'Systemic risk' theory gains in stature as way to prevent the next bubble - WaPo
Marc Faber: Sit Still, This Is Going to Hurt - Motley Fool
Cash as the real real option, to do anything - Worthwhile Canadian Initiative
Cash piles - Free Exchange
Analysis: New safe-haven currencies shine amid debt fears - Reuters
Temp Jobs Gain as Uncertainty Reigns - Wall Street Journal
The folly of the anti-stimulus consensus - Guardian
The Budget Deficit Chicken Hawks - Truthout
Is America facing an increase in structural unemployment? - Economist
New autoworkers make half as much as veterans in same plant - WaPo
The political genius of supply-side economics - FT Wolfexchange

European Banks Stress Tests: Delight in Details, Headlines Underwhelm

- Headlines vs. Details – "CEBS Stress Tests were announced 23 July. The headlines – number of weak banks (7 out of 91), capital deficit (€3.5 billion), definition of capital (Tier 1 not equity Tier 1), stress of the trading book only for government bonds – are underwhelming. But positives are in the details: CEBS provided a lot of data, in a systematic way, including on banks' sovereign exposures. And aggregate credit loss assumptions and pre-provision profits look sensible."
- Winners & Losers – "Looking at the change in Tier 1 capital ratios between the reported 2009 and the 2011 stressed result, the best performing big banks are from the UK, Spain and the Nordic region. Barclays leads the large caps, with Santander and BBVA high up in the table. Nordea, Intesa, Lloyds and BNP Paribas round out the large caps in the top quartile. If we use absolute stressed Tier 1 levels, the UK and Nordic banks again feature at the top of the table. And French are best of the Euro area."
- Stressing Sovereign Risks – "One obvious omission in the CEBS test is that it explicitly only considers sovereign shocks in the trading book. But the data on sovereign exposure provided by CEBS allows us to carry out our own stress test: capital deficit increases to €15 billion at 24 banks. If we were to use a 6% equity Tier 1 ratio (which is harsher that the US tests’ 6% T1 and 4% equity T1) the capital deficit rises to €63 billion. Note that six of the 91 banks did not give us their sovereign exposures, all from Germany, including Deutsche Bank."
- Sensible Assumptions on Credit, PPP – "While the macro-economic assumptions do not appear to be too tough, the credit loss assumptions do seem sensible. A stressed loss assumption of about double our 2010-11 base case forecast and more in-line with the c4ppt GDP drop in 2009 than the less than c1ppt cumulative drop assumed for 2010-11 stressed. And the aggregate CEBS stressed loss number is almost identical to our early June stress test of a dozen Euro banks. Similarly, CEBS' aggregate stressed pre-provision profit for these dozen banks is almost identical to our modelling."
- Rallying Into The Release – "Euro Area bank stocks are up c25% from their early June lows, while bank credit, as measured by iTraxx indices, have recovered about two-thirds of their sell-off during 2Q10. The positive recent momentum may be reinforced by the CEBS Stress Test release, especially due to the positives on information and transformation. We would look to Euro area stocks which have been laggards ytd and score well in the CEBS test, such as SocGen, Intesa and BBVA (all down c25% despite the recent bounce). Others are up more sharply recently, such as the Greeks, mid-cap Spanish and Santander, where we would
worry more about travelling and arriving."
Citigroup European Banks Stress Tests 20100726

Don't knock the Stress Test, but capital raising opportunity missed

- "The CEBS stress test result is of limited value to us as expected by the market. However, it offers new input data transparency especially on sovereign risk exposure - this is positive. Hence, with CEBS data we are able to build a JPMC Acid Test for 35 banks incl. banking book
sovereign haircut with 13 out of 35 banks falling below core T1 6% in 2011E with €8.7bn capital deficit without adjusting for €35bn of gov’t support."
- "However, the CEBS stress test is also an opportunity missed, as EU member states could have encouraged banks to raise equity i) as core Tier I ratio remains low at 7.4% 2011E in our JPMC Acid Test, and ii) to demonstrate to the debt investor ability to access the equity capital markets."
- "Why do we equity holders need happy bank debt investors? The missed equity capital raising opportunity becomes even more relevant when focusing on the upcoming material refi calendar with €245bn senior debt refi remaining (35%) compared to total 2010 €707bn outstanding FY2010 senior refi. Senior debt redemptions remain high in Eurobanks at close to €690bn in each year 2011 and 2012. In addition, within the covered bond market we have €162bn refi remaining or 36% this year."
- "Time for bank differentiation post CEBS stress test: It is interesting to witness the credit market differentiating between quality of issuer whereas Eurobanks are mainly clustered close to 1.0x 2011E NAV. We expect CoE differentiation to start to take place slowly among banks with i) well capitalized banks re-valuing to over 1.0x, and ii) high cashflow generative
banks with low P/pre-provision profits to outperform. The CEBS Stress Test is on a static balance sheet, resulting in material RWAs due to credit migration increases, which is conservative, and helpful in our analysis to differentiate between bank valuations."
- "Within the Eurobanks our preference is for IB geared private banks over credit banks with Fixed Income rates volatility high, low sovereign and traditional credit risk exposure compared to traditional banks with ongoing concern and uncertainty in respect to European traditional credit provision run-rate in 2011E. Within credit banks we prefer high cashflow
pre-provision banks with preference for non-EU exposure. Hence our top picks are: CSG, UBS, DnBNor, HSBC, UCI, SG. We remain cautious on Spanish Banks."
JPMorgan European Banks 20100726

