European Lending Stalls

Daily Analysis - 17/03/2015

The ECB’s Easing Activities Fail to Moderate Nonperforming Loans and Increase Lending

ECB President Mario Draghi is rapidly reaching the limits of monetary policy as evidenced by the latest data from banks which shows that nonperforming loans on balance sheets continue to rise as lending metrics contract. Without the accompaniment of fiscal policy from regional governments, Draghi’s efforts are likely to go unrewarded as the Economic Bloc struggles to deal with contagion effects.

European Nonperforming Loans Rise

Besides the battle of words between Greece and Germany, other data throughout the Euro Area is pointing to challenging times for the monetary union even after a resolution of Greece. Italy yesterday announced the latest figures for nonperforming loans, showing a surge to €185.5 billion, the highest on record, reaching nearly 10% of annualized GDP. This coupled with 33-straight months of contraction in bank lending is not a positive sign for the Euro Area’s third largest economy just as the ECB’s Mario Draghi tries to orchestrate a turnaround in the lending. After a modest bounce, the Euro is once again trending lower against peers as expectations of Greek exit rise. Although not yet impacting lending, quantitative easing is seeing regional equity benchmarks soar, with the German DAX hitting new record highs yesterday.

Japan Maintains the Course

As was widely expected, Japan maintained the benchmark interest rates at a record low, exhibiting no shift in monetary policy despite the constraints the Bank of Japan is facing. With the Central Bank adding 80 trillion yen of assets to the balance sheet on an annual basis, they are quickly running out of assets to buy. This is why the Bank of Japan has shifted to buying exchange traded funds (ETFs) and real-estate investment trusts (REITs) as they have effective corned the Japanese bond market. According to this morning’s statements, policymakers are worried about the contagion issue of deflation from the Euro Area, noting that Japans expected annualized increase in inflation is 0% due to low energy prices, short of the 2% targeted. USDJPY continues to consolidate ahead of tomorrow’s FOMC Statement, trading just shy of multi-year highs.

Equities Rebound Despite Data

US benchmark equity indices rallied yesterday even after disappointing industrial and manufacturing data highlights the risks to the economic outlook. The worsening in fundamental data made no dent in equity valuations as indices inched back towards record highs, with all benchmarks rising over 1% on the session. Manufacturing production which was forecast to expand in February actually contracted -0.20% while industrial production figures expanded a meager 0.10% with the prior number revised lower to -0.30%. What is more surprising is that the decline in oil prices failed to impact energy stocks which have notoriously been highly correlated with movements in commodities. With WTI crude oil falling below $43 per barrel briefly, it is possible that stocks in the energy sector will be under renewed pressure in coming sessions as the divergence ends.

AUDUSD Equidistant Channel Technical Setup

With Australia’s fortunes largely tied to movements in the commodity space, it is no wonder the local currency has nosed lower substantially over recent months. The slowdown in Chinese economic growth and faltering global trade have seen the mining sector drag on the real economy which has elicited increasingly dovish policy from the Reserve Bank of Australia. The weakness in the Australian dollar will likely continue to extend as more interest rate cuts are forecast for later in the year. The AUDUSD pair is trending lower in an equidistant channel since July of 2014 and is rapidly approaching the upper channel line. The wisest strategy in a channel is to follow the trend and initiate short positions at the top of the channel with expectations to close at the bottom channel line. Fighting the channel will see reward characteristics of the trade worsen.