Market update – Stress tests results for US banks, Russia’s central bank

The stress test results will be out for large US banks, underpinning the view that the financial system is healthy compared to the crisis 12 years ago.

Investor Relation Specialist

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The virtual stress test after the real one

The stress test results will be out for large US banks, in all likelihood underpinning the view that the financial system is healthy compared to the crisis 12 years ago. The macro-economic numbers will be monitored for further green shoots.

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After all the stress this spring, you would think that another virtual stress test is not needed. Yet the US Federal Reserve does not change protocol simply because a global health crisis is raging. Therefore, it will publish the results of its recent test for large banks. The results should nevertheless be relevant from a health-crisis perspective too: the difference with the Great Financial Crisis is the fact that the banking system is rather healthy this time around. Other than that, there are a few macroeconomic data points worth mentioning, such as flash purchasing managers’ indices (PMIs) and some key reports in the US on durable goods orders and consumer sentiment. As in past weeks, the focus moves from assessing the damage to looking for green shoots in the economy after the easing of some of the lockdowns.

Christian Gattiker, Head of Research Julius Baer

Economies & Markets

Argentina: Discussions stall

As the latest deadline looms, Argentina’s discussions with its creditors has come to an impasse. While the two sides seem to be not that far apart, there is still no agreement on amended terms.

Despite indications that a solution was coming nearer, Argentina’s discussions with its creditors have reached an impasse in the last days, ahead of the deadline expiry date for bondholders to accept its initial offer (Friday, 19 June). Argentina cannot “responsibly commit” to some of the terms that creditors require, as it would jeopardise its path to debt sustainability and an IMF programme. The gap between the two sides is about 5 percent-age points, which does not seem unbridgeable. Sticky points include the way that accrued interest can be paid out as well as the legal protection of the new bonds, with bondholders asking for the new bonds to be issued under the 2005 indenture (which offers higher protection when it comes to collective action clauses) instead of the 2016 one. At the moment, the abrupt halt of discussions is a negative development, but we still expect that both sides will ultimately soften their stance to reach an agreement in the coming weeks since a hard default is not a favourable outcome for either side. Discussions could last until the end of July without any legal consequences, as Argentina’s coupon payment on the discount bond and the following 30-day grace period expire.

Eirini Tsekeridou Fixed Income Research Julius Baer

Fixed Income

Russia: Cental bank cuts interest rates to post-soviet low

Russia’s central bank slashed its benchmark interest rate to a post-Soviet low as the economy enters a deep recession fuelled by the fall in oil prices and the coronavirus pandemic.

The bank lowered its key rate by 100 basis points to 4.5%, following a 50 basis-point cut in April. The bank said that it could trim the rate further in the future, depending on how the economic situation develops. The rate cut on Friday is intended to make bank lending cheaper and alleviate the economic pain that has penetrated all sectors, increased unemployment and lowered incomes. Russia’s central bank chief said that the economic recovery will take longer than previously expected. ‘A full return to gross domestic product levels from 2019 is likely to occur only in the first half of 2022’, Ms Nabiullina said at a briefing. The bank said that it expects Russia’s gross domestic product to decrease by 4% to 6% this year. The International Monetary Fund forecasts a 5.5% drop, the steepest decline since 2009. Inflation, meanwhile, has been muted, according to the central bank. The downturn has put pressure on President Putin, who has called a referendum later this month on constitutional changes that would allow him to stay in power until 2036. On Monday, Mr Putin asked the government to boost its stimulus measures after statistical data signalled that a deep contraction and a slow recovery is in store for the Russian economy. Russia has recorded more than half a million Covid-19 infections, the third-highest tally in the world after the US and Brazil.

The official death toll stands at 7,841. Data from individual economic sectors paints a picture of a deep and prolonged downturn. Business activity in the services and manufacturing sectors has dropped significantly and investment has declined. Industrial production fell 9.6% in May compared with the same month last year, deepening a slump of 6.6% in April. Unemployment has risen to 6.1% in May, up from 4.7% in March, while real incomes have shrunk, following six years of stagnating incomes. The recovery of internal demand to pre-crisis levels will be very gradual and may take at least two years. Consequently, the central bank policy needs to be accommodative to speed up the recovery. While the phased lifting of restrictions between May and June has helped consumption-oriented sectors, recent business surveys reflect continuing cautious sentiment, according to the central bank. Mr Putin noted that new measures will be necessary because there is still a difficult stage ahead of the restoration of the economy, the labour market and the usual rhythm of life. 

Angela Freyre, Fixed Income Research Julius Baer

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Market update – Stress tests results for US banks, Russia’s central bank