Uncertainty Spreading – Banking Sector

July 16, 2016

“One day the AIs are going to look back on us the same way we look at fossil skeletons on the plains of Africa. An upright ape living in dust with crude language and tools, all set for extinction.”
Nathan (Oscar Isaac), Ex Machina (2015)

Banking sector crisis in Europe is slowly but firmly moving forward as the size of the problem is gradually getting clearer and it seems that a large scale bailout is almost impossible to avoid. In the meantime Bank of Japan is getting closer to stepping up their efforts to boost growth and inflation in Japan and the phrase “helicopter money” is being used very loosely these days in that part of the world because BOJ is starting to run out of new measures to implement. And of course worries caused by brexit are still very much on the table as the United Kingdom and European Union are both getting use to the idea that they are not sitting behind the same table anymore. In short, there are plenty of signs that we should be ready for further easing from BOJ, Bank of England and possibly from the European Central Bank in the near future.

However, things do not go always as planned, especially in trading. Majority of market participants were expecting a rate cut from BOE last Thursday but the official bank rate surprisingly remained unchanged. The unexpected outcome caused a vicious spike to the upside in GBP related pairs creating a lot of headache to the bears but the fight is far from over. While BOE’s move was a bit odd, it doesn’t mean that they are not going to cut – quite the opposite. According to the minutes of the meeting, BOE is just warming up and it’s quite possible that we’ll see a double-move in August, meaning a rate cut & a QE announcement. Though it all sounds super-bearish for the British pound there’s one thing we should all keep in mind – Mr. Carney expressed his worries regarding the possible brexit well before it actually happened and hence there’s a strong possibility that the market has priced in quite a lot of potential easing measures into the GBPUSD exchange rate, meaning that whatever the BOE will do, the reaction that follows might not be as aggressive as bears hope.

On the other side of the world Japan is struggling with its own demons. At the beginning of the week, the big news was that Mr. Ben Bernanke met with Mr. Kuroda and Mr. Abe to discuss the progress of Japan’s economy. Quickly rumors regarding the possible use of the “helicopter money” started to spread and later on they were more or less confirmed that the subject indeed came up during the meetings. Yet, it’s way too early to start speculating on the idea of Japan as the first developed economy to introduce a new, and by far the most aggressive, monetary policy tool in the history of finance. As one Japan’s official said, “adopting helicopter money in the strict sense is impossible as it’s prohibited by law” adding that, “it’s an illusion to think that a country can spend as much money as it wants, without having to pay it back”. Both arguments make perfect sense and most likely, it’s actually far more complex to introduce such a monetary policy tool without doing a fair amount of damage to one’s own credibility. Competitive devaluation is already a problem and if some should bring in the “big guns” then chances are that the other central banks will reply to that one or the other way, bringing us closer to uncontrollable hyperinflation.

And last but not least, the European Central Bank. Their number one worry right now is clearly the amount of non-performing loans in the Euro area. I’d say the real crisis is still quite far away but we are taking baby steps towards it and soon the storm will arrive. One thing is more than clear – the issue of bad loans is not going to go away by itself and given the total amount of debt we are talking about ($360 billion in Italy for example), it’s hard to believe that the ECB or EU as a political union, won’t step in to resolve the matter. Most likely, tax payer’s money will be used once again to save the almighty banks so we could have the chance to borrow money for things we cannot afford!

Capital Properties FX