European Markets Fall 1%; Italian, Spanish Yields Cross 6%

Arjun Dave
18 Jul, 2011
New York City

European markets declined more than 1% after investors digested bank stress test results which many consider were not stressful enough. Italian bond yields rose above 6% and the euro dropped to a record low against the Swiss franc. Philips swung to a second quarter loss.

[R]3:10 PM Frankfurt – European markets declined more than 1% after investors digested bank stress test results which many consider were not stressful enough. Italian bond yields rose above 6% and the euro dropped to a record low against the Swiss franc. Philips swung to a second quarter loss.[/R]

European indexes turned lower as investors digested the details of the recently completed bank stress test that many considered were not stressful enough. Insurers and banks led the decliners in the region.

The euro declined against the Swiss franc to a record low and gold traded briefly above $1,600 an ounce.

The worries related to the euro-zone sovereign debt stress dragged markets indexes in the region lower more than 1%. The yields on German bunds increased and the Spanish bond yields spreads rose to the record wide levels since the creation of the euro.

Italy regained the focus of investors as bond yields rose to record 6.06% and Italian banks dropped as much as 4%.

Italian Parliament approved €48 billion austerity package on Friday but investors worried that rising bond yields will demand larger cuts.

Investors were disappointed after the release of the bank stress test results and worried that a Greek default or another round of bond market sell-off may weaken the banks further.

European Banking Authority said of the ninety banks stress tested, eight failed and 16 more will need to raise capital immediately. In all, eight banks are required to raise 2.5 billion euros.

Private estimates suggest banks may need as much as €90 billion of new capital if Greece defaults and Italy and Spain needs bailouts.

European banks in the first four months of the year raised nearly €28 billion ahead of the stress test.

The tests did not include full default on Greek bonds but only 25% decline in value and counted the trading losses resulting from the equity markets fall of 15% and economic growth decline of 0.5% in the euro-zone.

Europe’s 100 largest banks have as much as 680 billion euros of exposure to the sovereign bonds of Portugal, Italy, Ireland, Greece and Spain and the stress test assumed trading losses of 10 billion euros only.

In Paris CAC-40 Index declined 51.84 to 1.40% to 3,674.61, in Frankfurt DAX Index edged lower 76.71 or 1% to 7,143.41 and the FTSE 100 index fell 60.52 or 1% to 5,782.69.

Stock Movers

Intesa Saopaolo SpA extended the losses by 3.7% to €1.52 and fell 20% in the month and Unicredit declined 3.4% to €1.17 and dropped 24% in July.

Banco Popolare dropped 3.6% to €1.39 after the bank received the lowest rating in the stress test and Chief Executive Pier Francesco Saviotti said that the bank does not need new capital and will not sell its unit Credito Bergamasco.

Philips Electronics NV decreased 6 cents to €17.31 after the company swung to a second quarter net loss of €1.34 billion compared to net income of €259 million in the quarter a year ago. The electronics maker took a one-time charge of €1.4 billion.

Sales decreased to €5.21 billion from €5.35 billion a year ago quarter and the company said it will buy back €2 billion of shares.

Atlas Copco declined 7.2% to SEK 151.10 after it reported second quarter earnings below market estimate.