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Daily Agenda: Big Banks Grapple With Stress Tests

Two foreign banks fail to pass Federal Reserve stress test muster; Sabadell announces offer for TSB; U.K. trade deficit narrows.

Federal Reserve stress test results, announced yesterday, have put divergence in the banking center at the forefront. Wall Street stalwarts such as Goldman Sachs Group, JP Morgan Chase and Morgan Stanley are cleared going forward to begin returning capital to investors, while the U.S. divisions of Deutsche Bank and Banco Santander were found to be deficient. Given the rising costs of navigating regulation, investors are increasingly focused on how profits may be dampened for the big financial players while smaller banks appear increasingly vulnerable to activist campaigns. Among primary U.S. lenders, Citigroup perhaps had the most improved standing with Fed policymakers, securing approval for an increased dividend and share buybacks.

Spanish bank to acquire foothold in the U.K. Spanish lender Banco de Sabadell announced today an offer for U.K. bank TSB Group in a deal that would exceed $2.5 billion in value. The proposed transaction would allow Lloyds Banking Group to divest its holding in TSB ahead of the schedule U.K. regulators had stipulated. The deal will position Sabadell as the second major Spanish bank to enter the U.K. mortgage market in recent years following expansion by Banco Santander.

Ukraine bailout. The International Monetary Fund unveiled a $17.5 billion loan package to the Ukrainian government today. Conditions attached to the credit facility include significant structural reforms and reductions in public spending, with the first cash expected to arrive within days to prop up the embattled nation’s coffers.

U.K. trade deficit narrows. International trade data released today by the Office for National Statistics today showed the U.K.’s trade deficit narrowing to £616 million ($923 million) in January, as low oil costs kept import levels lower. Excluding oil, the balance of trade in goods for the month reached the lowest point since 2013.

U.S. economic indicators on deck. In the U.S., weekly initial jobless claims and business inventory data for January will be released today. Also on the macro agenda are February retail sales figures, with consensus forecasts for a 0.5 percent month-over-month bounce after an unexpectedly downbeat showing by shoppers in January.

Alibaba invests in Snapchat. Reports yesterday indicated that a recent $200 million investment made by Chinese Internet giant Alibaba Group Holding into messaging service Snapchat will bring the messaging company’s valuation to $15 billion. The most recent prior round of capital raised by the Silicon Valley upstart had included investments by Yahoo and venture-capital firm Kleiner Perkins Caufield & Byers.

ECB reviews Greek banks. European Central Bank authorities are reviewing the emergency liquidity assistance funding of Greek banks. Most analysts do not anticipate that the ECB will ease its stance before a reform package (and its implementation) is on track. Separately, in televised comments this morning Greek Finance minister Yanis Varoufakis complained about ECB refusals to accept Greek debt as collateral, saying the bank “is pursuing a policy that can be considered asphyxiating toward our government.”

Portfolio Perspective: A Lower 2015 Growth Forecast for ChinaJian Chang, Barclays

Real activity data in January and February posted big downward surprises in industrial production and fixed-asset investment. Excluding the distortion from Chinese New Year, averaged data for those two months confirmed that downside risks to China’s 2015 growth have started to materialize.

We revise down our 2015 GDP growth forecast to 6.8 percent from 7 percent in view of the likely weaker-than-expected growth during the first three months of this year. We maintain our sequential growth path forecast for the rest of the year: with quarter-over-quarter growth picking up to 6.6 percent (seasonally adjusted) during the second quarter and 7.4 percent in the third quarter, assuming more government-led infrastructure investment and improving external demand on the back of a relatively strong U.S. recovery. The property market correction, still a key risk to watch in 2015–’16, is expected to weigh on growth. The plunge in January and February property sales and new construction starts point to continued slowdown in property investment in the coming months.

We now expect an accelerated monetary easing cycle and somewhat loosening of the fiscal stance. We think the overall fiscal stance in 2015 will likely be close to neutral or somewhat tightening, given the government’s commitment to streamline local government borrowing. We think the government will also provide more support for local government financing through debt swaps and maturity extensions, however, as well as increasing social transfers and accelerating government-led infrastructure investments.

Jian Chang is the chief china economist at Barclays in Hong Kong.

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