Independent Strategy

AQR – horrors behind the hype

Markets will take a benign view of the upcoming asset quality review (AQR). Banks have been raising capital and increasing bad loan provisioning. They have also been shrinking balance sheets to reduce the level of risk-weighted assets. ECB easing will do a lot to mask any nasty outcomes. The recently-announced ABS and covered bond programmes could even be construed as a backdoor bank recapitalisation. But this can’t erase the risk to the financial sector of continued private and public sector deleveraging, weak growth and low inflation — if not outright deflation. As such, the results should be taken with a pinch of salt. We would remain short the euro and stay out of European financial sector equities.

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