Happy now?: Four questions on the European banks’ stress test

- Question 1: Will the sector bounce strongly? "The US bank sector surged 70% around
the time of its stress test, but we do not think Europe will follow suit. The US stress test proved the catalyst for massive equity recapitalisations, coincided with an economic recovery, and was performed on a sector trading one-third below its long-run valuation. We believe the July 2010 European stress test is unlikely to lead to any meaningful capital raising, was released at a time of growing economic uncertainty, and has been conducted on a sector trading within 10% of its long-run valuation."
- Question 2: Is the test credible? "We give a qualified “yes”. Two year loan losses of 3.6%
represent 30-year highs for the sector but are dwarfed by the US’s 9% stressed level. Whilst such comparisons can be misleading, there does appear to be more individual bank “wiggle room” for European banks, which we see as disappointing. In addition, pre-provision profit assumptions feel optimistic. There are substantial differences by country; in Spain, for example, the assumption is for a cumulative decline in commercial property prices of 55%, yet for just 7% in Greece. This may reflect an element of delayed recognition in Spain. The absence of testing for full sovereign default is understandable, but new disclosure allows investors to conduct their own stress test."
- Question 3: Who was the stress test done for? "Our view is not for us in equities, but for the debt markets. Whilst the US test last year was conducted in the shadow of nationalisation risk, this test was prompted by a renewed funding crisis. Indeed shareholders’ equity has not even been tested. So what is the debt market likely to make of it? We see a “cautious welcome” as the likely view."
- Question 4: Will funding costs come down? "This is perhaps the key question. To the
extent that the market feared what it did not know, the full sovereign risk disclosure is likely to be a positive. However, much of the sector’s funding pressure is, in our view, structural: too many balance sheets (banks and sovereigns) chasing too few funds. With or without a stress test, Europe’s banks still have €1.5trn of debt maturing by 2012, as well as the need to repay over €500bn to central banks. Well-capitalised banks with limited exposure to SGIIP (Spain, Greece, Ireland, Italy, Portugal) sovereigns, such as HSBC and BNP Paribas, should continue to be best placed to benefit. Of the big caps in Europe, BBVA appears to us the weakest positioned. We suspect structurally higher overall funding costs – and the differential in costs among banks – are set to remain."
Barclays Equity Research 20100726

European bank stress test results: A systemic positive, despite the oversights

- "We were biased to being long risk going into the tests: expectations were low, worst-case capital holes could, in our view, be filled within the scope of existing facilities, transparency would be a major positive, and weak banks would be forced to recapitalize. We believe the tests fell short in many respects, but we nevertheless have a positive view of the outcome. On the one hand, the tests exceeded expectations concerning disclosure of sovereign bond holdings. The majority of banks should be able to fund more cheaply. On the other hand, the tests were not stringent enough. Investors will perceive the banks that barely passed to be
undercapitalized; we expect poor spread performance from those names and they are likely to continue to face high funding costs."
- "In our view, the positives (creation of transparency) outweighs the negatives (too little forced capitalization). The majority of European financial risk in credit indices has been issued by banks that cleared the tests by a wide margin, where capitalization is not a concern, and where transparency is a key positive. The risk to our view is that, while systemic fears are likely to subside, the soft-handedness of the stress tests are likely to leave concerns over the capitalisation of some specific institutions – and that these idiosyncratic problems become so large that they overwhelm the systemic benefits."
Barclays Credit Research 20100726

