Tags: china | banks | united states | investors

Should US Worry About China's Banks?

By    |   Monday, 13 July 2015 10:25 AM

It looks like everything is coming up green this morning as a relief rally over reports of a deal for Greece is underway.

However, the first CNBC clip looks at the case that developments in China might be more important.

Jonathan Fenby, of Trusted Sources, describes how the forces promoting financial reform and the development of capital markets compete against the determination of Party leaders to keep control.

A cynic might think this model also describes the management by U.S. Fed and Treasury of the financial crisis here.

Fenby listed margin trading, the slowdown in the property market, the squeeze on “shadow banking,” liquidity in Chinese households, and the Prime Minister pushing 24 IPOs, all creating “froth,” and the market disquieted by measures to control this froth, because those actions suggested that “the Party wasn’t in control.”

Fenby observed that these issues are all linked, and they all come back to the banks, with the leadership trying to erect firewalls to keep the state of the stock market, driven by retail investors, from affecting the economy. An interviewer asked what the effect of the market decline has been on the credibility of the government that sponsored the boom.

Fenby responded that the government “did enough” at the end of last week, and he concluded that the market is now trading on expectations of how government support will prop up the market.

This writer would add that this discussion begs the question of how the Fed and Treasury are managing these issues, with Federal Reserve Chair Janet Yellen scheduled to testify before the banking committees this week and Treasury Secretary Lew expected to appear soon at Senate Banking.

Next, Holger Schmieding, Chief Economist at Berenberg Bank, provides a window into why the markets are celebrating the Greek deal, which he called “a fragile half-deal” that has a lot of roadblocks to its implementation. He asserted that the deal represents an improvement from the state of affairs of the last couple weeks and “the markets are right to celebrate that progress.”

Schmieding went on to predict that the Federal Reserve will see this deal as an indication that it should proceed to raise rates.

This writer would add that whether Schmieding is right or not, he is beginning to raise the right issue, which is how the U.S. authorities are positioned to manage the ongoing financial crisis in Greece, China, and the U.S. itself. The markets might be celebrating the reaffirmation that the global financial authorities stand behind the stock markets.

Next, Richard Yetsenga, Head of Global Markets Research at ANZ, expresses the “What, Me Worry?” view of markets that see the coast as clear for a resumption of the government-sponsored rally.

An interviewer raised the issues of bond illiquidity and high P/E ratios in the U.S. as potential market worries. Yetsenga stressed that the Fed is “in the center of the frame” and likely to raise rates in September or October, and he cites stability in 30-year yields, which he called “the smartest market,” as an indication the Fed will move soon.

Yetsenga cautioned that there are as many upside risks as downside ones for investors, so overall he is not worried. This writer would note, however, some concern over how Asian markets will react to any rate hike, that the Fed is aware of this, and there are other forces tending to stay Fed action.

Finally, with Boeing (BA) at 145, Dan Nathan, on the Options Action panel, displayed a chart suggesting a potential reaction to any disappointing guidance that might be forthcoming, and he recommended a Sep 140/130 put spread for $2, because, he says, “This is a market where bad news is getting absolutely punished, and good news is not necessarily being rewarded.”

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It looks like everything is coming up green this morning as a relief rally over reports of a deal for Greece is underway.
china, banks, united states, investors
Monday, 13 July 2015 10:25 AM
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