Wednesday, July 21, 2010

European Bank Stress Tests Said to Describe Three Scenarios

By Meera Louis and Jann Bettinga - Jul 20, 2010

European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors.

Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes “sovereign shock,” according to a template prepared by CEBS for the banks and obtained by Bloomberg News.

In the last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document that was dated July 15.

Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.

The sovereign-shock scenario doesn’t assume a European nation will default, said a person with knowledge of the matter, who spoke on the condition of anonymity because the information is private. Instead, it will assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.

EU Stress Tests

CEBS coordinates national banking authorities and makes policy recommendations to the European Union on regulation. Spokeswoman Efstathia Bouli declined to comment.

EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a recession and a decline in the value of their government bond holdings. They are using the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal.

The banks may publish how much they will need to raise in capital if their Tier 1 ratio, a key measure of financial strength, falls below 6 percent under the sovereign scenario, the draft shows. Lenders will also provide estimated loss rates for their corporate and retail holdings for the adverse cases, according to the template.

Tuesday, July 13, 2010

Greece provides an opportunity to sell the EUR

Posted by Dean Popplewell at 6:16 am EDT, 07/13/2010

Moody’s paranoia of being forgotten decided to downgrade Portugal two notches to A1 this morning. This has given the Euro-zone sovereign debt crisis top-billing again, surpassing the disappointing ZEW Business survey from Germany, which did not fall, but plummeted from 28.7 to 21.2. All this negative news has hit a market that was already looking for safer heaven trading ideas after China made it clear that it will halt any property speculation and on fear that their GDP report on Thursday will show that their economy is slowing down. Global sentiment again has taken a hit. Will earnings season save the day? Solid demand for the Greek bill auction has given the EUR some support, but sellers are lurking.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

The market yesterday felt motionless ahead of this week’s earnings report and tomorrows US sales data. Investors are looking for some ‘concrete’ guidance before they go out on a limb again. The US trade deficit has been virtually unchanged for the last three months and analysts do not expect much movement in the May report either. Consensus is pegging this morning’s headline print just above the -$40b mark again, as a price related decline in petroleum imports will be negated by an increase in the non-oil deficit. The market is anticipating solid gains in both the import and export non-petroleum gains, but with a greater weighting on the imports category. Digging deeper, the ‘nominal deficit is expected to be restrained by lower oil prices, while the ‘real’ should rise.

The USD$ is higher against the EUR -0.44%, GBP -0.24%, CHF -0.15% and lower against JPY +0.21%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.52%. All good things temporarily come to an end and that includes the loonies advance after stellar fundamental reports of late. Last weeks unemployment report blew all analysts estimates out of the water (+93k), but with equities floundering temporarily reduced the appeal of growth based currencies. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates (+0.50%) somewhat or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. The futures market has priced in a 0.25% hike by the BOC next week. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD has continued its slide for a second consecutive day, retreating from its highest level in three weeks amid speculation that the recent rally was overdone and before Chinese GDP reports that analysts expect will show that their growth is slowing, thus damping demand for higher-yielding assets. Currently the AUD is running out of momentum, and the market expects to see more of the same this week. Last week we saw that there was nothing better to drag a currency higher that strong employment numbers. This week, economic sentiment seems to rule the coop. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. However, that been said, the currency pressure is coming mostly from investors who want to own safer heaven position. On the crosses especially, like AUD/JPY one can expect further pressure being exerted. For now, speculators will be better sellers on upticks (0.8753).

Crude is little changed in the O/N session ($74.94 -1c). Crude prices felt the heat yesterday, declining from a one week high as investors locked in profits. Earlier, the commodity rose on the back of China’s import fuel data (net imports +2m-metric tones to +22.14m), setting up the market nicely to offload winning positions ahead of an anticipated softer US sales data tomorrow. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation the country would sustain its economic recovery’. The earning’s season and an equity market finding it difficult to maintain traction will pressurize commodities, as will cooler weather being predicted coupled with no threats of hurricanes in the Gulf of Mexico. Last week’s EIA report revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions with speculators preferring to sell on rallies.

The ‘yellow metal’ had the largest rally on Friday in three week’s as investors demanded the commodity that had been trading close to its technical lows for a few day’s. Investors continue to weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). Yesterday, with consolidation the name of the game, the metal pared some of its advances on speculation that a strengthening dollar will erode demand for the precious metal as an alternative asset. Technically, the bullish sentiment has been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175-80 is broken. Year-to-date, the commodity has gained +11.5% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,204 +$5)!

The Nikkei closed at 9,537 down -11. The DAX index in Europe was at 6,149 up +72; the FTSE (UK) currently is 5,230 up +63. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.05%) and are little changed in the O/N session. Debt prices remain soft on the back of investors diminishing concerns that the US will slip back into a double dip recession and also on investors radar, is the US governments auction of $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b). Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2, warrants dealers to cheapen up the curve and keep 10-year yields above the +3% level to take down product. With the current market sentiment dealers will want to sell product on up-ticks.

