Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Capital Markets, Economy

Waiting on the central banks


Posted on August 31, 2012

The story for markets and investors during August has been “the calm before the storm”.

Investors on both sides of the Atlantic are betting on more stimulus from central banks this month that can maintain this summer’s powerful rally in equities, corporate bonds and commodities.

    Equities climb on easing expectationsClick to enlarge

    Traditionally, September marks the return of many financiers from holidays and market activity kicks into a higher gear. This year, flows and sentiment in the coming two weeks will be dictated by a calendar bristling with events that includes central bank meetings, European elections, court rulings and crucial economic data.

    With key markets in the US and Europe firmly higher on the year, the paramount risk is that the Federal Reserve and more importantly the European Central Bank and eurozone governments disappoint markets.

    “Our bias at the moment is that there is scope for at least mild disappointment in September, if not something more extreme,” says Neil McLeish, head of fixed income research at Morgan Stanley.

    A sense of this was conveyed on Friday as Ben Bernanke indicated the Fed could embark on large-scale asset purchases, or QE3, should the economy warrant further help at the yearly symposium of central bankers in Jackson Hole.

    “While he did not give an explicit nod for QE3 in September, he made a strong case for QE as a tool for generating growth,” says Millan Mulraine, strategist at TD Securities. “This is a clear indication that this remains the key approach under consideration, and reaffirms the bias for large scale asset purchases among other Federal Open Market Committee members.”

    In the wake of Mr Bernanke’s speech, government bond and equity markets across Europe and the US briefly trimmed their early gains, as investors expressed disappointment at the lack of a definitive start date for QE3.

    “After the Bernanke speech, the QE decision remains very data dependent, but it seems the economy needs to show signs of acceleration if another round of QE is to be averted,” says Alan Ruskin, strategist at Deutsche Bank. “I think the US equity market has either the benefit of stronger US data coming down the pike, or QE3, and is relatively well protected, so this is good for macro risk.”

    There are plenty of reasons for the Fed to sit back and watch with policy makers and investors left eyeing next week’s US jobs data and the ECB governing council meeting. This is followed a week later by a ruling by Germany’s constitutional court on Europe’s new bailout fund, while the Fed concludes a two-day meeting on September 13.

    Moreover as central bankers were set to discuss ideas over the weekend against the backdrop of the Teton Mountains, the most acute topic remains that of the eurozone and what role will be played by the ECB in the coming weeks.

    Among the issues Mario Draghi, president, has still to resolve are the terms of the ECB’s engagement in bond markets – and how the ECB will react if eurozone governments renege on reform pledges.

    While attention has focused on the ECB’s theoretically unlimited firepower, investor optimism of an imminent breakthrough in the eurozone debt crisis has waned.

    Mr McLeish warns: “In Japan we saw cycles of crisis, then a response, followed by an improvement and then complacency. We have had similar cycles in the eurozone in the past few years. It doesn’t mean you get no progress, but you only make progress after going through this cycle.”

    Mr Draghi has said the launch of an enhanced bond-buying programme would be conditional on relevant governments accepting conditions set out by the European Financial Stability Facility or its permanent successor, the European Stability Mechanism.

    But Germany’s constitutional court in Karlsruhe could throw a spanner in the works on September 12, when it will rule on the ESM’s legality. While the court is not expected to block the ESM’s launch, it could insist on greater safeguards for German sovereignty.

    Germany’s Bundesbank is, meanwhile, voicing public opposition to bond buying by the ECB, which it fears will generate long term inflation risks. Mr Draghi, however, will be able to put that potential problem to one side this weekend. Jens Weidmann, Bundesbank president, is one of the few ECB governing council members who will be in Jackson Hole.

    The topic of Europe and its consequences for global trade and markets was mentioned by Mr Bernanke in his remarks on Friday.

    “Some recent policy proposals in Europe have been quite constructive, in my view, and I urge our European colleagues to press ahead with policy initiatives to resolve the crisis,” noted the Fed chairman.

    Against that uncertainty, it would appear Mr Bernanke and the FOMC have QE3 parked on the runway.

    “The European financial crisis remains the single largest threat to both the domestic and global economy,” says John Brady, senior vice-president at RJ O’Brien. “Using the QE3 bullet too early has more downside than upside, and the Fed needs the flexibility to react to events in the coming months.”