News from financial equity.

Reflation Picking up Steam.
With yield curves at the steepest levels in 4 years and inflation breakevens accelerating higher, the reflation theme is picking up steam as markets begin to anticipate the reopening of the global economy. Massive amounts of fiscal stimulus have already been deployed and this is set to continue – the US budget deficit/GDP could be well over 20% this year, and EU Recovery Funds will start to be deployed this year. Already $2 trillion of excess deposits have been created across the US and Europe, essentially helicopter money targeting mostly lower and middle income households ready to spend. It seems like we may be at the beginning of a secular shift from a monetary policy regime of QE, which led only to inflation in financial assets, to aggressive use of fiscal policy with central banks happy to let economies run hot.

US bank earnings – Wrapping up Another Strong Quarter.
US bank earnings wrapped up on an encouraging note. Loan losses have come in much lower than expected, and the average US bank has seen +15% EPS revisions for 2021. In addition, with the Fed approving bank share buyback resumptions in December, repurchase plans are 10x the level from a year ago, with some banks likely to return nearly 30% of their market cap in the next two years.

European Bank Earnings – Off to a Strong Start.
European bank earnings are off to a strong start. Nearly every bank is beating across P&L and capital. Driving these beats are repricing lower of wholesale liabilities and better lending margins supporting net interest income, elevated levels of capital market activity supporting fees and trading income, government support programs mitigating loan losses, and higher organic capital generation along with progress on de-risking efforts supporting capital.

European Bank Stress Test – Taking a Page from the US.
The European Banking Authority recently published the economic assumptions for its annual stress test. While the scenarios seem harsh at first glance, the considerable capital buffers in place and inclusion of the beneficial impact of government support programs suggest the majority of banks will pass. The results will be published later this summer, which will instill further confidence in the sector’s capital adequacy and lead to a full lift of the dividend restrictions that have been an overhang on the sector. A harsh, credible stress test has bolstered the valuations of banks in the US and this should result in a similar re-rating for the stronger banks in Europe as well.