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The AQR, One Week On

31 October 2014 by lberuti

A total of €25bln capital shortfall across 25 participant banks was jointly identified by the AQR and the stress tests last week. It appeared to strike the right balance, strict enough to show the ECB means business when it comes to the safety of the financial system but without too many casualties (and also a good part of the mending job already done as a portion of the shortfall has already been raised in the market since the beginning of the year) not to spook the market. The initial reaction of investors was very positive indeed, but most of it was gone in the first hours of trading on Monday. During the whole week, financials actually failed to outperform the market and it looked as a typical example of the “buy the rumour, sell the fact” adage. There was a persistent bid for protection on banks, both in 2014 and 2003 docs, which probably means that old long risk positions were unwound. While the credit market traded sideways, financials were the clear underperformers on the back of profit taking.