Wednesday, July 7, 2010

EU Stress Tests Will Cover 91 Banks, Assume Bond Value Drop

By Ben Moshinsky - Jul 7, 2010

European Union regulators are carrying out stress tests on 91 banks, accounting for 65 percent of the area’s banking industry, to examine whether they can withstand a shrinking economy and a drop in government bond values.

The lenders being tested include 14 from Germany, six from Greece and four from the U.K., the Committee of European Banking Supervisors said in an e-mailed statement. EU banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.

“This sounds like the softest option possible,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “If that is the indicator how stringent the stress tests will be, then they aren’t worth too much.”

Regulators are counting on the tests to reassure investors that banks have enough capital to withstand a debt default by a European country. U.S. bank stocks rebounded last year after government analysis of their balance sheets found that 10 lenders needed to raise $74.6 billion of capital.

EU leaders have pledged to disclose the results of the tests, showing how individual banks would hold up to economic and market shocks, by the end of July. CEBS is working with the European Central Bank on the tests.

CEBS’s role is to coordinate national banking authorities and make policy recommendations to the EU on regulation. The London-based regulator is working with the European Central Bank on the tests. An ECB spokeswoman declined to comment.

Sovereign ‘Deterioration’

The adverse scenario being tested “assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon and a “deterioration of sovereign risk” from early-May government bond values, according to the CEBS statement.

The commission has said it expects the EU’s economy to grow by 1 percent this year and 1.7 percent next year.

The results will be disclosed “both on an aggregated and on a bank-by-bank basis, on July 23,” CEBS said. The agency didn’t specify scenarios for so-called haircuts on European sovereign bonds.

Greek Bonds

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

The tests originally covered only big cross-border lenders, later broadening out to include smaller EU banks such as Spain’s savings banks, known as cajas.

German Landesbanken such as Bayerische Landesbank, Landesbank Baden-Wuerttemberg and WestLB AG, and Spanish cajas are undergoing the tests. Landesbanken are owned by regional governments and groups of savings banks.

Billionaire investor George Soros said it would be impossible to judge the state of the European banking industry without including “the smaller banks, notably the cajas in Spain and the Landesbanken in Germany,” in the stress-testing exercise, during a speech in Berlin on June 23.

Banks including Spain’s Banco Santander SA and Bankinter SA, as well as Deutsche Bank AG, Commerzbank AG and HSH Nordbank AG, are also involved in the stress testing.

The U.K. banks being tested are HSBC Holdings Plc, Lloyds Banking Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc. BNP Paribas SA and Societe Generale SA are among the French banks under examination.

Friday, July 2, 2010

Orders to U.S. Factories Declined in May More Than Forecast

By Timothy R. Homan

July 2 (Bloomberg) -- Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC, discusses the June U.S. employment report released today and outlook for the economy. Payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures showed. Employment at companies rose 83,000. The jobless rate fell to 9.5 percent from 9.7 percent. Lebas talks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.

The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.

Manufacturers are seeing a pause in demand after the industry helped the world’s largest economy emerge from the worst recession since the 1930s. Today’s figures underscore the Federal Reserve’s concerns that the European debt crisis poses a risk to a self-sustaining U.S. recovery.

“Manufacturing has been the star of the economy this year so any signs that conditions are turning would cause some concern,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “The demand for products is slowing.”

Estimates of total orders in the Bloomberg survey of 70 economists ranged from a decline of 2 percent to a gain of 1.5 percent. The decrease in May was the first in nine months.

Manufacturing in June expanded at the slowest pace this year as factories received fewer orders and demand from abroad slowed, a report showed yesterday. The Institute for Supply Management’s manufacturing gauge fell to 56.2 from 59.7 a month earlier. Readings greater than 50 indicate expansion. The Tempe, Arizona- based group’s new orders measure fell to the lowest level since October.

June Employment

Earlier today, the Labor Department said the U.S. lost 125,000 jobs in June, reflecting a drop in the number of federal census workers and a smaller-than-forecast gain in private hiring. Factory employment rose by 9,000 in June, the smallest gain this year.

Demand for durable goods, which make up just over half of total factory demand, decreased 0.6 percent in May. Shipments of durable goods fell 0.3 percent.

Bookings of non-durable goods, including food, petroleum and chemicals, decreased 2.1 percent. The decline reflected a drop in the value of orders for petroleum products, clothing, fertilizers and beverages.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent after a 2.8 percent drop in April. Shipments of these goods, used in calculating gross domestic product, rose 1.4 percent after rising 0.4 percent.

Factory Inventories

Factory inventories declined 0.4 percent in May, and manufacturers had enough goods on hand to last 1.25 months at the current sales pace.

Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in a June 23 interview in reference to the manufacturer’s agricultural business. “We do believe the recovery is underway,” he said. “We do believe it is moving slowly.”

Manufacturing, which accounts for about 11 percent of the economy, faces the risk of a slowdown in exports as the debt crisis threatens Europe’s economy and factory activity in China cools.