Pershing’s Weekly Market Commentary as of September 16th is now available.
To read the full commentary, click here.
The markets had a decidedly better tone this week as the fear from Europe subsided. Although risk assets were in vogue for the better part of the week, to us it feels more like an uncomfortable truce given the many unresolved issues that continue to plague the continent. Top of those concerns has been the increasing dysfunction in the European banking system. As we discussed last week, Europe’s banks have been increasingly unwilling to lend to each other, except for the shortest time period. And this reluctance was not due to a lack of funds. Deposits at the ECB are reaching record levels—an indication that these same banks are parking excess balances at the safest venues available, the central banks. This distress was evident when two banks reportedly tapped a seldom-used ECB lending facility this week, presumably because they could not obtain enough dollars funding in the open market. In an attempt to address these growing concerns, the Fed announced it would make unlimited dollars available to the ECB, Bank of England, Swiss National Bank and the Bank of Japan for three-month loans, through the end of the year. These central banks would then make loans to their banks if the interbank lending market shut down. While this was a twist on an existing seven-day lending policy, the market took solace in the coordinated effort of the central banks to address the funding situation. As a result, investors became increasingly comfortable bidding up the price of Euro bank stocks and bonds as the week progressed. However, as the table above indicates, many of these banks continue to post large losses for the year and are trading at steep discounts to even the most conservative measures of book value.
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