Monday 21.30 BST. US markets have shrugged off the problem of what to do with the European bank stress test results and are rallying on the back of upbeat economic and corporate data.

The FTSE All-World index is up 1.2 per cent and industrial commodities are higher as US markets pick up where Asian traders left off, ignoring a soft European session in between. Wall Street has risen steadily and closed up 1.1 per cent.

European markets struggled to decipher the meaning of the stress test results, in which only seven banks out of 91 tested failed, with a capital shortfall of just €3.5bn. The euro has made feints at clearing the $1.30 level but has thus far failed to do so.

But banks are now outperforming sharply, with the FTSE Global Banks index adding 2 per cent. Credit spreads on lenders are also tighter, according to Markit, although trading is thin. The iTraxx Senior Financials index is narrower by 12 basis points.

It would be premature, however, to suggest that investors have turned the corner and are now believers in the stress test, in spite of the still widespread criticism that the conditions were too easy. Simon Samuels, banking analyst at Barclays Capital, said that the tests were focused on the risks to interbank funding markets, not to shareholders, who learnt little to change their view of the level of risk in bank shares.

“The US bank sector surged 70 per cent around the time of its stress test but we do not think Europe will follow suit,” he said, adding that credit markets would probably greet the tests with only a “cautious welcome”.

Indeed, on that basis it is thus far a tepid welcome. Spanish and Portuguese bonds were in demand. The Euribor three-month borrowing rate also rose 0.5 basis points to a fresh one-year high, but it has risen for 40 sessions in a row, and the rise was not unusual.

In any case, US traders seem ready to put the whole matter behind them and keep the focus on their economy, creating a rising tide lifting European and Asian boats. Markets are seizing on a surprising jump in US new home sales. Property sales had been tumbling in the US since a tax credit expired earlier this year, so the reversal is being greeted as a significant marker. Business-activity bellwether FedEx also supported risk-taking after it raised its full-year earnings estimate.

Factors to watch. The European interbank stress question will stay in view. Strategists say they will be monitoring banks’ use of European Central Bank lending facilities to see whether private markets bought into policymakers enthusiasm for the test results, or are tightening the screws. ☼

Europe. Shares were weak for much of the day, but rallied into the close following the US market opening. The FTSE 100 index added 0.6 per cent, and the broader Eurofirst 300 index was up 0.4 per cent.

In Greece, where, of six banks tested, only the commercial lender Atebank failed, the Athens market was up 2.2 per cent. In Spain, home to five of the seven European test flunkers, the Ibex 35 index was up 1.1 per cent. Earlier efforts to recapitalise the caja savings banks were seen as largely successful, as none of the newly consolidated entities failed.

Asia. Equities made small gains as investors awaited further news about the stress test results. The Nikkei closed up 0.8 per cent and the Hang Seng composite added 0.1 per cent.

Shanghai markets reversed their weaker course of late, adding 0.7 per cent. Mumbai’s Sensex was again the laggard, losing 0.6 per cent, with bulls believing inflation is under control while the central bank seems poised to tighten policy once again.

Forex. The euro is up 0.6 per cent to $1.2995 against the dollar, struggling through a mid-session lull to rekindle its Friday rally. Sterling has been higher since the beginning of the session, up 0.4 per cent to $1.5480, its highest level since mid-April.

Much credit goes to the European and UK economies for supporting those currencies’ gains in recent weeks. Last week, Germany’s manufacturing activity index topped 62, indicating accelerating expansion, and business confidence showed its biggest monthly leap in decades. Meanwhile, the UK’s second-quarter gross domestic product figures were revised higher, nearly doubling the previously stated rate of growth.

The yen is also higher, adding 0.7 per cent against the dollar, to Y86.86. Some in Japan on Monday expressed concern about the strength of the yen after export growth was reported to have slowed for the fourth straight month. That led to calls for the Bank of Japan to intervene on the currency’s behalf, which would knock the value of competing riskier currencies such as the euro.

Debt. Core bonds have reversed and are being sold, in keeping with rising risk appetite in other markets. The yield on 10-year US Treasury bond is flat at 2.99 per cent, its highest level in nearly two weeks.

Treasury yields have struggled to move higher even though the risk environment has been supportive of late. Traders are concerned that deflation is still the biggest risk in the US, with Ben Bernanke, US Federal Reserve chairman, telling Congress last week about contingency plans for further tightening.

Supply may be providing some counterweight, as the US Treasury will auction off $104bn worth of notes this week, starting on Tuesday.

German Bunds were up 5bp at 2.76 per cent. But peripheral eurozone debt was in demand. Portuguese bonds are down 4bp, and Spanish bonds are down 11bp. Greek two-year bonds are down 5bp.

Sovereign markets in Europe are viewed as a key measure of the stress tests’ success. After all, with sovereigns in Europe essentially guaranteeing their banks’ survival, it is truly their creditworthiness that the stress tests are measuring.

Commodities. Oil is volatile around the baseline, having risen slightly during Asian trading but struggling to maintain those gains. It suffered from a technical correction as it neared $80, a level not quite yet supported by global economic growth. Brewing storms in the Gulf of Mexico, however, are being closely watched because they may shut down production. US crude is now down a fraction, at $78.96 a barrel.

In general, the complex is embracing risk. Nymex copper is up 1.4 per cent, a fresh two-month high, at $3.23 a pound. Gold is down 0.5 per cent, reversing an earlier gain, to $1,183 a troy ounce.

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