Posts Tagged ‘AQR’

Notes From Underground: European Stress Tests Have Passed; Now All Trading Stress Begins

October 27, 2014

After the release of the asset quality review yesterday, analysts had time to digest the information and form a modicum of market opinion prior to Monday’s market opening. I give the European authorities credit for releasing reams of information on a Sunday so the market would not be merely reacting to headlines and tweets and could actually trade on substance rather than fluff. The FED could learn a great deal about how to disseminate information from the European authorities. Yes, I know that the results were leaked on Thursday or Friday but the leaks were not significantly market-moving events. The market’s initial reactions to the 25 undercapitalized banks was a rally in the European equity markets and a short-lived rally in the European peripheral bond markets.


Notes From Underground: Another Cold Day In July

October 21, 2014

In late July, Bundesbank President Jens Weidmann made a comment about being in favor of a rise in German wages. I was citing a Financial Times article, “Bundesbank Shifts Stance To Support Pay Rises.” The article opens with the line, “Germany’s Bundesbank has backed the push by trade unions for inflation-busting wage settlements …” I noted that it was Bundesbank Chief Economist Jens Ulbrich who called recent wage trends moderate, given the strength in the German economy. If the Bundesbank had capitulated on the wage issue look for ECB President Draghi to feel renewed strength in his efforts to weaken the EURO and placate French and European peripheries who have continued to complain about the impact from an overly strong EURO. (This was from the JULY 23 Notes from Underground).


Notes From Underground: It’s Good News Week (By Hedgehoppers Anonymous)

October 19, 2014

Last week was an appropriate tribute to a song from the 1960s in which the news is looked upon as just so much blather about drivel and evil events. The fears of EBOLA, SECULAR STAGNATION, ISIL, COLLAPSING ENERGY PRICES and EUROPEAN ECONOMIC COLLAPSE converged to create volatility and fear in all asset classes. The nervousness about global equity markets collapsing caused the bond yields to dramatically decline, which led to a capitulation by BOND MARKET SHORTS. In my opinion the volatility in the bond markets was also the results of decreased market making abilities of money center banks due to increased capital regulations. (This is not a commentary on the increased regulations but just an observation about market impacts). Also, many market actors have been selling volatility in an effort to increase returns and got burned for their efforts.


Notes From Underground: Why Draghi Needs to Phony the Impending AQR Results

October 5, 2014

In the mid-October the ECB will announce the results of the Asset Quality Review (AQR), which is a bank stress test by another name. The ECB has measured the riskiness of the European domestic banking system in an effort to measure how much capital banks will need to raise to prevent systemic solvency problems. It is an act of absurdity in some regards because many of Europe’s banks have bought huge amounts of sovereign debt (i.e. Italian and Spanish banks purchasing Italian and Spanish bonds and notes) because they carry a zero risk weighting, requiring no reserves. The problem is that the banks’ assets hide the poor financial health of the banking sector. While European governments are able to borrow at ridiculous rates, private individuals are not able to access credit, which keeps the European economy at a standstill. If the bank stress tests don’t show a dire situation then Mario Draghi will be hard pressed to achieve the massive QE program he would like to undertake.


Notes From Underground: Mario Draghi’s Veni, Vidi, Vici Moment

October 2, 2014

Mario Draghi, the Caesar of European monetary policy, took the ECB meeting on the road to Naples and wowed the world with his ability to hold an hour-long press conference and say nothing. The world waited for some clarity on the proposed European QE programs and the result was confusion. President Draghi announced that the Asset-Backed Security Purchase Program (ABSPP) would commence this quarter but the ultimate size of the program remains a mystery (NOTE: Europe’s asset-backed securities market is about $317 billion). We do know that the ABSPP is intended to last for two years but if economic activity remains dormant the time period could be extended.