First look at 2012

- Looking out to 2012 "We expect the global recovery to continue in 2012 and for the pace of growth to pick up."
- United States Further out: a brighter outlook "Near term there is some weakness but beyond the year ahead we see stronger growth."
- Europe The slow and hazardous road to recovery "Ongoing financial market tensions and restraining effects of fiscal consolidation are why."
- Japan Lowering forecasts "We now see 2011 growth of 1.5%, given increasingly difficult conditions for exporters."
- Asia Rebalancing in 2011-12 "We see strong domestic-led growth, with China growing more than 10% again in 2012."
- LatAm: Strong growth set to continue "We see growth in 2012 returning to trend after a weaker 2011."
- United States Understanding the ECRI "The ECRI index is signaling recession, other leading indicators are not. We explain why."
- United States Forecast dispersion and data surprises "For some indicators the dispersion of consensus forecasts contains information."
- South Korea Policy remains accommodative "We expect the BOK to keep hiking rates gradually, reaching 4% by H1 2012."
Nomura Global Weekly Economic Monitor 20100723

Rates De-stress as Summer Begins?

- "Yet US rates still head into month-end with a tight & low range?"
- "It now appears that the consensus has come around to our view that rates, especially at the front end, could remain anchored for some time and that a further flattening of the curve is likely."
- "The summer doldrums seem to be fast approaching with the Fed and the EU stress tests now out of the way, leaving the search for themes tougher than ever. Our core view hasn’t changed and the slow pace of the next few months should keep our central themes intact."
Nomura Rates Radar 20100723

It’s not for a lack of US demand

- The ongoing US inventory build is not for a lack of US oil demand "US petroleum products inventories built for the seventh consecutive week, according to the US Department of Energy (DOE). While this would seem to be consistent with the recent slowdown in the pace of US economic growth, the build in US petroleum products is not due to a lack of US oil demand, in our view, but is being driven by extremely high crude runs by US refineries. In fact, US oil demand growth remains strong, averaging 563 thousand b/d year-over-year in the last four weeks, and US export demand – particularly for distillate – continues to strengthen and is now approaching the record levels reached in the summer of 2008, when oil topped $145/bbl on the back of strong global distillate demand."
- Chinese oil demand continues to reach new highs "Chinese total petroleum demand reached 9.21 million b/d in June, the highest number on record. China has also imported yet another record amount of crude oil in June, rebounding from relatively weak May levels.
Importantly, while Chinese petroleum demand growth had been primarily driven by demand for so-called other oil products, it is now shifting more towards transportation fuels such as diesel, gasoline and jet fuel. Diesel accounts for almost 40% of Chinese demand growth in June, while motor gasoline accounts for 22%."
- The IEA gives its first look at 2011 supply and demand "The IEA has recently reported its first outlook on 2011 demand and supply, forecasting non-OPEC supply to grow at 300 thousand b/d year-over-year in 2011. In contrast, we expect non-OPEC supply will actually decline by that amount. This difference arises from differing expectations for several
key areas, notable: Norway, Egypt, Azerbaijan, Columbia, Russia and Brazil."
GoldmanSachs Energy Weekly 20100726

Presenting Our New Scenarios and Optimized Portfolios

- "Our new three-month curve and spread scenarios are dominated by a bullflattener,
positing the economy on a trajectory towards a double dip, and a bearish scenario, steepening sharply at the front end, that figures in improved economic data. The other two, more mild, scenarios are also a bear-steepener and a bull-flattener. With the Fed likely to be on hold for an extended period, the curve is anchored at the front end."
- "We recommend our Maxmin portfolio for the next three months. We project it will outperform the BIG Less Credit Index by 0.06–0.07% across our scenarios. Our solutions take advantage of the steep Treasury curve to garner roll-down return. Recognizing tight spreads and a bias towards wider spreads in our scenarios, our portfolios tend to underweight mortgages."
- "We glean the following themes from the analysis of our new scenarios:
• Duration and Curve. Our optimized portfolios tend towards being long duration. With the curve steep, taking advantage of rolldown is a common theme. To that end, the Maxmin portfolio holds large positions in six- and 30-year Treasuries. Nine- and 3.5-year Treasuries are also popular for garnering roll-down return. Overweights in the 30-year part of the curve take advantage of 10s/30s flattening in three of our four scenarios.
• Spread and Convexity. Our Maxmin and hedged portfolios are short spread duration and avoid negative convexity. The portfolios tend to overweight agencies on a market value and spread duration basis –underweight bullets on a spread duration basis but maximally overweight callables. The solutions underweight mortgages on a market value and spread duration basis.
• Maxmin Portfolio Performance. Our previous recommended portfolio, the Maxmin, trailed the index by 0.12% over the period. Being negatively convex and the rally in rates accounted for most of the underperformance. As expected, carry boosted returns."
Citigroup Bond Portfolio Analysis Quarterly 20100721

