Fixed Income: ECB published EU-wide stress test results

Julius Baer - Lunes, 27 de Octubre

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As the last preparatory step for the Single Supervisory Mechanism to be initiated on 4 November 2014, the ECB published on Sunday the detailed results for all the 123 banks to be directly supervised by the ECB. 25 banks failed the stress test with a total capital shortfall of EUR24.62bn. Of the failed banks 12 have already covered their capital shortfalls, whilst the remaining banks have to submit a re-capitalisation plan within two weeks and cover the shortfalls within six months for the baseline or nine months for the adverse scenario of the stress test. The stress test was the critical element for the ECB. To make the test credible, there had to be some banks that failed. However, if too many banks had failed, the whole European banking system would have been put to question. Having a closer look at the re-sults, Münchener Hypothekenbank (not covered) was the only German bank that failed the test. Not affected were Nord LB and Commerzbank (both not covered) heavily engaged in ship lending. Nine of the failing banks are Italian banks, mainly because they have above-average NPLs*.

Overall the stress test was not as credible as it could have been. Nevertheless, it should restore some confi-dence in the European banking sector. But there are still significant challenges ahead such as the troubled credit transmission channels.

 

Christian Dubs, Fixed Income Research Analyst, Julius Baer

 

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Investment Strategy: The week ahead: how stressful post-stress test, pre-Halloween?

 

Two major scheduled news are already in the bag before the week in finance has really started: the release of the Europe-an Central Bank’s (ECB) asset quality review stress test and the election results in Brazil. Other than that the week is mostly about corporates reporting: 160 US names in the S&P 500 (almost a third of the index) will be reporting and over 80 in the European Stoxx 600. From the macro world, the Federal Reserve (Fed) meeting will garner most attention, likely followed by the US Q3 gross domestic product (GDP) numbers and German Ifo survey data.

 

After the stress test and election results, the next big news are roughly 250 corporates reporting their num-bers in the US and Europe – plus the Federal Open Mar-ket Committee (FOMC) update. Then Halloween will end a spooky month in financial markets.

 

Christian Gattiker, Head Research and Chief Strategist, Julius Baer

 

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FIXED INCOME

 

Russia’s rating confirmed, Ukraine election yields pro-Western majority

 

S&P, the US rating agency, on Friday confirmed Russia’s sovereign credit rating of BBB-, the lowest investment grade and confounding fears of an immediate downgrade to junk. In its regular update, S&P praised Russia’s large currency reserves and net external asset position as a reason to maintain the rating, despite the gloomy economic outlook. The Russian bond market is likely to react positive to the news since a downgrade to non-investment grade by one of the large rating agencies could have sparked selling pressure among institutional investors. Meanwhile the Ukrainian parliamentary elections cemented the positions of the pro-Western parties. Exit polls show the party of President Poroshenko who is pursuing a more diplomatic approach and that of Prime Minister Yatsenkuk who is said to be relying more on domestic power to regain control of the eastern regions combined to gain some 44% of the votes. At 6 o’clock this morning, some 20% of the votes had been counted. It should be noted that elections will be held separately in the Eastern regions next week and it remains open to what extent the Eastern regions regarding this Sunday’s elections is binding for them.

 

The Ukrainian currency UAH traded almost unchanged this morning, confirming that the market had been betting on a pro-Western outcome. Given

the economic malaise and the lack of consensus among the parties how to reform the country, investments in Ukrainian debt must still be regarded as most risky.

 

Markus Allenspach, Head of Fixed Income Research, Julius Baer

 

 

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COMMODITIES

 

Unabated silver supply growth

 

According to the World Bureau of Metal Statistics, global silver mine supply reached a new record in August despite the continued slide in prices. The pace of growth has however slowed from 4.8% during the first eight month of last year to 3.6% this year. Around three-quarters of silver mine supply comes as a by-product of other metals, making it almost independent of the price, while the cash production costs of the primary silver mines – the other quarter –is still below today’s price of around USD 17 per ounce. With no supply cuts on the horizon and industrial demand struggling, the market remains in the hands of inves-tors, which as of late seem to have lost some faith. Holdings of physically backed products have fallen more than 350 tonnes this month, but at more than 20,000 tonnes still represent more than eight months of mine production. Due to silver’s dependence on investment demand it is unlikely to develop its own dynamics and diverge from its close relationship with gold. We maintain a longer-term bearish on gold and silver view but acknowledge short-term upside risks from very bearish sentiment in the futures market. Elsewhere in precious metals, the second poll on the Swiss gold initiative showed supporters in the lead but still falling short of majority with 17% of voters still undecided. We continue to believe a vote in favour of the initiative is unlikely. Nevertheless, it still represents an upside risk to our longer-term bearish view on gold.

 

The silver market continues to face headwinds from growing mine supply and strug-gling industrial demand, leaving it in the hands of investors. We maintain a longer-term bearish view but see short-term upside risks from bearish sentiment.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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