Daily Insight
Group Economics Macro & Financial Markets Research
13 July 2016
Banking in Italy continues to draw attention Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
European Financials - It was a busy day for the Italian banking sector on Tuesday, as the rumblings of the Italian banking dilemma linger on. The IMF released its Article IV consultation report on Italy, and in particular drew attention to the urgent need to address the challenges in the banking sector. The IMF notes that the large amount of NPLs is restraining bank profitability, which, in turn, is reducing banks' capability to use retained earnings to bolster their balance sheets. Furthermore, both the IMF and the Italian authorities agree that a swift consolidation of the smaller mutual banks is essential to solve the present-day predicament. On the same day, Angela Merkel told the EU finance ministers that she saw the future for Italian banks to be "resolved in a good way" and without any "crisis-like development". Nonetheless, the Bank of Italy announced that gross bad loans rose 3.2% year-on-year in May 2016, to EUR 200bn. At present, European authorities are at loggerheads while discussions continue to find the solution to the NPL problem that would cause the least pain, but also offer structural reforms to the sector. We expect that a solution can be found, due to the focus at a pan-European level. However, the IMF also noted that Italian authorities were cautious about forcing consolidation, while they remained of the view that bail-in rules are currently applied too restrictively. So, the jury is still out about how to solve the Italian NPL problems. (Thomas Kinmonth) Fed - Since the UK referendum, Fed officials have commented on post-Brexit developments. This week we will be having several interventions. On Tuesday, Federal Reserve Bank of Cleveland Loretta Mester, a voting member well known for her hawkish stance, mentioned that the impact of Brexit will be mainly through financial markets. She did not expect large spill-overs via trade. She stressed that lower US Treasury yields were a sign of a flight to quality rather than a sign of a slowdown in the US economy. Later in the day, James Bullard, also a voting member, who has taken a more dovish stance lately, said he expects the US economy to remain in a low-growth mode for the next few years. He continues to support just one rate hike over time. We continue to expect the Fed to remain on hold this year, mainly as a result of the uncertainty related to global developments and the impact for the US economy. In the coming few days other Fed policymakers will speak, but most of them are non-voting members, except for Esther George who will be speaking on Thursday. (Maritza Cabezas)
FX – Since the US employment report last Friday, investor sentiment on financial markets has improved. Expectations of more monetary policy stimulus in Japan and news that Theresa May will be the new UK Prime Minister have resulted in a further improvement in investor sentiment. As a result, safe haven assets such as the Japanese yen and gold have come under pressure. After all the gloomy news since the Brexit referendum, investors were clearly receptive to some positive news. They used this to take profit on short sterling positions and long gold and long yen positions. Japan is expected to compile stimulus measures this month with the possibility of the issuance of construction bonds. Meanwhile, carry trades have remained in vogue. Since June, the AUD and NZD have strengthened by
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Daily Insight - Banking in Italy continues to draw attention - 13 July 2016
5 and 7%, respectively, against their basket of currencies. Both currencies are trading at stronger levels than forecast earlier by the central bank of Australia and the central bank of New Zealand. We think there is no reason to become optimistic now, as the negotiations between the EU and the UK will likely be tough. In addition, the US jobs report will not likely change the thinking of the Fed policymakers as underlying labour market conditions are still cooling. In short, we continue to expect sterling to weaken and gold to strengthen in the months ahead. We do not expect the current bullishness in the AUD and NZD to be sustainable as both central banks are likely to strike a dovish tone on the exchange rate in the next monetary policy meeting in August. (Georgette Boele and Roy Teo) Credit - The credit market reached a new milestone yesterday. The first (semi)corporate transaction with a negative yield was brought to the eurobond market. Deutsche Bahn (Aa1/AA/AA stable/neg/neg) issued a 5 year bond with a coupon of 0% and a price of 100.03. This means that the bond will have a negative yield of -0.006%. Investors that bought the bond are exposed to credit risk and will make a guaranteed loss on it if they hold it to maturity. Despite this fact, there was more than sufficient interest by investors. Deutsche Bahn printed a EUR 350mln and the book was 2.4 times oversubscribed. Although Deutsche Bahn is not a pure corporate as it is 100% owned by The Federal Republic of Germany, we have no doubts that we will see 'real' corporates issue in the primary market with negative yields soon. In particular high quality corporates have the opportunity to print new deals with negative yields. (Hyung-Ja de Zeeuw)
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Daily Insight - Banking in Italy continues to draw attention - 13 July 2016
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Daily Insight - Banking in Italy continues to draw attention - 13 July 2016