US: Surprise result of Federal Reserve’s stress test - Rabobank

The results of the Federal Reserve’s stress tests were – surprise, surprise – positive as all the 34 largest banks operating in the US got the official sign-off on their ability to withstand economic shocks, notes Michael Every, Senior Asia-Pacific Strategist at Rabobank.

Key Quotes

 “This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” said Fed Governor Powell. Of course, the real test of any pudding is in the eating, but it seems a reassuring message. Let’s just see how it all stands up to the roll-back of QE, if that proceeds as planned.”

“The timing of the exercise was also a useful example of contrast, as over in China the authorities have called in the country’s most active borrowers –and overseas deal makers- for scrutiny over their borrowing: Anbang (owner of the New York Waldorf Astoria), Fosun (owner of Cirque de Soleil), HNA (25% owners of Hilton), Wanda (owner of Hollywood studio Legendary Entertainment and AMC Entertainment, the world’s largest cinema operators), and Rossoneri Sport Investment Management Changxing (the owners of AC Milan) are all being questioned over the amount of leverage they have built up to finance their aggressive off-shore (and domestic) acquisitions.”

“As the Wall Street Journal notes on the matter: “Just how indebted many of China’s big conglomerates have become is extremely tough to gauge for outsiders. The equivalents of parent companies for the Anbang, HNA and Wanda groups aren’t listed and disclosure is thin. None of those groups have credit ratings from the big, global rating companies.” Let’s just say that if one has one lingering doubts about the efficacy of the Fed’s stress tests, one needs a massive multiple of that scepticism for the Chinese equivalent right now. Even more so once QE starts being reversed, of course, given Chinese firms can’t access USD as easily as US firms can.”

“Of course, if we see a further halt in Chinese capital outflows as a result of this crack-down that is likely to moderate downward pressure on CNY, which would be a relief to both China and global authorities trying to stem a fresh tide of deflation. That said, it is still open to question how China can keep juicing its local money supply so aggressively, and ostensibly internationalize its currency, without some of it leaking it out somewhere. Moreover, a near-term pulling of the plug on the wondrous “China bid” in many markets is likely to put a serious dent in the global assetprice inflation growth model we have slipped into post-2008, which might make ‘stress tests’ much more stressful again. (The first canaries in the mine are likely to be high-end property prices and struggling UK football clubs dreaming of the big time).”