The only banks that failed the EU stress tests were those which already had some degree of government support. Relief that most banks passed was sufficient to reassure investor sentiment in Asian hours. However, the relief is already running dry in Europe amidst widespread criticism that the tests lacked rigour and therefore fail to bring the transparency that the markets had been demanding. As long as doubt over the credibility of the tests remains, they will fail to draw a line under the scepticism and doubt that has been haunting the European banking sector in recent months.
As a consequence many banks are likely to continue to find longer-term funding expensive. This suggests that the availability of credit to some business and consumers will remain low; a factor which will act as a constraint on growth. European stock markets have given back their opening gains this morning. In the fx market the yen has pushed higher as investors seek out a safe haven. USD/JPY has pushed lower to the 87.10 area, EUR/JPY has found support near 112.40.
A strong GDP reading for S.Korea boosted sentiment in Asian overnight. Asian stocks indices managed closing gains and EUR/USD spent most of the session a little higher on the day. Enthusiasm for the EUR softened in European hours. Over the next few months it is very likely that worries about the inseparable issues of sovereign default risk and the banking sector will again undermine the outlook for the euro. Near-term, however, the EUR may perform better. USD1.2900 is serving as solid support for the EUR this morning implying that despite a lot of negative press surrounding the credibility of the stress tests this morning the EUR is holding in well.
Now that the stress tests are out of the way attention is likely to be drawn back to the relative health of the US economy. This week the US data calendar is well stocked. While the pace of the US recovery has clearly been stalling, Germany's economic recovery has become increasingly difficult to ignore. If US data releases disappoint, EUR/USD could retest the 1.3000 level once again.
Last Friday's far stronger than expected UK Q2 GDP release continues to push the pound higher this morning; gains being registered vs both the USD and the EUR. Sterling's gains are despite the -0.1% m/m decline in house prices in July registered by the Hometrack survey; this being consistent with the drop in mortgage approvals in June.
Clearly the recovery in the UK housing market lacks momentum but complaints that mortgages remain relatively expensive must be measured against the relatively high cost to banks of raising longer term funding. While headwinds facing the UK economy are likely to increase as fiscal conditions are tightened, clearly the fact that the economy was growing at a decent clip in Q2 (1.1% q/q) means that it is in a far better condition to absorb the impact. A break of the EUR/GBP 0.8315 level is needed to strengthen the medium-term technical downtrend.
The NZD has performed well against the USD and the AUD this morning on expectations that the RBNZ may hike interest rates by 25 bps on Thursday.
US new home sales data are due today.
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