Stress tests somewhat better than feared

illustration: numbers

(18.07.2011) The stress tests of the European bank showed that eight failed the test, somewhat fewer than expected in advance. US macro data disappointed on Friday, sending long yields down. This week’s most important event will probably be a scheduled EU summit in Brussels on Thursday.

By Knut A. Magnussen, Senior Economist at DNB Markets

The European stress tests, released Friday afternoon, showed that two Greek banks, five small Spanish banks and one Austrian bank failed. This implied that their core capital ration was lower than the 5% benchmark in adverse scenarios. Taken together the eight banks will have to raise 2.5 bill. Euro in order to fulfil the requirements.

One German bank, Helaba, also failed but would not accept the results to be published. The larger Italian and Spanish banks all passed the tests. However this may be due to the performance of the test regarding sovereign debt. As last year the tests only look at effects on the trading portfolios of changes to the value of the bonds, but do not study effects of a (Greek) default. However, EBA says that all banks have been asked to reveal all their sovereign debt exposure, making it possible for investors to examine effects of a default.

The test in general looked at adverse scenarios for GDP, unemployment and housing prices ie a drop in GDP of 4%. Results were revealed after market close on Friday, but the FX market did apparently not react to the tests. The EUR has however lost some ground over the weekend and EURUSD is now trading tat around 1.4070. Thursday this week another top summit is scheduled in the euro-zone. The focus will be how to include private investors in the second Greek bailout package.

The US data on Friday were a disappointment and lead to lower long term interest rates. In particular the Michigan consumer sentiment dropped far below estimates and is pointing at zero growth for private consumption. The index fell to 63.8 – the lowest since February 2009 – while a small increase was expected. Somewhat lower petrol prices could obviously not counteract the negative effects from the labour and the stock markets. Hopefully consumer demand will continue to perform better that the sentiment index indicates.

Industrial production also was a disappointment in June
. Production grew by only 0.2% and manufacturing production showed no growth at all. Car production fell 2% and is still dampened by the Japanese supply chains. The NY Fed sentiment index rose less than expected even though the outlook for the coming six months rose.

US
core inflation rose more than expected for the second month running. Inflation is lifted by higher prices on clothing and hotels. Headline inflation stayed at 3.6% (y/y) despite a small monthly drop. Today the NAHB housing market index is due. Together with capital flows (TICS).

There have not been new negotiations on the debt ceiling during the weekend and no meeting is scheduled for today. Hence it seems not very likely that President Obama will succeed with the plans for a grand bargain, senators are looking at other options. According to Reuters the two Senate leaders are discussing the possibility for Obama to raise the ceiling without the support from the republicans. However, this solution may only be used if no agreement can be reached by 2. August.

Today the minutes from the Riksbanken rate meeting 4. July will be released. It is not expected that the minutes will reveal new views among the board members. However, it will be interesting to see whether the board has discussed effects of the weaker data recently. We think the weaker data will imply fewer than planned rate hikes.

Se also
» EU-Wide Stress Test results for DNB Bank ASA - press release