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Are Chinese Banks Making Up Numbers?

Recent reports suggest that the People's Bank of China (PBOC) may lift the upper limit of the floating range for deposit interest rates to 1.2 times the benchmark rates. While it’s tough to discern whether or not the Shanghai Composite Index was up on this today, as the rumors have apparently been circulating, it’s interesting to see the PBOC continue with its financial system reform agenda. Recall that a full liberalization of deposit rates is something that would materially erode the asset quality and the Net Interest Margin/profitability of the Chinese banking system. Roughly 25% of the Big 5 banks’ portfolios are in bonds that are marked-to-model yielding at or below the benchmark one year deposit rate.

 

Are Chinese Banks Making Up Numbers? - CHINACHART

 

While a move from 110% to 120% of the benchmark isn’t necessarily a game changer, it does raise serious questions about what Chinese banks plan to do when D-Day finally comes. Another major recapitalization of the banks, which would be the third time in the last 10 years, is not out of the question. The prospect of major secondary issuance could potentially hang over the Shanghai Composite Index for the foreseeable future, creating a headwind for the Chinese stock market.


MACAU: STRONG START TO MAY

While five days of data is not enough from which to draw many conclusions, the May holiday is off to a strong start.  Average table revenues for 5 days spanning April 30-May 4th were HK$1.2 billion, up 24% YoY (HK$975 million) and up 36% from last week’s HK$886 million.  In-line with our earlier projections, we expect May GGR growth to accelerate to 16-20% or HK$29.5-30.5 billion.

 

In terms of market share, Galaxy and Wynn were big gainers.  Galaxy’s share shot up to 21.1% from 17.8% share in April while Wynn’s share rebounded to 12% from the April low of 9.2%.  MPEL gave back its massive share gains in April and dropped back to its 6M average share of 14.0%. 

 

MACAU: STRONG START TO MAY - M1

 

MACAU: STRONG START TO MAY - M2


SECTOR STUDY: XLK & XLY

As consumption continues to drive growth, it should come as no surprise that one of the best performing sectors this year is US Consumer Discretionary (XLY) stocks. And after lagging in the beginning of the year (due in large part to the decline of Apple's (AAPL) stock price), technology (XLK) is making a rebound. XLY and XLK are up +5.6% and +5.0%, respectively, over the past month. The S&P 500 itself is up +4.3% over the past month and continues to make new all-time highs week after week and remains in bullish formation.

 

SECTOR STUDY: XLK & XLY - BESTSECTORS


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Growth Kills Gold

Gold (GLD) prices continue to fall lower as stocks head higher. Why's that? Consumption and growth. We're seeing a ton of consumption and growth as evidenced by last week's jobs data and the housing market and stock market. There's lots to like. As for gold? It'll continue to fall in price as we recover - we feel sorry for those that bought it at the top.

 

Growth Kills Gold - YTD GOLDchartmay


Treasuries: Fighting For Yield

The yield on the 10-year Treasury surged to 1.75% this morning as investors stopped worrying so much about having a safe haven for money and are keen to take advantage of the performance offered in other markets like the US stock market. Still, investors need to get bullish on growth ASAP. No point in putting your money in a low-yield device like the 10-year when the S&P 500 is making new all-time highs each week.

 

Treasuries: Fighting For Yield - USTperf


European Banking Monitor: Credit Markets Get Even More Comfortable

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

European Financial CDS - Europe's financial system continues to heal, in spite of the occasional headline to the contrary. With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

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European Financial CDS - With the exception of one Greek bank, all European Financials saw swaps tighten. Big moves came in Spain, Italy, France and the U.K. 

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. banks

 

Sovereign CDS – Sovereign swaps were tighter around the globe last week with the largest improvements coming in Portugal (-40 bps), Spain (-25 bps), and Italy (-20 bps). The U.S. tightened by 2 bps to 32 bps, while Germany and Japan were unchanged.

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov1

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov2

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. sov3

 

Euribor-OIS Spread – The Euribor-OIS spread tightened by 1 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. euribor

 

ECB Liquidity Recourse to the Deposit Facility – Deposits were relatively unchanged week-over-week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Credit Markets Get Even More Comfortable - pp. facility


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