Stay Calm and Carry On: Results of the ECB’s Bank Reviews and Stress Tests

Euro Currency Bank NotesOn Sunday October 26th 2014, the ECB released the results of the Comprehensive Assessment (CA) – which encompassed the Asset Quality Review (AQR – which covered all large banks in the Eurozone) as well as Stress Tests that also included UK and Nordic banks. The exercise has been the most rigorous ever undertaken in Europe to date (it comes ahead of the ECB becoming the Single Supervisory Mechanism in November). The number of people involved, files reviewed and proportion of loan books examined dwarfs any previous exercise in Europe (or in the US or Japan).

Garrett Walsh, Pioneer’s head of Credit Research Europe, provided some analysis of the results in a recent Investment Talks. Here’s a summary: Continue reading

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Last Week in the Capital Markets: Equities Bounce, Bonds Simmer Down

Illustration of a statistics boardAfter four consecutive down weeks, the S&P 500 Index returned 4.2% last week – its biggest weekly gain since January 2013. Earnings reports (IBM and Amazon were notable exceptions) were generally above expectations (75% beating versus 66% normally), but a rebound from last week’s bottom (a capitulation) helped. Ebola in New York and two “terrorist” attacks in Ottawa were only speed bumps for the market; the fact that Ebola apparently didn’t spread in Spain or Dallas was a positive. Continue reading

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A Wild Ride in The Markets Last Week

Hair Pin Bend SignMargin calls? A short squeeze? A panic? Whatever the combination, it was a wild ride in the markets last week.

  • Bond yields rode a roller coaster, ending slightly lower. The Barclays Aggregate and BoA Merrill Lynch High Yield (MLHY) Indices each ended the week up about 0.4%, but not after experiencing some turmoil. The option adjusted spread (OAS) of the BoA ML HY Index ended the week up 2 bps at 4.65%…but it widened by over 40 basis points (bps) mid-week before falling back. The 10-year Treasury fell almost 50 bps mid-week before rebounding to end 9 bps below its start. The 10-year TIP yield ended 5 bps lower. Japanese 10-year yields fell 3 bps to 0.47% and German 10-year yields fell 2 bps, to 0.82%. Peripheral Eurozone sovereigns sold off sharply, with Greek 10-year yields rising over 125 bps.
  • The S&P 500 Index ended the week down 1.0%, but—after sharply underperforming over the prior month—cyclicals outperformed defensives. Industrials (+2.3%) and Materials (+0.7%) led while Health Care (-2.3%) and Consumer Staples (-2.2%) lagged; the Russell 2000 Index gained 3%. The MSCI Europe Index gained 0.2% in US dollar terms, the MSCI Japan was down 4.3%, and the MSCI Emerging Markets Index was down 1.3%.
  • Currencies: The dollar gave up a little more of its recent gains. The euro and Yen each gained roughly 1% against the dollar last week; the Yuan inched up. Other emerging market (EM) currencies were mixed.
  • Commodities: Oil prices fell sharply again. WTI fell to below $82 mid-week, ending around $83. As noted last week, supply is exceeding demand. Gold was relatively quiet, ending up $15 to $1,234.

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When it Comes to the Markets, Maybe Some Rain is a Good Thing?

Close up of water droplets on leaf

Not surprisingly, we’re seeing a market correction. My metaphor for this is – If you go a month without rain, you’re due for some, but there can be no certainty about when it will actually start raining. We’d gone a long time and a long way without a correction and a lot of people were nervous – poised to sell – but there are also people saying they are waiting to buy the dip, but not willing to catch a falling knife – a perfect set-up for a correction. The VIX futures curve has inverted, which is often the sign of a near-term bottom.

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A Strong Employment Report…But Not Strong Enough to Change Fed Policy

Architect Looking out of Window

Last month, I said the “weak” job report would not deter the Fed. Despite a strong monthly employment record for September, the Fed did not accelerate its pace of tightening. The data can be volatile, and seasonal factors (e.g. local schools and automakers) are sources of noise.

For Capital Markets, it was Another “Risk-off” Week

  • Currencies – the dollar is king for a week. The U.S. dollar rose against the euro, yen, pound sterling, Swiss franc and the Canadian and Australian dollars.
  • Treasuries rallied again as investors continued to seek safety as inflation expectations fell. The 10-year Treasury yield fell 9 basis points (bps) to 2.45% and the 10-year TIPS yield fell 5 bps to 0.52%. The spread – a proxy for expected inflation – declined again.
  • High yield bonds again found support after a sharp sell-off. Retail investors may be selling on fear, but institutional investors seem to like the spread/default risk trade-off.
  • Stocks rallied Friday, but ended the week down. The S&P 500 Index ended the week down 0.8% (-1.6% for the month, +0.6% for the quarter). However, the MSCI EAFE and MSCI Emerging Markets Indices fell roughly 3.4% and 2.6%, respectively.
  • Commodities. Gold fell almost 2%. Oil was down roughly 4%. WTI oil fell below $90 for the first time in 17 months, as Libya reported strong supply growth and Saudi Arabia unilaterally cut the price of its oil. A price war appears to be breaking out within the OPEC cartel.

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