Brexit’s Risk OFF to Risk ON: Central Banks Powers Titanic Short Squeezes!‏

Global stocks mounted a colossal rally to offset mostly last week’s losses from a mini crash 

While I noted here that central banks panicked last week and that such panic has failed to stave off the markets from crashes, it’s a different story this week. Direct and indirect central banks actions have incited a remarkable short squeeze. 

Abe eyeing more stimulus (again!) From Reuters: 

Japanese Prime Minister Shinzo Abe on Monday instructed Finance Minister Taro Aso to watch currency markets "ever more closely" and take steps if necessary, in the wake of Britain's historic vote to leave the European Union. 

Abe made the comments at an emergency meeting with Aso and Bank of Japan Deputy Governor Hiroshi Nakaso as some analysts speculate the central bank may ease if it calls an unscheduled policy review before its planned July 28-29 gathering. 

While Abe ordered the BOJ to ensure ample liquidity in markets, his government is ready to provide the economy fiscal support, with an eye on expanding planned stimulus steps to total more than 10 trillion yen ($98.03 billion), sources told Reuters. 

Taiwan central bank slashes rate for the fourth time. From Bloomberg 

Taiwan’s central bank lowered its benchmark interest rate in a widely expected decision as the export-dependent economy’s growth prospects remain under pressure. 

At its quarterly board meeting Thursday, the Central Bank of the Republic of China (Taiwan) cut the benchmark rate to 1.375 percent from 1.5 percent. Twenty four of 27 economists had seen a cut of at least 12.5 basis points this quarter.

Taiwan is battling three consecutive quarters of economic contraction and global demand for its goods has fallen every month since February 2015. Central banks around the world have offered fresh funds to financial systems and intervened in currency markets to offset panic generated by the U.K.’s vote to exit the European Union. 

The US Federal Reserve gave a go-signal for 31 of 33 banks to lift dividends and engage in buybacks. The result has been a torrent of buyback announcement to the tune of tens of millions of dollars 

The Chinese central bank, the PBOC reportedly intervened to shore up the yuan last Wednesday. From Bloomberg: 

Chinese authorities intervened via banks to support the offshore yuan in morning trading, according to people with knowledge of the matter. 

The People’s Bank of China wants to maintain stability in the currency, the people said, declining to be identified as the move hasn’t been publicly announced. The yuan strengthened as much as 0.26 percent against the dollar in mid-morning in Hong Kong’s freely traded market, paring its discount to the onshore rate. 

The Bank of England reportedly injected £3.1 billion last into their domestic financial system last Tuesday June 28. In addition, BOE governor proposed to ease “within months” as well as to consider a “host of other measures”. 

The ECB likewise offered to loosen rules on their bond buying program. From Bloomberg 

The European Central Bank is considering loosening the rules for its bond purchases to ensure enough debt is available to buy in the aftermath of the Brexit vote, according to euro-area officials familiar with the discussions. 

Policy makers are concerned that the pool of securities eligible for quantitative easing has shrunk after investors piled into the region’s safest assets and pushed down yields on some sovereign debt too far to meet current criteria, said the people, who asked not to be identified because the matter is confidential. Some Governing Council members now favor changing the allocation of bond purchases away from the size of a nation’s economy toward one more in line with outstanding debt, one of the people said. 

Later. the ECB denied this. From CNBC 

The European Central Bank is not currently considering buying government debt out of proportion to euro zone countries' shareholding in the bank, and the hurdle for abandoning this "capital key" is high, sources close to the ECB said on Friday. 

Bond markets rallied after Bloomberg reported that the ECB was considering giving up the capital key due to a shortage of German paper, which investors see as safe and have bought heavily in the aftermath of Britain's vote to leave the European Union. 

But sources familiar with the ECB's thinking said that several other changes would be considered before any such move, which would have heavy political ramifications, especially in Germany, where many are already uneasy about the ECB's 1.74 trillion euro quantitative easing scheme. 

The ECB seem to be using trial balloons and false info to jumpstart the market

Nevertheless, Italy’s troubled banks got a reprieve from EU’s $166 billion of liquidity guarantee. From Bloomberg 

Italy was given the go-ahead by the European Commission to supply as much as 150 billion euros ($166 billion) in government liquidity guarantees for its struggling banks until the end of the year, according to an EU official. 

Liquidity support for solvent banks is a “precautionary measure” requested by Italy, the EU said in an e-mailed statement. The guarantees of senior debt allow lenders to maintain access to financing, often at a better price. 

“There is no expectation that the need to use this” should arise, the commission said. The support was approved on June 26, the EU official said on condition of anonymity, and wasn’t made public before now. 

Saddled with some 360 billion euros in soured loans and a sputtering economy, Italy’s lenders have been sliding toward the type of crisis that other European countries dealt with years ago. The government’s latest effort -- getting the biggest banks to back a fund to rescue the weakest -- failed to convince investors. 

Italy asked for liquidity support that the EU has approved for countries including Greece, Cyprus, Portugal and Poland. The financial backstop is provided under EU state-aid rules, usually for six months. 

Finally, an Italian bank had been bailed out last week, even as the bailout fund runs the risks of depletion From theFinancial Times 

An Italian bank bailout fund has taken control of a second lender after Germany rejected a plea for a more sweeping state-funded recapitalisation of the country’s banking system. 

Angela Merkel, the German chancellor, turned down the plea from Matteo Renzi, Italy’s prime minister, at an EU summit in Brussels on Wednesday evening, prompting a sharp fall on Thursday in Italian bank shares, which have now dropped 54 per cent this year. 

The rejection renewed questions about how to shore up Italy’s banking system, given scant interest among private investors and strict EU rules that limit government action. 

Atlante, a privately backed €5bn fund rushed into existence in April to quell the threat of contagion from struggling lenders, took control of Veneto Banca after a €1bn capital increase demanded by EU bank regulators attracted zero interest. 

The fund, known as Atlas in English, was intended to hold up the sky for Italian banks. But is showing signs of strain, having depleted more than half of its war chest after taking control of Popolare di Vicenza, another regional bank, last month. 

That has left little in reserve to tackle about €200bn in non-performing loans run up during Italy’s three-year recession, of which €85bn have not yet been written down. Bad loans are weighing on bank lending and crimping an already weak recovery. 

Central bank actions were mostly directed at banks, liquidity and currency support. 

Curiously while much of headline indices soared, much of where actions of support were directed seem to have hardly reciprocated.

Despite the PBOC’s intervention the yuan fell by .6%. 

Banks of major economies sputtered or underperformed. Japan’s Topix bank index was down by .4% (-37% y-t-d) even as the Nikkei zoomed 4.89%! Europe’s Stoxx banking index dropped 2.4% (-31% y-t-d). The risk on eluded Italian banks even when they had been were provided with liquidity and one which had been bailed out. Italian bank stocks slumped another 5.4% (-54% y-t-d). Deutsche bank which the IMF named as “the most important net contributor to systemic risks” plummeted 5.5%. The other two systemic risk posted variable outcome HSBC Holdings Plc (+2.11%) and Credit Suisse Group AG (-5.5%). Even as the S&P and Dow Jones Industrials posted over 3% in gains to surge back into near record highs, the KBW Bank (BKX) Index increased by only 1.08% and the S&P Bank index (BIX) jumped by only 2.2% 

If the abovementioned banks fail to meaningfully recover and reflect on the gains of their non-bank peers then it is likely these furious central bank inspired rally could come to an end.