June 30, 2022

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From sovereign to banking, Federal Reserve and shareholder support is facing changes. The European Central Bank will have to acquiesce

Do central banks that decided on the first – at least official – tightening of their expansionary policies really include anti-inflation as their guiding principle? Thinking back to the excitement Middle East and Africa neglect Her Majesty’s Governor of the Bank of England Consumers, one might think so. As well as the official elimination of the character transient From the definition of inflation that appeared in the Fed’s latest statement, it will speak this language.

Be careful though. Because the devil is in the details. In the labyrinth of the market. These two graphs


Inflationary Outlook Trend on Fed Day (December 15)
Fonte: Bloomberg


US implied interest rate trend priced in futures

US implied interest rate trend priced in futures
Fonte: Financial Times

It reveals a basic fact that we will have to deal with, given that The most pressing question is how to deal with the emerging difference in policies between central institutions. The first shows how price expectations rose by just 10 basis points in the two hours following calls from the Federal Reserve’s Monetary Committee (FOMC) last Wednesday. The second, however, shows us how already the next day Futures indicated clear and reassuring confidence on the part of traders in Jerome Powell’s true operational intentions regarding rate hikes..

translated, The Federal Reserve has completely lost its credibility. This is where the main concept comes in: Central banks act as hub but are no longer a playmaker. I’m like a traffic cop directing traffic but his job ends once everyone decides which side of the square to go. every month or month and a half, Meetings of the various boards stimulate attention and bring order to the chaos of the market: and then realism prevails in the trading rooms. This last concept is light years away from the logic of those for months classified and removed from it as temporary inflation which, for example, in Great Britain in April is expected to be 6%.

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There is more, though. The Federal Reserve and the Bank of England are both working in mode Falco, at least compared to full quarters of Lace Doo Frontier Cash on Faustian. But they did it without effective moves immediately against the price run. No point in raising prices or flipping point charts to the point of reporting 3 upward adjustments for 2022, When purchasing programs remain running at the same time. Bank of England Without affecting the amounts in the slightest, the Fed has sold double tapped values ​​in the market and public opinion, but still guaranteed steady rates and record balance sheets through March 31. All this, then, with a view to complete flexibility. That is, if the position micron hits the bank, it will return to the previous system in real time.

It is difficult to fight inflation effectively in this way. Of course, it is always better than the Turkish Central Bank’s prescription, but it will be necessary to remain in the field of credibility. Why this bet in gambling then? Just to secure the headlines and gain more time, hoping to be a catalyst for the pandemic? No. These two other graphs show that,


The relationship between the Stoxx 600 banking sector and 10-year US Treasury yields

The relationship between the Stoxx 600 banking sector and 10-year US Treasury yields
Fonte: Bloomberg


The relationship between the banking sector Stoxx 600 and the overall target price

The relationship between the banking sector Stoxx 600 and the overall target price
Fonte: Bloomberg

From them we note a key element: After quarters of support for the sovereign sector, it is now up to commercial banks to tap some of the services of the Federal Reserve and its partners. Mislav Matika. The strategist at JP Morgan, without a doubt: Banks are the key game in the coming year, both in terms of potential revenue increases and flattening their curve. It is no coincidence that the two images refer to the Euro Stoxx 600 bank, or the banking sector in the European benchmark.

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In fact, the European Central Bank was the only one of the major central banks that remained officially columba, to confirm the end of Pepp on March 31 but play the APP expansion card for the same time frame. Little things, indeed. But symbolically enough to secure headlines. However, there is a problem, and the second graph clearly shows it: Sovereign yield trends play a role in the fate of the banking sector And in the case of the European system, which operates under a strong discount system, traders are already pricing something else. That is, a 20% increase over the next 12 months at the total target price level. In short, the ECB has to do something. You may have already done so. Because the failure of the EU stock exchanges after the Council is basically a sign of a forced tightening of monetary policies In progressSomething that will not be noticed until after it has happened.

But the banks that are already dependent today. Not a coincidence. With an EPS of 8.5 and a book price of 0.6, the Stoxx 600 banking segment is not only at an all-time low in price but is operating at a discount rate of 45% in terms of price. P / E. In the entire index. In short, the sovereign spread will have to wait some time, because the banks (and their profitability) also have their needs. The European Central Bank will have to understand this. In fact, I have already done so, as I announced on Friday how No more TLTRO auctions will take place, as continental institutions can count on abundant liquidity. Is it just the 52 billion error I requested in the last allocation? No, it’s the whole mechanism that will change the structure now: from above average a central bank.

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For a while, at least. The direct result of such a fundamental shift in policy? This last graph shows you:


Correlazione fra USA Liquidity Index Treasury/Junk Spread

Correlazione fra USA Liquidity Index Treasury/Junk Spread
Fonte: Bloomberg

Nearly 3,200 zombie companies in the world, or those that in the last six quarters of the pandemic have registered an interest service rate of less than 1, appear destined for extinction.. And in this case, almost in real time, because if the increase in the taper is equivalent to fresh water due to the dynamics of inflation, On the other hand, it directly affects the liquidity. In short, more than 10% of the 25,518 officially ranked zombie companies tracked worldwide could say goodbye as early as 2022. Central banks have already changed their paradigm. But not in the sense in which to explain this revolution in general.