Futures Rebound On Latest European Bank Failure And Bailout

Following a ghastly week for stocks, the momentum algos were desperate for something, anything to ignite some upward momentum and stop the collapse which last week pushed the DJIA into the red for the year: they got it overnight with the previously reported bailout of Portugal’s Banco Espirito Santo, where the foreplay finally ended and after the Portuguese Central Bank finally realized that the bank is insolvent and that no more private investors will “recapitalize” it further, finally bailed it out, sticking the stock and the subs into a bad bank runoff entity, while preserving the senior bonds. So much for Europe’s much vaunted bail in regime and spreading of pain across asset classes. At least the depositors did not get Cyprused, for now. 

On the back of BES bailout, stocks traded mixed in Europe where algos aren’t quite clear that horrible news is great news, with the German DAX index underperforming where Adidas (-1.6%) remained under pressure as investors continued to fret over the Russian sanctions, while analysts at Berenberg downgraded the company to sell from buy.

In terms of other notable stock movers, HSBC (+2.8%) shares briefly slumped after the bank reported pretax down 12% vs. Exp. down 10%. Focus in the US will be on earnings by AIG, Marathon Oil, Cardinal Health and Pioneer Natural Resources. Bunds recovered from a lower open and moved into positive territory, as the somewhat cautious sentiment amid concerns over the implication of Russian sanctions on profitability of EU majors, together with risks associated with the looming risk events weighed on sentiment. Nevertheless, PO/GE 10y spread tightened aggressively this morning after it was announced that Banco Espirito Santo is to be split into ‘good’ and ‘bad’ banks in a EUR 4.9bln rescue package that wipes out equity and subordinated debt holders, but protects taxpayers and senior creditors.

There is far less macro and economic news on this week’s calendar which means the usual geopolitical tensions points: Russia, Gaza, ISIS, as well as the spread of the Ebola epidemic, and of course, speculation on what the Fed may or may not do, will drive risk in the coming days.

The earnings calendar winds down in the US although we still have 73 S&P 500 companies lined up this week. AIG, Walt Disney and News Corp are some of the notable ones. In Europe we have 69 companies reporting with some of the major financial services group (HSBC, Unicredit, Standard Chartered, ING) expected to report. In the US about 360 S&P 500 companies have reported so far with the EPS beat:miss ratio standing solid at 77%:23% although sales performance has been bit more subdued at 65%:35%. European earnings are still coming through but so far EPS beat:miss are running at a more balanced 55%:45% whilst sales revenue are less impressive at 45%:54%. Our usual earnings season tracker updated in the PDF.

 

Bulletin Headline Summary from RanSquawk and Bloomberg:

• Bund futures remain bid into the North American cross over, despite initially gapping lower, as the DAX continues to be sold as participant confidence ebbs
• Treasuries little changed, 10Y notes holding just below 2.50% level; Bank of Portugal said it will take control of Banco Espirito Santo’s assets and deposit-taking operations by transferring them to a new company.
• While Banco Espirito senior bondholders and depositors were left unscathed, sub debt holders face losses as regulators try to avoid leaving taxpayers on the hook for losses caused by failed lenders
• Investors may be underestimating the pace at which the Fed will raise interest rates over the next two years, said Richmond Fed president Jeffrey Lacker
• A Chinese central bank loan that’s almost the size of the U.S. bailout of AIG has spurred speculation that policy makers have adopted a new form of monetary easing to shore up growth
• China’s non-manufacturing PMI fell to 54.2 in July from a previously reported 55.0 in June
• The spread of Ebola in Liberia threatens to erase the economic progress the West African nation has made since the end of the civil war in 2003, Vice President Joseph Boakai said
• The outbreak has killed more than 800 in Sierra Leone, Liberia and Guinea, threatens to spiral out of control
• Militants from Islamic State took control of two oil fields and some predominantly Kurdish towns in northern Iraq following clashes, according to the Northern Oil Co.
• Israel held its fire in parts of the Gaza Strip to allow for humanitarian relief as violence defied diplomatic efforts to end four weeks of conflict
• Sovereign yields mostly lower. Euro Stoxx Banks gains 1.2% after sliding 3.4% last week. Asian and European equities mixed, U.S. stock futures rise. WTI crude, gold and copper little changed
• Chinese equities shrug off a six-month low in non-manufacturing PMI as hopes for reform of state-owned enterprises send the Shanghai Composite and the Hang Seng Index higher
• Today’s calendar is relatively quiet ahead of a slew of central bank decisions (BoE, ECB, RBA, BoJ) all due later this week