Potential Opportunity - Patience PaysPreviously I wrote a brief note explaining caution for the US Banking industry as illustrated by XLF.
This is due to:
- market risk of a broader market pullback - as currently being experienced
- impact from Covid-19 variants like Delta etc.,
- the cumulation of record high bank reserves (cash) which serve to stress Bank Capital and Capital adequacy ratios. These reserves have been building up due to the FED's policy of buying Bonds in the market. Once sold, the vendor banks cash at a Bank which severs to increase the Bank's liabilities. The FED has tried to mitigate this effect by using reverse repos - which is ridiculous - it should stop the buying / QE ie the naughty word - Taper!!! :)
The opportunity to be long includes:
- market risk subsides as debt ceiling is mitigated.
- infrastructure bill goes through which is GDP positive.
- further recovering of the US and European economies noting n increased travel facilitated by increased vaccination rates.
- Bank capital being strong as it is, has seen some Banks start to sell assets which have a lower capital rating (for the purposes of capital measurement) and will eventually open the door to strong lending programmes noting the prior comment.
- still good fiscal support - so economy, GDP and the broader market is growing.
In other words a decent credit cycle may ensue which will be very positive for Banks and of course XLF.
However - Patience Pays!!!
Buying in smalls around key support areas and build a position - no 'binary' trading.
