Bank bust rolls on as funding costs march higher

The AUD is still struggling through the day:

XJO is down a touch:

Bonds are well bid at the long end:

Dalian is firm:

And Big Iron:

Big Gas is weak:

With Big Gold:

Big Banks are still under pressure other than the magical CBA which apparently lends elsehwere:

The RBA may not want to hike but mortgagees had better prepare for some more out-of-cycle mortgage rate hikes in the year. BBSW is marching higher:

Big Realty is weak:


The ASX has held up relative to global stocks recently thanks to miners. Whether it can continue is another question…

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • I’m not sure that the RBA will cut any further. I’ve shifted to the opinion that they’ll do a behind the scenes expansion of their CLF facility and in the process weaken their own balance sheet while simultaneously strengthening the balance sheets of the big4. It’s a sort of backdoor very opaque QE that’ll give everyone room to say they’re winners while the biggest smelliest ones get flushed from the system.

    • Wait for it. There’s usually a delay due to the term structure of bank’s foreign-source liabilities. International liabilities are intermediated into domestic assets with a duration mismatch between the two (short term international, longer term domestic). When liabilities must be rolled, that’s when higher costs kick in and are passed through.

      The RBA is in real trouble here. International pressure is pushing them to raise rates. Domestic pressure is pushing them to cut. If they move in one direction, to cater to one party, then they trigger a crisis in the other. Hence they freeze like a deer in the headlights, holding rates steady and hoping desperately that the situation will resolve, either:

      – international conditions will deteriorate (seems to be happening)
      – domestic conditions will improve (not happening)
      – Megabank will roll out of exposure to well-performing counterparties into exposure to relatively weaker counterparties (no idea)
      – Megabank will reduce net international exposure (no idea, but runs the risk of triggering an AUD exchange rate linked crisis)

      If none of that happens, there’s a big problem. If international pressures are not relieved, Megabank will keep pushing costs through to a higher domestic market rate, bringing on a recession and housing market collapse. Under this circumstance, the only real option open to the RBA is (as fisho also suggest), to engage emergency policy.

      If the RBA cuts, or does nothing while market rates rise, then the spread between the market rate and the RBAs discount rate narrows. Once it’s at zero, the RBA has moved from the lender of last resort to the lender of first resort, something that is not supposed to happen except in an emergency. The effect of this will be a crisis signal to the world economy:

      – Megabank profitability will be reduced, to the point of going negative (as the RBA is taking over lending)
      – international confidence in Megabank will be reduced.
      – Megabank share prices will sell off, reducing the ability to raise capital via equity markets
      – counterparties of Megabank will raise collateral requirements
      – credit ratings will downgrade Megabank, feeding into higher capital and collateral requirements
      – the AUD will fall, further exacerbating pressure on Megabank via illiquid international exposure (and no, the RBA is not fooling anyone by trying to sweep this under the rug by claiming that Megabank is fully protected by interest rate and currency swaps. Protection have a cost, and that cost will rise with each roll).
      – government debt will have to go higher to enable OMO supply, enough to hit the target rate. The RBA will find itself swapping TSYs for lower quality bank “assets” (QE) and we have a downward spiral until such time as Megabank can relocalise.
      – the RBA will also find itself directly swapping for distressed assets (recall that the Fed’s QE were approximately half government TSYs and half RE-bubble distressed assets).
      – the RBA may have to draw directly on currency swap lines with foreign central banks to maintain international liquidity.

      Either way they move, they’re screwed, which is why they’re not moving. Hope and pray boys, hope and pray. I still think there’s an outside chance of a short term rate hike as they try to avoid engaging QE and sending a panic signal to the world. Followed by domestic carnage, panicking and the usual ZIRP + QE + Bail-ins to follow.

      It’s their own stupid fault for swallowing neoliberal dogma and globalising our banks whilst allowing a RE bubble to blow up.

  1. Surreal how Aussie shares and short bonds are holding up. Most traders probably think the rate cuts will help, but if they are old enough they will remember that dividends halve in a recession.

    AOFM buybacks will make the snapback on short bonds particularly quick when it happens

    • Nyleta
      My feeling we are near a bottom in equities
      I had dreaming ideas that we would see 7000 again but I think above 6000 again next year
      As they cut rates and aud falls you are getting that dividend until you aren’t might get all next year = it’s a pretty big diff btw equity yields and cash, I understand the earnings and bank risk but think we may get another run higher

      • bcnich,

        I struggle to see how…if the RBA is going to do these things because of a sucky, risky economy, what is the justification for the rise in equities? Surely their prospects/earnings are looking bleaker by the week?

        Perhaps you are right, and some “juice” causes say, bank stocks, to rise on fumes, but it is hard to see a sustained rise, don’t you think?

      • BW
        Yes maybe you are right
        I don’t have a very big share position but I really do think they’ll go higher next year on lower rates and AUD msybe I’m wrong but I’m not selling out down here
        Think we are close to all the longs stopping out, let’s see next year but sentiment can change very quickly

  2. “the magical CBA”

    I think Santa and his elves may be trying to prop that one up, without it ASX is toast. Interestingly it now has higher short interest than WBC, though both still relatively low compared with earlier in the year.

    • CBA always trades that way. Cast your charts back 10 years to the GFC and see how it sat on a massive plateau for months while the rest of the world crashed around it.

  3. Am I reading this right.?

    From the Commonwealth bank entry on wikipedia…

    Revenue Increase A$26.005 billion (2017)
    Net income Increase A$9.881 billion (2017)
    Total assets Increase A$976.374 billion (2017)
    Total equity Increase A$63.716 billion (2017)

    So if the Assets are 980B and Equity is only 60B does that mean that the assets are loans owed to them and they owe almost as much to other lenders?