Market implications of the European stress tests

- "Only 7 of 91 banks failed the European stress tests published by the Committee of the European Banking Supervisors (CEBS) on Friday. While this put into question the severity of the stress tests, the results are close to market expectations based on what has been leaked from the National Supervisors in recent weeks."
- "The amount of disclosure was the positive surprise. Most banks, apart from a few German banks, have released detailed information about their sovereign debt exposure. This may aid the market in differentiating between banks’ risks."
- "However, we do not expect the stress tests to be the big game changer in Europe. With the apparent weakness of the stress tests, financial markets are probably not convinced that the European bank sector as a whole has sufficient capitalisation."
- "In Europe, confidence in the banking sector and in the sustainability of public finances are highly interwoven and in that sense restoration of confidence in peripheral countries in particular will still depend on Europe’s ability to convince the market that a sovereign default is unlikely."
- "The market reaction in US trade Friday evening was slightly positive after some initial jitters. EUR strengthened slightly and European banks traded in the US ADR market gained modestly. As a direct consequence of the release of the stress tests the Bund future lost around 30 cents (around 3-4bp in 10Y yields)."
- "On balance we regard the stress tests as slightly positive, but a significant near-term reduction in the risk premium levied on the single currency appears unlikely. The market impact could be slightly positive for risky assets including peripherals’ government bonds."
DenDanske Research Euroland 20100726

LatAm: sustained growth in activity

- "Economic activity continues to grow, with a surprise from the EMAE (Monthly Estimator of Economic Activity) in Argentina, good data on construction and durable goods in Colombia and Peru, and an increase in credit in Peru and Venezuela. Internal demand is growing in Mexico, although it is still quite slow. In Brazil the Central Bank raised its reference rate but only by 50 basis points instead of the 75 bps expected a few weeks ago, while Argentina and Peru are taking measures to prevent their currencies from strengthening."
- "Financial assets in the region performed well, despite greater global volatility. Although international markets were volatile, financial assets in the region performed well, in general, and reacted to monetary policy measures (Brazil), announcements of currency intervention (Peru), the bond bidding schedule (Chile), and corporate results (Brazil and Mexico)."
BBVA Latin Weekly Observatory 20100723

Asia’s robust growth indicators begin to moderate

- Asia’s robust growth indicators begin to moderate… "In a week that was light on data releases, our attention was focused on Taiwan’s export orders which, while still robust, show signs of slowing. This is in line with our expectations of a slower H2 for the region as the global inventory cycle and impact of policy stimulus wears off. Last week’s release of China’s strong, but slowing, Q2 GDP reinforces this view."
- …while inflation temporarily eases ""A number of recent inflation releases for June show moderation for the time being. China, Korea, Thailand and Singapore, for example, have all posted lower-than-expected inflation over the past month.Nevertheless, many central banks in the region appear ready to continue normalizing interest rates from very low levels in order to preempt rising underlying inflationary trends."
- Markets rebound on improving European sentiment "Asian currencies and equities were supported by a modest decline in global risk premiums."
- In the coming week…. "Korea’s Q2 GDP outturn is expected to reveal another strong quarter of growth, while markets will watch for CPI releases in Australia and Japan as a guide to the future course of monetary policy. The Reserve Bank of India will hold its next scheduled policy meeting on July 27, with expectations of another rate hike."
BBVA Asia Weekly Watch 20100723


Deflation Defies Expectations—and Solutions - Wall Street Journal
Ratings Understate `Dangerous' Chinese Local Government Risks - Bloomberg
China Banks Said to See Risks in 23% of $1.1 Trillion... - Bloomberg
Chinese banks face state loans turmoil - Financial Times
Portuguese debt office agrees to post collateral to its dealers - Risk
Bank of England Takes First Step to Nationalizing Consumer Credit - Minyanville
Debating the Securitization of Mortgages - Economix
Deflation: Pay Close Attention - Seeking Alpha
U.S. may face deflation, a problem Japan understands too well - Los Angeles Times
Goldman Sachs Relied on Citigroup, Lehman for AIG Protection - Bloomberg
Gift From Fed Stops as Profits Shrink at Banks Led by JPMorgan - Bloomberg