deemed to have put them on-side again. When dynamic balance sheet assumptions are applied, there are eight or less left with work to do.

This all prompted Jeroen Dijsselbloem, Chairman of the Eurogroup, to comment “I definitely think the banking crisis is behind us”. Well done that man – 10 out of 10 for perceptiveness! This was echoed by political leaders across Europe who all crowed with satisfaction as to the fine position which their respective banking industries were in. Such a shame they didn’t think about this 10 years ago while they were busy garnering dividends from public sector banks and basking in the reflected glory of staggering fiscal revenues generated from the commercial banking community.

The one level of scepticism which will no doubt remain will be when it comes to assessing the macro-economic scenarios used for the stress tests. Was the risk of protracted deflation adequately covered? Did the recessionary scenario go deep enough? Did it include a 2-degree rise in global temperatures or even the resurrection of Hugo Chavez?

I think it is fair to say that the ECB spoke softly while showing the big stick and that, as a whole, we can be satisfied with the outcome. My guess was, and is, that most of what we have been handed in writing was already known. Markets had already discounted the news (which is not new and therefore should perhaps be termed “olds”) and that we can now move on in the renewed knowledge that big exercises like this one almost always produce the desired result. Next!

ECB flexes the ABS

Today the ECB will reveal for the first time what it has achieved in the first found of ABS purchases. The programme remains controversial and now Sabine Lautenschlaeger, a full-blooded BuBa beast although a member of the ECB Executive Board, has again raised the points that “I have no problem with conventional measures such as interest rate cuts, or liquidity injections.” She went on: “If we’re talking about large-scale purchase programs of securitized loans, the famous ABS program, or even purchasing government debt on a large scale, then I see that more critically. For me, the balance between cost and benefit is at the moment negative… On top of that, I’m a bit concerned about the incentives that we’re now setting for governments that have to create more growth in the euro area with structural reforms and budget consolidation.” I’m afraid I couldn’t agree more.

Listening to the self-congratulatory tone of the politicians in the aftermath of the AQR, you’d have though it was “Mission Accomplished”. It’s 11 years since said claim was pronounced in Iraq and look where that got us. Each time the ECB does something dramatic, the political class declares that finally all matters have been resolved. Has anyone been to Cyprus recently? I rest my case.

Oiled up

Meanwhile, it feels as though oil has done its thing with Brent having bounced off the low of US$83.78pbb to close on Friday at US$86.16. I have a gut feeling that we might have seen the bottom. There has been a lot of speculation with respect to pressure which the United States is supposed to have put on Middle Eastern producers to pump up output in order to depress the price and this put pressure on Russia to come to the negotiating table. Recent rhetoric coming out of the Kremlin seems to display roaring indifference – the well-being of the people has not often featured notably in the thinking of Russian leaders going back at least to Katherine the Great – and squeezing the Russians where it is supposed to hurt is showing little effect.

Remarkably, on the flip-side, there is a school of thought which has the Russians engineering the collapse in energy prices in order to undermine the economic viability of fracking, i.e., the new-found energy autarchy of the US. Thus the long-running rally in the dollar, the chart of which is near as dammit identical to that of the oil price, is also stalling. Pays yer money, takes yer choice.

This feels like it could be a decent week for risk assets. Markets soon get tired of being bearish and unless they’re is an adequate news-flow to push them lower, they are surely set to recover some of the lost ground. Still, I can’t see them returning to the highs of the summer. Look for something in the region of 320 as a target for the end of the week on the S22 iTraxx Xover. Equity markets I find harder to read and, when Murphy’s Law is applied to my trying to second guess stock markets, I do best to shut up.

But you can, I’d think, cautiously buy oil, buy credit and buy the euro.

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