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No more hikes for the US, ECB's too many banks problem PDF Print E-mail
Thursday, 11 February 2016

Tahmina Mannan from ratings and research firm FE says: "Janet Yellen would have given equity bulls a glimmer of hope with her words: “Financial conditions in the US have recently become less supportive of growth,” spoken to Congress yesterday. 

The head of the Federal Reserve cited falling stockmarkets, higher interest rates for riskier borrowers and a strengthening dollar. Foreign economic developments, she underlined, “pose risks to US economic growth”. Volatility since the Fed raised rates in December has convinced markets that it probably won’t raise them again this year. History will highlight that this isn’t the first time financial jitters have influenced rate-setters. The London Business School found, in a study looking at data going back a century, that rate cuts tend to follow market upheaval; increases don’t. The researchers concluded that during market tumult central banks are reluctant to increase rates, for fear of making things worse, but are happy to cut – if nothing else but to prop up consumer confidence. So for now, it shouldn’t be a surprise to anyone if we don’t see another rate hike any time soon. -- In Europe, it has been a horrid week in the markets - despite yesterday’s rally. Shares have revisited the lows of 2012 back when the euro zone’s demise looked almost like fact. This week’s lows can be blamed on fears over global growth; the zone’s recovery, which started in 2013, but has yet to sparkle (and tomorrow’s GDP figures may knock off some more shine off yet). These fears have reawakened longer-term worries. Too many European nations, notably Germany and Italy, have just too many banks. Analysts point out that Europe lacks America’s deep capital markets and some lenders have wrongly clung to flawed models – which is not helping the situation. Germany’s biggest bank Deutsche has tried to remain a mighty investment bank in what many would say is a hospitable regulatory climate. The bank’s notable losses, reported last month, haven’t helped; nor have worries about future legal bills. Hence the rout in Deutsche’s “CoCo” bonds, the riskiest type of bank debt (banks can miss payments; in extremis CoCos convert to equity or are written down). Deutsche has since come out ot say that it is “rock-solid”. And it may well be, but the cracks in Europe’s banks are now more evident.

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