The lead consensus at JP Morgan holds that the ECB will cut its deposit rate to -.5% next month and then in June to -.7%. European banks hold one trillion euros in non-performing loans, and Greece is once again a default threat. This is an open invitation for bank runs.
A gauge of deposit outflows are the Target-2 balances from the ECB. The following chart shows that Spanish and Italian banks have remained tapped into this scheme since the 2012 crisis. January’s numbers (when bank indexes fell out of bed) will be very revealing if this surges.
In answer to my own headline, I adamantly reject the incompetence theory. This is co-opted criminality. The arrival of lamebrain NIRP in Japan has resulted in an unmitigated disaster for banking stocks worldwide. The TOPIX bank index is but one prime example.
There are $7 trillion in negative-yield sovereigns. The 2-year, zombie, Italian and Spanish sovereigns are near 0%.
The Commitment of Traders report showed a net-long reduction of 15,973 contracts for the $10 move from $1,120 to $1,130, not that good. Managed money ended last Tuesday at 29,000 net long, so there was ample firepower to launch a $45 rally. But a chunk of the short covering ammo has been used.
Going over 100,000 net long or higher is not unusual, so I grade the synthetic gold market neutral. The Boyz who piled into gold shorts sub-$1,100 are blooded, begging the question of whether they want to go back to the same trough.
Crime Syndicate bail-in alert:
Hedge fund manager Shah Gilani warns:
If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing.
NY Fed President Dudley kicked off a hail Mary rally by hinting at a policy error and bad consequences from the strong dollar. But the stock “market” rally once again came with lack of participation from credit. HYG is mired at 78.