Tag Archives: Asset

Trading Futures: Risk On, Risk Off

“Equity and Bond markets set the tone for commodities, although there are signs of healthy demand growth, Saxo Bank analyst Alan Plaugmann writes in his latest market update.

“Further pressure on prices could lead to cuts in production, which in turn will leave the freight markets in dire straits.”

Alan Plaugmann

Osaka Mercantile Exchange

“The main theme for this, and next week’s trade, centers around risk aversion, which by enlarge has spilled over into all market in some way or form.  Generally speaking, the main indicators for the measure of risk were lead through the Equity and Bond markets,” Plaugman writes.

Equities are under severe pressure and US and European government bonds are showing no signs of breaking the strong long term bull trend.  Both these factors are pessimistic signs of economic growth, and the consequences of both are evident in the re-balancing of investor risk across all asset classes, with no quarter on commodities.

Alan Plaugmann

The high levels in storage also have an adverse effect on the freight markets. A rather grim picture emerges for the VLCC’s (Very Large Crude Carriers) transporting oil primarily from Arabian Gulf to Japan (benchmark route TD3).  From the year low of 6.185 USD per day, which is around operating costs levels (but far below break-even levels) on 9 august the spot rallied briefly but is now back to very low levels.  Further pressure on prices could lead to cuts in production, which in turn will leave the freight markets in dire straits.

WTI Crude made a move towards the lower end of the longer term weekly trend channel.  Although it did not quite reach the $70.00 level, the losses seen over the past three weeks are significant.  A break of the trend channel leaves WTI in real trouble of further losses that could amount up to as much as 10-15%.

That being said, we haven’t broken that level, which means that we have seen market tacticians entering at these levels for strategic longs, inside the longer term trend.  The 50 day moving average still remains upwardly, and will be significant resistance on any rallies towards $76.80.

Read the full analysis at The Swapper.

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German Banks With More Than 200 Billion Euro In Faul Credits

You think  Greek and Spanish banks are in trouble? Well, that’s only peanuts compared to the trouble the German financial industry is facing; according to a new report from PriceWaterhouseCoopers the amount of non-performing loans in German banks increased by 50% in 2009, to over €200 billion, and is still rising.

“Investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards.”

PriceWaterhouseCoopers


The new report on European banks’ non-performing loans by Price WaterhouseCoopers is quite interesting reading. (Not to mention scary). Since the last report, nine months ago, the amount of NPL’s in European banks have rose to unprecedented levels. Ukrainian banks have an increase of nearly 2500%. However,  measured in euro the German banks are holding the most – 213 billion.

It is a well known fact that Germany would be the most affected country in the EU by the global financial crisis, given its persistent and large current account surpluses.

Recent estimates by PriceWaterhouseCooper suggest that German Banks are sitting on a portfolio of about 213 billion euro in non-performing loans – the highest amount in Europe.

The alarming estimate of the scale of the problem was released yesterday by PriceWaterhouseCoopers.

According to the report NPL Europe June 2010,  the amount of bad debt among German banks was €213 billion at end-2009 – a 50% increase from 2008.

It is natural to suspect that the figures have continued to rise since in 2010, and does not include what German banks have yet to expect from their exposure to southern Europe.

“Based on information contained in financial statements of the largest German banks, NPLs and write-downs grew significantly during 2009 and many expect this to peak mid 2010,” PriceWaterhouseCoopers writes in the report.

Deutsche Bundesbank indicated in its Financial Stability Review 2009 that additional write-downs on loans of €50 billion to €75 billion will be necessary as a result of both macro and micro economic factors in 2009.

I guess it will be closer to 75 than to 50 when the final numbers are on the table.

Between 200 And 220 Billions

“2009 NPL volumes are an estimate based on movement in the loan loss provision and gross NPL volumes for a sample of banks covering 75 per cent of total assets in Germany. Based on these estimates, NPLs in Germany could be as high as EUR200 billion (using a 34 per cent growth rate) to EUR220 billion (using a 50 per cent growth rate) at the end of 2009,” PWC points out

All the key banks in Germany experienced significant portfolio deterioration during 2009.

The chart below shows the development in the largest German banks non-performing loan portfolios:

Last year, the German bank regulator produced a worst-case scenario of some €800 billion in write-offs.

And while we are not there yet, it is quite alarming to see that by end 2009, we were already a quarter of way, and they’re expected to rise significantly over the next couple of years.

Europe’s 620 Billion Problem

An oversight of 16 European countries shows a stunning total of 619,7 billion euro in non-performing loans.

For some – unknown – reason, French banks are not included.

The increase in NPL’s varies from 28% (Spain) to unbelievable 2447,6% (Ukraine).

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Will Need To Work Together

PriceWaterhouseCoopers conclude that the banks and investors will need to work together and reach some kind of compromise when it comes to the NPL’s, who in fact are illiquid assets at the moment.

“One major change observed is that investors claiming to have money and chasing NPL and non-core portfolios are back in force. The big question is how much this money costs and for how long can it be put to work. In most cases, NPL portfolios and to a lesser extent non-core portfolios are illiquid assets and require an investment horizon of at least three to four years. Experience over the last nine months suggests investors are pricing portfolios with the aim of getting their money back with a healthy IRR within two years,” PWC notes.

“On the bank side, in almost all countries the provision coverage of NPLs has decreased despite increasing levels of NPLs and non-core assets, indicating that banks may be underestimating their defaulted assets. In addition to this, there is evidence some banks are still using historical values for underlying collateral. Should updated appraisals be performed, collateral valuations will likely decrease, bringing further strain on loan to value covenants. The result is that the uncollateralised portion of the NPLs and sub-performing loans is being understated. The flow-on impact of this would be that the loan loss provision (LLP), which is applied to the uncollateralised portion of the loans, may also be understated.”

“Given the above, investors and banks will need to work together to reach a compromise on pricing deals which adequately shares portfolio risks and rewards. There are now 10 European markets with NPLs of over EUR5 billion, which means there are plenty of  opportunities to put this into effect. A key question over the next six to nine months is whether funding and collateral values will stabilize or even begin to increase enough to align the pricing of both buyers and sellers,” PriceWaterhouseCooper concludes.

For more shocking details; here’s a copy of the PWC report “NPL Europe June 2010”

Related by the Econotwist:

European Banks: “Leman Times Ten”

European Banks Loaded With Greek Debt

Investors Are Dumping Covered Bonds

G20: Another Meaningless Summit

Global Economy On Fast Track To Disaster

EU Officials Fears Second Depression And War

How To Create A 3 Trillion Dollar Bubble And Burst It

E.U. Parliament To Investigate Euro Zone Bailout

Bundesbank Suspects A French Conspiracy

Why Optimists Are Wrong About The Euro Zone

Transantlantic Bailout Buddys Agree To Disagree

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Filed under International Econnomic Politics, National Economic Politics