Weekly Outlook: The European Post Stress Test Syndrome

The financial sector is likely to rally when the market opens on Monday morning, as a reaction to the results of the EU stress test, published after the European markets closed Friday. After the publication the euro  strengthened and US stocks indices gained about 1%. However, the rally may be short lived as both Goldman Sachs and Danske Bank warns about the rising conflict between Hungary and the EU/IMF.

“This could become messy.”

Erik F. Nielsen


Most analysts are still going through the published material related to the EU bank stress test with a huge magnifying glass. Trying to figure out if the better-than-expected results really is as good news as some EU politicians and bankers says it is. Until they’ve made up their minds, the market are likely to focus on earnings reports and the usual macro numbers. That is; if not Hungary blows up…

According to Bloomberg, the EU bank stress tests have failed to reassure investors, who are still wary of the capital criterias.

“The amount of capital needed is much lower than the market expected,” says Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd. “It seems quite trivial considering the concerns about losses from the sovereign crisis.”

European governments are using their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.

Rising budget deficits in those countries raised concern that they won’t be able to pay their debts.

“This is not reassuring at all,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. “These tests were set in such a way that most of them would pass. That doesn’t say to me that the banking system is stable.”

Goldman Is Optimistic

“The stress tests were released on Friday; unprecedented amount of new consistent data – my colleagues are going through it all, and we’ll have a comprehensive assessment before Monday morning,” European strategist at Goldman Sachs, Erik Nielsen, writes in his weekly update.

However, Eriksen makes the following statement:

“The fact that fewer banks failed – and less capital seems to be required – than expected might suggest that the assumptions were somewhat lenient, but I’ll rather wait with any assessment until Jernej & Co have digested it all. One thing is clear though: Equity analysts and investors have considerably more consistent data to consider today than they had last week, and it seems to me that if indeed we don’t like the assumptions we can then re-run it all ourselves on the back of all these newly released numbers. This must be good at some level, including for the overall macro picture.”

Meanwhile, Goldman Sachs point out the other main drivers in the European markets at the start of the  week:

“We are through a week of outstanding European real growth and indicator numbers, making our above-consensus forecasts look somewhat pessimistic.”

• “This coming week will see the first roll-out of corporate earnings in Europe; we think they’ll beat expectations.”

“On the macro side we’ll get the rest of the July surveys in the Euro-zone as well as June labor market data; we expect continued good surveys, but a marginal increase in unemployment.”

“In the UK we’ll get the CBI distributive trade survey and mortgage approvals; they’ll probably both slip a bit this time.”

* “Finally, watch out for Hungary; the lines are being drawn between the government’s reluctance to consolidate the fiscal side and the EU/IMF demands for more. This could become messy.”

Here’s a copy of Goldman Sachs’ European Weekly Update by Erik Nielsen.

(By the way: here’s the weekly US outlook from Merrlill Lynch/Bank of America),

Oh No, Please No More Bad News!

Danske Bank Markets (Danske Markets) also focus on Hungary in their weekly outlook for the emerging European markets.

“Once again Hungary is back in the limelight – and that unfortunately is not too positive. Last weekend talks between the EU/IMF and the Hungarian government broke down. That is hardly good news and Hungarian yields and rates have spiked this week. Rather impressively, there has been no spill-over to Polish and Czech rates and yields, which is a clear indication that the markets for now– rightly in our view – see this as a Hungarian rather than a wider central & eastern European (CEE) story. That said if the Hungarian crisis escalates we don’t believe that the other CEE markets will remain totally immune, but for now there is reason to panic. See also our comments on the Hungarian crisis here. On Friday Moody’s said it puts Hungary’s rating on review for a possible downgrade. That added further to the negative sentiment in the Hungarian markets,” the Danish analysts writes.

“Looking into next week we have relatively little on the agenda in terms of macroeconomic data releases so the markets could continue to focus on the Hungarian situation and we fear that we could be heading for more volatility in the Hungarian fixed income markets. We are especially worried that the Hungarian government’s apparent disregard for the concerns of international lenders and market participants could spark more volatility and if we see yet another sharp move in the forint then we would certainly not rule out that the Hungarian central bank might decided to hike interest rates in a “super hike” of 300 – 400bp as on previous occasions where the forint has come under significant pressure. We therefore recommend investors to be positioned for a further rise in the Hungarian yields – especially at the short-end of the curve.,” Danske Markets concludes.

Here’s a copy of Danske Markets’ EM Weekly.

Euro Continue to Rally?

The European currency made a sharp rally on Friday afternoon, after the stress test results was known.

Looking at the charts for the last 5 days, it seems like the euro rally may continue, at least for a short while.

The EUR/USD Momentum Indicator is still pointing cautions up:

The Money Flow Index indicates increasingly more money going into euro:

Note that the relative strength index (RSI) seems to be in a falling trend – at least measured in short terms. That might indicate mid- and long term weakness.

Top 10 Bets In Nordic Stock Markets

If you’re thinking about betting on Nordic stocks, here’s the current “Top 10 List,” according to the technical analysts at Investtech.com:

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6 Comments

Filed under International Econnomic Politics, National Economic Politics

6 responses to “Weekly Outlook: The European Post Stress Test Syndrome

  1. Pingback: Acetrader-Daily Market Outlook 26-7-2010 | forex currency trading

  2. I am in the process of applying for a bridging loan, it all sounds simple enough, but I still feel uneasy about taking a loan against my current home, which I own outright .

    • econotwist

      I would be a bit wary, too…if I was to take on more debt at this moment….:-)
      It’s still uncertain what way the housing prices will go from here.

      One the other hand; one can’t stop living just because something might happen sometime in the future.

      My advice would be; make a stress test on your own economy, based on some realistic worst-case scenarios. And don’t increase your debt more than you can handle if anything goes wrong.

      Hope for the best, but prepare for the worst.
      Then you’ll be okay :-)

      Best Wishes
      econotwist

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