Muted Market Reaction to European Bank Stress Test Results

October 27, 2014

The stress test results were officially announced Sunday but largely leaked on Friday and hence did not carry an element of surprise.  Moreover, no German, French or Spanish banks were listed, and about three-fourths of the collective extra capital needed to be raised by banks has been done. 

The dollar is unchanged against the euro, yuan and Swiss franc.  The greenback has slipped 0.3% relative to the yen, 0.2% versus the kiwi, and 0.1% vis-a-vis sterling but is 0.1% firmer against the loonie and Australian dollar.

Ten-year German and British sovereign debt yields are steady, while the Japanese JGB has edged a basis point lower to 0.46%.

Gold ($1,231.30 per ounce) is steady, and WTI oil has eased 0.2% to $80.85 per barrel.

The main contingent of under-capitalized financial institutions are Italian, and that sector has led a 1.6% decline in Italian share prices.  Spain’s stock market is all 1.2%, but reactions in France and Germany (down 0.3%) and the British Ftse (off 0.2%) have been mild.  In the Pacific Rim stocks rose 0.9% in Australia, 0.6% in Japan, 0.3% in South Korea, and 0.1% in Singapore but fell 0.7% in Hong Kong, 0.9% in China, 1.0% in Indonesia and 0.2% in Taiwan.

Euroland money and credit data improved in September, but the IFO Institute reported further deterioration in Germany’s business climate for the sixth straight month in October.

  • M3 money growth accelerated to 2.5% year-over-year from 2.1% in August and 1.8% in July.  Money growth of 2.1% in the year to 3Q was close to analyst expectations.  M1 accounted for about half of the acceleration in September, but the growth of non-overnight short-term deposits and marketable instruments also quickened.  Loans to the private sector posted a smaller on-year drop of 1.2% in September versus a decline of 1.5% in the year to August.
  • According to the closely followed IFO monthly survey, the German business climate index dropped 1.5 points to a weaker-than-forecast reading of 103.2.  Such crested in April at 111.2.  Current conditions weakened two points to 108.4, while the expectations component printed at 98.3, down from September’s reading of 99.3.  A sister business services survey compiled by IFO unexpectedly revealed clear improvement in that part of the German economy, as such rose four points on month to a value of 23.

The Confederation of British Industries survey of distributive trades was unchanged in October, printing at 31 — same as in September but down from 37 in August.  This result was better than forecast.

Euroland’s index of leading economic indicators was unchanged in September, according to the Conference Board.  So was the index of coincident economic indicators. 

New Zealand markets were closed today in observance of Labor Day.

Hong Kong’s trade deficit widened 60% to HKD 50.4 billion in September from $31.5 billion in August.

Dutch business sentiment improved 2.2 points to +2.0 in October.

Japanese service producer prices edged 0.1% higher on month in September, leaving the 12-month rise unchanged at 3.5%.  In the five months after a 2.4% surge last April, corporate service prices have risen just 0.5% at an annualized rate.

Scheduled U.S. data arriving today are pending home sales, the Dallas Fed manufacturing index and the preliminary findings of Markit Economics’ services purchasing managers survey for October.  Tomorrow’s data calendar includes the Case Schiller home price index, consumer confidence, the Richmond Fed manufacturing index and durable goods orders.

The Bank of Israel will announce its latest interest rate decision today.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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