Deutsche Bank looks around the world to ascertain risk in the middle of a potential $150 billion European bank bailout featuring the German bank, and what does it recommend? More SWAPs trades, of course.
A leading bank with concerning derivatives exposure recommends derivatives
Never mind that Deutsche Bank’s Chief Economist David Folkerts-Landau was calling for a massive bank bailout on CNBC Monday morning. (The new, polite terms is “state-led recapitalization.”)
Or ignore the fact that Doubline’s Jeffrey Gundlach is speculating on panic if the bank’s stock falls into single digits. In polite society it is considered indelicate to mention the persistent and global economic risk of well over $72 trillion in bank non-cleared derivatives.
Never mind all this. What investors need to do is load up on more bank derivatives.
Thesis factors include Shinzo Abe victory for stimulus in Japan and EU QE fully priced in
When looking at the economic gymnastics being done in Japan – and likely more artificial sweeteners being injected into the market system through the election of Shinzo Abe two days ago – bank strategist Francis Yared and analyst Jerome Saragoussi recommend that investors short the US Treasury Five Year / Five Year (5y5y) SWAP rate.
The 5y5y SWAP rate is closely watched by central bankers for signs of inflation, as it represents the real five-year interest rate at that point in the future. It is determined through the market yields of the various Treasury Inflation Protected Securities (TIPS).
Yared and Saragoussi see several factors influencing their trade recommendation. There is Abe and his liberal ways with monetary stimulus. Looking at a relative value economic play, the analysts see diverging markets. European Central Bank stimulus – currently purchasing EU corporate debt, a new twist on the economic text books – might be strong, but its priced into the market, is the thesis. Status quo. Then look at the US, where data is confirming the US economy continues to operate on a glide path. But to put the cherry on top of the cake, political uncertainty around the scary Brexit is starting to subside.
“UK political uncertainty has receded with the forthcoming appointment of Theresa May as Prime Minister which has been supportive of European banks,” the Deutsche Bank report noted. “The risk of political contagion to Europe has receded as several polls suggest an increase of support for remaining in the EU in many countries.”
The Brexit vote has passed. The world is not ending, at least not yet.