(Premature) Optimism on Greek Banking System Sent Financial Markets Higher

   on August 30 2011 2:28 AM

Financial markets were in a 'risk on' mode yesterday as driven by the merger of 2 Greek banks and stronger-than-expected US data. Led by the +14% jump in Greek stocks, stocks rallied with DAX gaining +2.39% and CAC 40 up +2.16%. Wall Street also advanced further with DJIA and S&P 500 surging +2.26% and +2.83% respectively. In the commodity sector, oil firmed as sentiment strengthened. The front-month contract for WTI crude oil soared to an 8-day high of 87.62 before ending the day at 87.27, up +2.23%, while the equivalent Brent crude contract rose to 112.73, the highest level since August 4, before settling at 111.88, up +0.47%. Gold plunged after initially climbing to as high as 1841.5 as investors shifted their capitals to risky assets. The metal ended the day at 1791.6, down -0.32%.

The second and third largest Greek banks, Eurobank and Alpha Bank, announced a merger which would create the country's largest bank with 146B euro in assets. Paramount Services Holding Ltd, a Qatari investment fund, will assist the merger by capital injection of 500M euro. The market generally welcomed the deal as it should help strengthen the Greek banking system. Yet, the merger would not resolve the whole sovereign crisis in the Eurozone. We expect concerns on the issue will reemerge sooner or later.

Optimism was carried forward to the US session and was held up by US personal spending which surprisingly grew +0.8% m/m in July from an upwardly revised -0.1% in June. The market had anticipated a more modest gain of +0.5%. Personal income increased +0.3% in July following an upwardly revised +0.2% gain in the prior month. The market readily ignored disappointing pending home sales which contracted -1.3% m/m (consensus: 0.0%) in July after rising +2.4% in June.

As far as the dataflow today is concerned, unemployment rate in Japan climbed to 4.7% in July from 4.6% a month ago. Household spending slipped -2.1% y/y in July, easing from a -4.2% decline in June. Retail trade climbed only +0.7% y/y in July following a +1.1% growth in the prior month. Japan's economic developments have remained fragile. Finance Minister Yoshihiko Noda, the newly elected head of the ruling Democratic Party of Japan and would likely be the prime minister after Naoto Kan's departure, will have to speed up the recovery as well as to reduce the country's fiscal deficits. Confidence in the Eurozone probably slipped in August. It's expected that all of consumer, economic and industrial confidence indices deteriorated from a month ago.

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