Europe
Shares in Europe started the day in positive territory thanks to respectable results from the asset quality review but reality hit back home when German business sentiment soured again in September in the latest IFO survey and markets swiftly rolled over.
In a series of stress tests the ECB asset quality review failed 25 banks out of 130 and of those that failed, 12 have already done enough to not require raising capital. The remaining banks have to come up with a capital raising plan in 2 weeks and raise the money within 9 months or face further regulatory intervention including the possibility of forced asset sales or winding the bank down.
It was always going to be a tightrope walk for the ECB; if too many banks failed there’d be panic in the markets but if not enough fail then the results are not deemed credible. As it turned out, both were interpreted negatively for markets when the German IFO missed expectations reminding everybody the stress test results were never going to be any kind of silver bullet to heal the European economy.
Italian stocks and particularly Italian banks were pasted after coming in bottom of the pile in the stress tests with Banca Monte Paschi Siena (MILAN:BMPS) needing to raise 2.1bn euros to pass. Banca Monte dei Paschi can hardly be described as an Italian stallion, in fact if it were a horse after this many bailouts it would have been shot by now.
UK stock markets followed the mainland lower, even though no UK banks failed the stress tests; Lloyds Banking Group Plc (LONDON:LLOY), HSBC Holdings Plc (LONDON:HSBA), Barclays (LONDON:BARC) and Royal Bank of Scotland Group PLC (LONDON:RBS) were all lower. There are clear risks posed to the local recovery thanks to the coupling of the UK and European economies.
Investors looked to pick up a bargain after recent Ebola-induced weakness in the travel stocks; Easyjet (LONDON:EZJ), International Airlines Group (LONDON:ICAG) and TUI Travel Plc (LONDON:TT),Intercontinental Hotels Group (LONDON:IHG) and Carnival (LONDON:CCL) travel which were all higher.
US
US markets, easily rattled ahead of this week’s FOMC meeting followed Europe lower not aided by a fall in revenues and lowered outlook from Merck’s latest quarterly earnings report.
The most important twenty-four hours for social media stocks starts tonight when Twitter Inc (NYSE:TWTR) report earnings followed by Facebook Inc (NASDAQ:FB) tomorrow. Both companies epitomise what many view as a new bubble in technology stocks and overvalued markets.
Twitter naysayers were all aghast last quarter after the company blew away user growth estimates but it was the quarter of the football world cup and now that expectations have been raised the possibility of missing them becomes that much more likely. Shares hit almost $75 after the IPO but crashed to $30 and have rallied since sitting at around $50 now.
Pending home sales rose slightly by 0.3% in September after falling 1% last month but missed expectations of a 0.5% rise.
FX
The US dollar traded lower against most global counterparts today after a disappointing pending home sales report.
GBP/USD held 1.60 last week and looks like potentially breaking 1.6180 the high from Monday October 20 after a stronger than expected realised sales report, potentially leading to rally back to 1.64 last seen in September.
USD/JPY has been trading in a 60 pip range since Thursday ahead of the FOMC, the Bank of Japan and a host of other Japanese data this week.
Commodities
Gold is still stuck in its $7 range ahead of the FOMC meeting on Wednesday and an update on the inflation outlook for the US.
After a brief respite at $80 in WTI, crude oil dropped again today at one point down over 2% thanks to a broker report citing the continued influence of the US shale boom on global supplies.
Copper traded higher having recently held $3 per lb. its support since September 2011.
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