Friday 21:45 BST Risky assets are gaining following the initial results of the European bank stress tests, in which all but seven banks passed, but traders are waiting until Monday to take a stronger view of the eurozone and the global economy’s future.
Though the headline result was fewer failures than expected, early reaction to the details of the tests was disappointment. The CEBS says the total capital shortfall for the seven failed banks was just €3.5bn. A handful of banks that were earlier seen as in danger of failing, such as Italy’s Banca Monte dei Paschi di Siena and Germany’s Deutsche Postbank, narrowly passed.
Following the results, US traders pushed the biggest-volume New York-listed shares of European banks lower. Deutsche Bank and Banco Santander were each down 1.2 per cent at one point, though they have since rallied to gains.
“It won't be until Monday that the cynical camp will digest the full details and decide if it was an obviously non-credible test,” said Eric Fine, portfolio manager at Van Eck Global. “But €3.5bn sounds low to me.”
However, broader market action was rather muted. The S&P 500 index is 0.8 per cent higher, but traders are crediting General Electric, which said it was raising its dividend, and Sanofi-Aventis, which was reported to be exploring a megadeal for drug-making rival Genzyme. US Treasury yields and the euro have moved higher, alongside shares, but were mostly unchanged immediately after the test release.
The FTSE All-World index is up by 0.8 per cent. Although European banking shares spent much of the session lower, Europe was ultimately well supported by a rising economic tide, including surprising jumps in UK GDP growth and German business confidence. Crude oil remains softer despite support from the risk of storms interrupting supply.
In general, traders have not been eager to take substantial positions in any market before the tests are fully understood. Thursday’s sharp rally was the real reaction to the early leaks of the stress test results; now begins the wait for serious analysis. While the results may not have impressed, the sheer volume of information released by the CEBS is said to give analysts and investors plenty to work with over the weekend.
“The information set is so rich, it should be feasible for people to make up their minds about each bank. Once that fear of not knowing is gone, you’ll see it’s a generally a positive for risk,” said Sebastien Galy, strategist at BNP Paribas in New York.
Indeed, that reaction has already begun to some degree. Credit markets actually cheered the results, according to Markit figures, with credit default swap spreads on European banks nearly universally narrowing. The biggest gainers were Greek banks EFG Eurobank, narrowing 109 basis points, and National Bank of Greece, narrowing 92bp.
● Europe European equity markets were slightly lower for most of the day. The tone was set after Ericsson, the mobile phone maker, missed its earnings targets, saying global network sales were slower. Shares were down 5.7 per cent, leading telecoms sector lower across Europe.
The banking sector was 0.1 per cent higher, rising a bit towards the close after spending much of the session lower. UK banks were softer, leading the FTSE 100 index down slightly lower.
Spain’s Ibex index was up 0.8 per cent, with BBVA up 1 per cent and Banco Santander up 1.3 per cent. Spain’s smaller caja savings banks, not its large commercial banks, are in the spotlight. The Athens index, however, was down 1.4 per cent as fears for its largest commercial banks took hold, which were somewhat realised by the failure of Atebank.
● Asia Markets took their overnight cue from Wall Street. They were boosted further by a group of after-the-bell positive earnings reports, including American Express and Microsoft.
The Nikkei 225 index was up 2.3 per cent, with the Hang Seng rising 1.1 per cent. The Asia-Pacific index overall added 1.6 per cent. The Shanghai Composite index was a laggard, however, rising just 0.4 per cent, damping hopes that the depressed market had finally turned a corner.
Bombay’s Sensex was also behind, adding 0.1 per cent. India’s central bankers are sounding aggressive about monetary tightening, in spite of a report from a government minister of softer-than-expected price growth.
● Forex The pound is up 1.2 per cent, to $1.5426, thanks to the UK’s GDP surprise. The euro has rallied to 0.1 per cent higher against the dollar, at $1.2914. As a result, the dollar is down on a trade weighted basis. But it is 0.4 per cent higher against the yen, at Y87.43, a sure sign of investors embracing risk.
Moody’s said that it was putting Hungary, whose austerity programme is seen as insufficient by the International Monetary Fund, on watch for a potential downgrade. The forint is 1.4 per cent lower against the euro.
● Debt US Treasury yields have finally broken their tether to session lows, breaking out a bit toward the end of the session. Two-year bond yields are up 2 basis points from their record-low yield at 0.58 per cent. Ten-year yields are up 6 basis points, at 2.99 per cent, their highest mark in over a week.
Core bonds reflected shaky confidence during the European session. German 10-year Bunds, whose yields were higher most of the day, ended flat, at 2.7 per cent.
UK Gilts, however, were up 8 basis points to 3.43 per cent following second-quarter GDP growth coming in at nearly double the forecast.
Peripheral debt in Portugal and Spain was in demand, while Greek two-year notes were higher by 10 basis points, to yield 10.28 per cent.
● Commodities Benchmark crude oil is down 0.3 per cent, to $78.97, as traders book some of their profits from earlier, when crude nearly hit $80. But it has traded choppily as they weigh an uncertain growth outlook (Europe’s up, but is the US down?) against the support of an approaching storm off the US Gulf coast.
The base metals complex is higher across the board, with copper adding 1.1 per cent, to $7,010 a tonne in LME trading, a fresh two-month high. Gold fell 0.4 per cent to $1,190 a troy ounce, as the inflation outlook remains uncertain.
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