Banks

In successful investment analysis "less is more, and usually much more effective."

There has not been much of an improvement/recovery in the Chinese economy. Credit growth is weakening anew, which warrants a downbeat cyclical outlook for China's industrial sectors. Malaysia is heading into a classic credit/banking downturn. Go short Malaysian banks stocks and short the ringgit versus the U.S. dollar. In South Africa, take profits on the yield curve flattening trade. Continue shorting the rand versus the U.S. dollar.

Highlights Just ahead of the attempted coup d'état in Turkey, the international press was largely complementary of the political situation in the country. For example, a Bloomberg headline read "Once Spurned, Turkey Stocks Find Love As Political Risk Ebbs"…

A renewed flare-up in euro area banking sector stress will have ramifications for U.S. bank stocks, despite little direct geographic exposure. The chart shows that risk premiums for U.S bank stocks have been tightly correlated with those of the euro area…

We test three channels of contagion from the Brexit shock: political, banking system, and economic.

The exponential rise in banks' non-standard credit assets has occurred in spite of the government's efforts to contain and regulate it. The government does not have full control over shadow banking and non-large banks. These have become a large part of the credit system. Hence, the assumption that the central government in Beijing can sustain any rate of credit growth it desires is overly simplistic. Short small bank stocks in China.

Underweight Following up on yesterday's cautious Insight on the overall financials sector, the heavyweight bank sub-component looks precariously positioned. The latest FDIC Quarterly Banking Profile made for grim reading. Credit losses are on the rise and…

The Turkish central bank has almost exhausted its foreign exchange reserve. It has been printing money to keep interest rates lower, and sustain the credit boom in the economy. Such policies are unsustainable and the currency will plunge anew. Currency depreciation will push up market-based interest rates. Stay short/underweight Turkish risk assets. A new trade: Short 2-year local currency government bonds.

Risks to global growth remain to the downside. Selling pressure in cyclical markets and assets will escalate. EM currencies will make new lows versus the U.S. dollar, the euro and yen. Take profits on our long JPY/short KRW and long JPY/short SGD trades. Short KRW versus an equal-weighted basket of the U.S. dollar, yen and euro. Continue underweighting Peruvian equities.

China has fallen into the same "fiscal trap" that ensnarled Japan in the 1990s. Unprofitable investment projects undertaken by SOEs are a necessary evil. The underlying problem is not overinvestment, but an economy that is demand-deprived. Meanwhile, structural factors will ensure that savings remain high. Any efforts by the authorities to curb credit growth will result in a sharp economic downturn. China will continue to generate excess capacity and export deflation to the rest of the world, which is good for bonds. We recommend going long Chinese banks, the most hated equity sector.