European Markets Rally; Bank Stress Tests

Arthi Gupta
23 Jul, 2010
New York City

The European markets continued their fourth-day rally. Investors are awaiting the bank stress tests results to be released by European Union regulators later today. Moody

[R]4:00 PM Frankfurt – The European markets continued their fourth-day rally. Investors are awaiting the bank stress tests results to be released by European Union regulators later today. Moody’s may downgrade Hungarian sovereign debt. French manufacturers expect bleak global demand outlook in the third quarter.[/R]

U.S. and Asian markets gained after upbeat earnings. French consumer spending drops in June. German business sentiment index improved in July.

The European Central Bank President Jean-Claude Trichet urges industrialized nations for curbs in public spending.

Alstom SA, the French power-equipment maker received a €450 million contract to design, build and maintain two combined cycle gas units for the Indian utility GVK Industries in India.

In Paris CAC 40 Index decreased 3.24 or 0.09% to close at 3,597.33 and in Frankfurt DAX Index edged higher 166.31 or 2.76% to close at 6154.20.

The results of the European bank stress tests conducted by central banks and coordinated by the Committee of European Banking Supervisors is to be released today.

A total of 91 banks, representing two-thirds of the region''s banking sector, are being tested to assess whether they will be able to withstand future adversities in the financial sector. Banks from 20 countries across the European Union, with nearly half of them from Spain and Germany, are being scrutinized.

In order to pass the tests, banks will have to show that their capital reserves are strong enough to survive three different scenarios - a baseline scenario that assumes a continuous recovery; an adverse scenario in which the economy plunges back into recession; and a third scenario in which the value of the sovereign debt held on banks'' balance sheets falls.

Moody’s assessed placing Hungary''s sovereign debt rating on review for possible downgrade, citing ""increased uncertainty"" regarding the country''s fiscal outlook and uncertain economic prospects. The agency currently holds a rating of Baa1 on Hungary''s local and foreign currency government bonds.

""The failed talks between the IMF/EU and Hungary''s government about the country''s loan program which represents a crucial policy anchor for Hungary has increased uncertainty about the authorities'' determination to restore fiscal sustainability in the near term,"" said Dietmar Hornung, Moody''s lead analyst for Hungary.

""The review of Hungary''s sovereign ratings will focus on the ability and willingness of the Hungarian government to formulate a coherent reform agenda that could stabilize economic strength generally, and the government''s financial strength specifically, in a difficult economic environment,"" Moody''s said in a statement.

""In this context, the progress and substance of an expected resumption of discussions between the Hungarian government and the IMF/E.U. will be a key consideration in Moody''s ratings review.""

The agency said a failure to adhere to the IMF''s proposed fiscal targets could result in a one notch downgrade.

The European Central Bank President Jean-Claude Trichet wrote in an opinion piece published on the Financial Times Web site on Thursday that the industrialized world needs to immediately focus on public spending cuts and tax increases.

Trichet wrote prolonging the stimulus measures despite marked improvements in the economic conditions was not prudent. He also noted that cutting borrowing would have very limited effects on growth.

The ECB President further stressed systemic economic stability and sustainable growth relies on the ultimate capacity of public finances to intervene in difficult circumstances. ""Sound public finances are a decisive component of economic stability and sustainable global growth,"" he added.

German business climate rose to a record three-year high. The Munich-based Ifo Institute for Economic Research said its business climate index rose to 106.2 in July from 101.8 recorded in June. Business climate improved considerably in all the four surveyed sectors - manufacturing, retailing, wholesale and construction.

French manufacturers'' global demand outlook weakened for the third quarter, according to a quarterly survey from the statistics office Insee released today.

The indicator for expected total demand dropped to 2 in July from 4 in April, while that for past changes in demand rose to 17 from 9. The expected export demand improved to negative 2 and recent changes in export demand climbed to 14 from 4.

French consumers spending declined in June, according to figures released today. The statistics office INSEE reported consumer spending fell 1.4% in June from the 0.6% gain in May. The fall was perpetuated by reduced spending on household durables and textile leather. On an annual basis, consumer spending dropped 1.9% in June.

Retail sales in Italy fell unexpectedly in May. Retail sales decreased a seasonally adjusted 0.3% on a monthly basis in May, according to a report released by the statistics office Istat today. Sales for food goods slipped 0.1% and non-food goods fell 0.4%.

In the March to May period, retail sales declined 0.1% compared to the previous three-month period. Sales for food goods grew 0.1% during the period, while non-food goods sales fell 0.3%.

Alstom won two contracts worth approximately €450 million to build two units at the new Jegurupadu III combined cycle power plant in East Godavari District, Andhra Pradesh state, India. The part of the contract pertaining to the first unit of the power plant is expected to be booked during the third quarter of the fiscal year 2010/11.

The two units, to be commissioned from 2013 onwards, will be based on single-shaft configuration and will have a combined power output of 800 MW, providing much-needed additional generation capacity to India and making Jegurupadu III one of the most efficient combined cycle power plants in the country.

Gainers & Losers

Adidas AG increased 2.7% to €42.78 after it reported second quarter income increased to €126 million from €9 million a year ago.

Akzo Nobel increased 3.07% to €45.65 after it reported second quarter profit increased €273 million compared to €155 million.

Ericsson AB dropped 7.2% to SEK82.45 after it reported lower than expected earnings at SEK 1.88 billion. Revenues declined 8% to SEK 48 billion.

Pernod-Ricard SA declined 2.4% to €62.55 after the liquor maker and seller said revenues increase before the acquisitions increased close to 3% in the fourth quarter.