The Four Horsemen of Financial Market Armageddon? European (Italian) and Japanese Banks, UK Property, Brexit and the Chinese Yuan

Looks as if Risk OFF has returned!

First horseman. Yesterday 3 UK property firms announced that they have suspended investor redemption on their funds.

From CNBC:

The news that Standard Life, Aviva and M&G Investments have suspended dealing in their U.K. property funds has both investors and fund managers worried about the consequences on the broader sector.

Shares of Standard Life were down nearly 5 percent on Tuesday. Meanwhile, shares across other asset management companies were sharply negative too. Aberdeen Asset Management saw its shares down nearly 8 percent, while Schroders was down nearly 6 percent. 

Standard Life was the first to announce suspension on Monday. Aviva Investors and M&G Investments followed the lead to announce a temporary suspension on Tuesday. All three companies have attributed the decision to a massive increase in investor redemptions because of high levels of uncertainty in the U.K. commercial property since the outcome of the referendum on June 23. 

While all three companies have claimed that the decision was taken in order to protect the interests of investors who may be negatively impacted by this, the fear that this may be followed by more property funds has started to worry many.

Second horseman. Pressures on European banks led by Italy has exacerbated:

From CNBC

Italy's bank bailout fund might not be enough to beat back the Brexit. More key Italian financial services firms are under pressure and face the potential need to raise capital, leaving Italian government officials and its banking system trying to steer clear of a crisis. 

As Italian bank bonds and share prices are seeing their value slammed in the face of rising uncertainty, banks with substantial bad loans are facing greater pressure, with rates around the world slipping into negative territory. It's an anxiety some in Italy and throughout the European Union may have been hoping would be eased by the Brexit vote last month — but then the U.K. referendum delivered the opposite outcome from the one they had sought….

Many banks in Italy, including its largest, UniCredit SpA, have seen share prices pounded; its stock is down more than 60 percent so far this year. A staffer at UniCredit could not provide comment when contacted.

Already, Italian officials and executives appear to be pulling out all the stops to stave off banking sector contagion. The lingering question for banks is whether they can continue to support lending operations at a time when creditors face potential losses and as some of the country's leading financial services firms could be subject to shotgun M&A marriages by regulators.

Chart from Zero Hedge

It's not just Italian banks, Europe's banks have been crushed! 

The collapse in Europe's Stoxx banking index was followed up with yesterday's 2.73% meltdown.  

The bank index now approaches the European crisis low. Systemic risks banks Deutsche bank, Credit Suisse and HSBC holdings were slammed by 3.67%, 5.52% and 3.29% last night

Has the European banking crisis returned?

And it has not just been European banks, as yields of Japanese bonds crash deep into record negative zone, Japan’s banks appear to be taking it to the chin!

 

Note the Topix bank still trades at the moment. So the above represents the momentary quote

For the third horseman. Will Europe’s and Italy’s banking problem exacerbate the disintegration of the EU?

One analyst thinks so.

From CNBC

The problems facing the Italian banks could cause Italy to become the next country to try to leave the European Union, strategist Brian Jacobsen said Tuesday. 

That's because many Italian banks may need to raise more capital and European Union banking regulations won't allow recapitalization.

And that could hit the wallets of Italian retail investors, many of whom hold bank bonds, he told CNBC's "Power Lunch."

"The bigger issue here [is] the fact that you have so many pensioners and depositors who have purchased some of the slightly higher-yielding securities issued by Italian banks, who by EU rules would effectively need to be wiped out before there could be a recapitalization," said Jacobsen, chief portfolio strategist at Wells Fargo Funds.

Looks like JM Keynes’ observation of the destructive effects of inflationism—Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency—have become apparent: worsening economic conditions compounded by a potential banking crisis prompted by central bank inflationism may accelerate the EU’s demise and magnify global political risks

So from Brexit to Italexit?

For the fourth horseman, the offshore yuan has significantly dropped for the past two days! The USD-CNH (offshore yuan) has already breached, as of this writing, the January 2016 highs!

It seems that not only one, but four major deflationary forces have now combined to produce a lethal cocktail mix that now serves as structural headwind or nasty unintended consequences to the previous inflationary (invisible transfers) booms brought about by central bank policies. 

Has market forces taken over? Has the moment of reckoning arrived?