Via FTAlphaville comes anew note of pessimism from Citi. What’s the next channel of contagion from EMs? Developed market banks:
The European / Global banks most exposed to the more fragile EM markets are the Large Cap Spanish Banks, especially Santander (Brazil and Argentina exposure is equivalent to 270% of group TCE). Santander reported their 4Q13 results on Wednesday that included a weak Brazilian performance: attributable profit -31% yoy, -14% qoq (in local currency). While BBVA has exposure to weaker EM countries, its largest single EM country exposure is Mexico where it just reported a very encouraging 4Q13 (net profit: +16% yoy, +26% qoq).
And if the current account deficit revulsion spreads to DMs?
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That seems very unlikely in a world of relative returns and would take another global financial crisis. The Australian 10 year has been rallying pretty much in lock step with US bonds. However, we are beginning to see CDS pricing for banks tighten and the underlying bond pricing will be rising as well. The move is so far small, peaking at a 15bps move above the recent base at 80bps. But it is worth watching for a new upwards trend. My feeling is that so long as China remains relatively liquid, then rises will be contained.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
