Home Forex Analysis And Forecasts Markets approve of rigorous eurozone stress test results

Markets approve of rigorous eurozone stress test results

Good morning,

Markets approve of rigorous eurozone stress test results;

Second TLTRO take up may still be weak as demand for loans remains low;

FOMC decision on Wednesday the next potential banana skin for the markets;

German confidence readings key this morning.

European indices look set to get the week off to a good start after the results of the eurozone bank stress tests were released and were not as bad as some people had feared.

While 25 of the 130 banks that were tested failed, 12 have already raised the capital needed fill the gap leaving only 13 to make up the shortfall. This is fewer than the markets had been anticipating which is a relief given that the last thing the euro area needs right now is for people to lose faith in them again. The previous stress tests were heavily criticised for being too easy on the banks but it appears people are more satisfied this time around which should in fact help to restore confidence, rather than erode it.

With the stress tests now completed, it will be interesting to see what the demand is like for the next offering of cheap loans (TLTROs). Many people believe that the stress tests were behind the poor take up of the first TLTRO offering and that the banks were simply waiting for the results before deciding how much to borrow.

While the stress tests have been a big success in forcing banks to raise the capital necessary to withstand another shock and, in turn, rebuilding confidence in the sector that had previously been severely damaged, there is no guarantee that the TLTROs will be a success. Banks may be more willing, and in a better position, to take the loans and lend, but that doesn’t mean the demand will be there. For this to work, there needs to be supply and demand and I’m not convinced enough has been done by governments to ensure that demand for loans will be there.

The eurozone is having a very tough year and could well fall into recession. Even the countries at the core are struggling which is a major concern for the markets. Add to this the long period of low inflation, that could soon turn to deflation, and you are a million miles from the kind of environment in which companies and households want to borrow. With that in mind, I’m far than convinced that demand for the second TLTRO offering will be much better than the first.

With one potential banana skin out of the way, investors will now look ahead to the FOMC meeting on Wednesday which could potentially do some damage to this new found sentiment. There is still a lot of anxiety in the markets following that rapid sell-off earlier this month and I don’t think it will take much from the Fed to spook everyone again. While I do expect the Fed to follow through and bring QE3 to an end, I think it’ll maintain its commitment to keeping rates low as taking it out could create massive waves in the market.

As for today, focus will be on the few pieces of economic data that we have. The latest batch of sentiment readings for Germany will be released shortly after the open and are expected to show a further deterioration in confidence in October. It should be noted that the Gfk consumer confidence reading for the same month exceeded expectations on Friday and actually improved from last month, so it wouldn’t be a huge surprise to see a similar result today. If we do, then it may suggest the country is turning a corner and the fourth quarter is looking better the the preceding two. Later on in the US, we’ll also get the latest services PMI reading and the pending home sales figures for September.

The FTSE is expected to open 27 points higher, the CAC 20 points higher and the DAX 36 points higher.

Published On Mon, Oct 27 2014, 06:36 GMT

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