Cazenove European specialist Chris Rice explains why the EU stress tests and relaxation of the Basel III proposals has reduced the risk of a second credit crunch in 2011.
July saw a huge shift away from defensives towards financials and cyclicals. This was triggered by anticipation of the passing by all (bar seven) banks of the EU stress tests, followed by the relaxation of the Basel III proposals on the bank sector. This has two important consequences: firstly, the banks themselves now have the potential to earn a decent RoE in the coming years; secondly, it reduces the risk of a second credit crunch in 2011, which in turn means the economy has a better chance of a self-sustaining recovery. The main trigger for the rally in cyclicals was the unexpe...
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