Bank stress test graded on a curve

So news comes out today that Deutsche Bank received special treat from European regulators during this summer’s EU bank stress test in order to pass.
Germany’s largest lender was allowed by the European Central Bank to included the $4 billion gains from selling its stake in Hua Xia, Chinese lender, despite the deal not closing by the end of 2015.
While the deal was footnoted in the test results, other banks that had pending deals were not allowed to use those proceeds for the test.
“This [Deutsche’s treatment] is perplexing,” Chris Wheeler, an analyst at Atlantic Equities, told the FT.
“The circumstances mean that it is inevitable the market watchers will be suspicious and have some concern about the veracity of the results,” he added.
Deutsche Bank has failed US stress test two years in a row.
Meanwhile in Washington over the weekend the bank’s CEO John Cryon could not come to an agreement with Justice department officials in settlement talks over the $14 billion fine dealing with the bank’s handling of mortgage bond securities in 2006-2007 time period..
Shares of Deutsche Bank are down 43 percent this year.

NYC bombings and the Mayor's pipe dreams

New York City and its suburbs are under siege due to a weekend of bombings.

This situation should not surprise anyone who lives or works in this city. Under NYC Mayor Bill de Blasio, the quality of life has fallen to levels not seen since 1975.

The streets of Midtown are littered with panhandlers and emotionally disturbed people. The aggressiveness of the poor goes unchecked, due to the mayor’s civil liberties directives.

During rush hour last week a man with a meat cleaver was shot and killed by police near a large commuter hub and shopping district.

Now into this void of leadership, which has handcuffed the police from proactively handling these problems, comes a bomber group to wreak havoc.

Authorities just announced they are seeking a man named Ahmad Khan Rahami with the multiple bombings in NYC and N.J.

These new acts of terrorism — which it is, the people behind it may or may not be Muslim, but they do not hold the exclusive contract on the word — as the city moves past the 16th anniversary of the 9-11 attacks.

So as the most important revenue-generating season kicks off  — NYC tourists arrive in droves, which continues through the holiday season, the city finds itself with a new police commissioner, since Bill Bratton retired rather than see all of the effective policing policies instituted since the 9-11 attacks rolled back by the mayor.

So I leave now to go to the city, which I’m sure has a huge police/military presence with lock down sites popping up during the day for any suspicious packages.

However if you don’t see the bombings as a direct result of continuation in a reduction of policing policies under the current mayor.

Look for markets to move higher today as the ECB is out saying it will stand pat on interest rates. The move higher should continue into the week as the Federal Reserve is scheduled to announce its decision on rates on Wednesday as well.

The Fed will hold pat on rates as the latest inflation numbers show the economy is slowing towards stall speed. More on this tomorrow.

Overnight lending squeezed by bond vigilantes

Both presidential candidate Hillary Clinton and the markets feel like crap Monday morning.

While the Democratic nominee alleges she has her third different ailment in the last week, the global stock and bond markets can’t  keep anything down and wretched more than 2% losses in Asia and Europe overnight.

Bond yields worldwide have exploded as the sell off continues, with even the 10-year German bund now yielding a positive return.

The why is not that the markets think Yellen & Co. at the Federal Reserve may raise interest rates. No the credit markets have tighten overnight lending already.

The overnight lenders have put the squeeze on creditors, which has a devastating effect on banks such as HSBC, Deutsche Bank and a host of Italian and French banks needing easy credit to continue operating.

The fear of “pulling the punch bowl,” as ex-Fed head Alan Greenspan said, has spooked the bond market to such an extent that this slide in all assets may not be so temporary.

So, does Yellen & Co. come out today with a less hawkish statement on a September 21 rate rise?

If she does send a dovish message to the markets, she will be seen as capitulating to the bond vigilantes and lose what little capital she has with the markets.

I believe Mario Draghi and his European Central Bank will have to blink first by saying it will ramp up bond purchases in the banks to forestall a EU banking crisis predicated on the banks referenced above from cratering.

Be forewarned, I wrote about this happening early last week.

Yellen looking to help swaps market with Sept. rate rise

The narratives coming out of the banks in the most recent reports have a dire warning theme running through them.

The worry of a market collapse weaves its way through reports from Citigroup, Morgan Stanley and a few others I have glanced at since Labor Day.

Most hint of a bond vigilante rise arriving in the coming weeks, creating trillions in losses.

Now this move has to be predicated on Janet Yellen’s Fed raising rates this month. While the jawboning is strong coming out of the Fed saying September is on the table for a rate rise, there is little evidence in the US economy to support the move.

However, the Fed may have another motive for raising rates, beyond affecting the yield curve. There could be a many reasons, which I can’t even fathom.

But let’s look at one that is a bit esoteric, but could be the driver behind a need to raise rates. Interest rate swaps are a huge derivative play within the global banking system.

These swaps are contracts — bets — in which two parties agree to exchange payments based on fluctuations in interest rates or other benchmarks indices like Libor. The notional size of the market is approaching $500 trillion with a T, so its something that would be on all central bankers minds.

I’m not going to pretend I know the intricacies of this market, but suffice it to say that a 0.25% move higher in US rates would have a tremendous impact on this market.

So Fed transparency aside, the job market is not as strong as Yellen & Co say it is. It’s quality over quantity and since inflation is not in the system in any shape or form just yet,  there must be another motive, which I am not seeing, but maybe interest rate swaps is the start of the reason to raise rates.

ECB still easing down the road

The ECB  announced Thursday that it will keep rates at the zero bound level and will continue EQE for an extended period of time.

The plan prior was to keep buying bonds and equities until March 2017, but today the ECB said it can extend its purchasing of securities past that date as Europe is wracked negative interest rates and near zero growth.

European chief Mario Draghi said that the ECB will continue purchasing bonds both corporate and sovereign issues as well as equities of European firms for an extended period of time.

I believe in the press conference later Thursday, Draghi will have to broaden the definition of what securities the ECB can buy as issuance of existing bonds has dried up.