The Banking and Strategy Initiative

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The Mid-Week Trend Update: Banking heavies on watchlist as US exits S&P ‘risk’

The week’s continuing month long Global FX turn seemed ominous for the big banks, Citi coming under fire from one of the rare remaining bears (analyst Mr Peabody) as Emerging Markets in Asia led a decline to pump the Dollar and Brazil, India and Mexico currencies caused the Tuesday portfolio of the bank to be as much as $8 Billion in the red.

However, if Citi has indeed not sold, Wednesday was a very good comeback for the currencies esp the Indian Rupee and the Brazilian Reais and this may just be hot air with final portfolio losses probably one third of the amount ( One ventures that, and by the end of June, the Dollar would have defeated these machinations if  Oil trends down again ).

Most other financials have pared their losses /exposure in Emerging Market debt and only HSBC will be under fire in the same markets though, it might have been even bearish on some of the currencies mentioned led by the Turkish Lira as strategy foiling EM currencies and global equities unfolded Monday, accelerated by continuing firm calendarising of QE withdrawals (tapering).

On the other side of the argument, as the Euro posts some good recovery data and UK also balances itself in May performance with Carney in the seat, The US might keep liquidity rolling till the original 2015 based solely on the plan for low rates, which banks have advised against indirectly by citing their bad performance in expanding credit and net interest margins. US 10 Y yield has stabilised around 2.17% after a respite because of the especially pessimistic World Bank Report posted yesterday.

Another no holds barred celebration of the recessionary data followed new RBA policy confirmation  of last week as Australian indicators continue to favor serial rate cuts to save consumption and Chinese trade data was subdued

The Euro has to strengthen to targets of 1.35 and even 1.4 later for this year thus limiting dollars upside as the Yen continued a climb back as interest rate management by BOJ Chief Koruda drowned out the shorts and the Yen at 94.3 with the Euro at 1.32 push Dollar down in the direction of gold’s move two months back. Italian ields have firmed to just under 15 in the latest treasury action but to keep things non technical, Consumer inflation reports from the region were unexceptionally optimistic. Employment Data for each European state was also positive thought he Spanish and Euro Club data overall has not changed for the better yet.

The other big bank under fire was Bank of America as its $8.5 B settlement for the Fannie Mae portfolio (Countrywide) still hangs fire in appeals court, BofA Lawyers admitting an increased risk of bankruptcy for the $100Bln plus exposure till the settlement was upheld in Appeals. RBS lost 6% in Morning trading on the FTSE as Stephen Hester was finally forced out of one of two European banks braving regulators with heavy compensation packages. AIG is leading the charge against Countrywide Financial’s in appeals looking to grow the settlement case as BofA seemed to have gotten off too easy and had been ready to pay as much as $50 Bln and will shutdown Countrywide if required as it originally threatened before settlement season.

South East Asia is finally hitting circuit breakers on the verge of a crisis though participation by foreign investors continues to dominate local markets and currencies and local consumption would not be affected by this slide, not only because of Oil but because of healthier local Economies. BI (Indonesia) in the meantime has set in motion a novel attempt to shore up local rupiah through rate hikes, a n examle also used by the Real not so successfully near its Economic lows last year.  Fitch in the meantime upgraded India’s outlook to stable.



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