If Fridays publication of the European bank stress tests were a Shakespearian play they would have been “Much Ado About Nothing” as they came out with a mere 7 banks out of the 91 banks tested failing, suggesting that the criteria were less than thorough. The tests were limited to banks trading book losses, while assuming a four notch downgrade to securitised holdings, and a 20% drop in stock markets across Europe over the next two years.
The evaluations took into account potential losses only on government bonds the banks physically trade, rather than those they intend holding to maturity, according to the Committee of European Banking Supervisors (CEBS). That means the tests are set to ignore the majority of banks’ holdings of sovereign debt as they moved the riskier elements of the debt out of their trading books so that it was left out of the scope of the tests.
Time will tell if this bit of creative accounting or sleight of hand is able to reassure the markets; however what it may do is split the European banking system into a two tier one with the strong banks in one tier, and the weaker ones left to wither on the vine, locked out of the funding markets and dependent on the ECB.
This may well put a near term cap on recent euro gains and see the single currency start to slide back, however if it is able to get above its recent highs around 1.3020 it could well overspill towards 1.3125.
The pound could well continue to be well supported despite the 0.1% fall in July’s monthly Hometrack figures for July. Friday’s UK preliminary Q2 GDP figures should remain the dominant factor after surprising to the upside and embarrassing the economist forecasts by coming in at a whopping 1.1% against an expectation of 0.6%, its highest level since Q1 2006.
This unexpected boost to growth makes the likelihood of further quantitative easing unlikely in the short term, and also adds weight to Monetary Policy Committee member Andrew Sentance’s argument that rates should start to rise sooner rather than later.
In the US June new home sales housing data out today could well continue in the same vein as previous data, however analysts appear to be slightly more optimistic, since the May figure shocked the market with a 32% fall, with analysts predicting a 5% rise for June.
EURUSD – The single currency has continued to struggle to make gains beyond 1.3000, slipping back on the back of the publication of the stress test results
It hasn’t however been able to break back below the 1.2840/50 area for the moment, but in the event it does it should find support at last week’s lows around 1.2730/40. While above 1.2840/50 the risk of a move towards the 38.2% retracement level of 1.3125 remains a possibility.
GBPUSD – Friday’s surprisingly good GDP numbers boosted the pound at the end of last week sending it through 1.5335, after a tricky couple of days last week and keep alive the possibility of a test towards the April highs around 1.5520, and even 1.5610 which is the 61.8% retracement level of the 1.6460/1.4230 down move.
Trend line support levels, around the 1.5180/90 area, from the June lows at 1.4350 needs to hold to maintain the momentum of the recent gains and have so far. A break below 1.5180/90 potentially opens up 1.4980,
EURGBP – the euro finally came unstuck on Friday against a resurgent pound as the support at 0.8400/10 gave way to a sharp move lower towards the 0.8320/30 level.
The 0.8400/10 again becomes a key resistance level again to further euro gains and would expect to see further declines through 0.8320/30 back towards 0.8240, while 0.8410 caps.
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