If last week’s big “Risk Off” event was the acute spike in heretofore dormant Portugese bank troubles (as a reference Banco Espirito Santo has a market cap at the close last night stood at around €2.1bn ($2.9bn), contrasting to Goldman Sachs ($78.1bn) and JP Morgan ($220.5bn)), then yesterday’s acceleration in the Portuguese lender’s troubles which as we reported have now spread to its holding company RioForte which is set to default, were completely ignored by the market. Today this has conveniently flipped, following a Diario Economico report that Banco Espirito Santo has the potential to raise capital from private investors (hopefully it ends up more lucrative for said “investor” than the recent capital raise with Baupost). No detail were given but this news alone was enough to send the stock soaring by nearly 20% higher in early trading. Still, despite the “good”, if very vague news (and RioForte is still defaulting), Bunds remained bid, supported by a good Bund auction, in part also dragged higher by Gilts, which gained upside traction after the release of the latest UK jobs report reinforced the view that there is plenty of spare capacity for the economy to absorb before the BoE enact on any rate rises. Also of note, touted domestic buying resulted in SP/GE 10y yield spread narrowing, ahead of bond auctions tomorrow.
As a result the turnaround in Portuguese sentiment has helped send European stocks surging some 1.3% to the highest since July 8, with 19 out of 19 Stoxx 600 sectors rise; bank, basic resources outperform, health care, personal & household underperform. 94.3% of Stoxx 600 members gain. Eurostoxx 50 +1.3%, FTSE 100 +0.9%, CAC 40 +1.5%, DAX +1.2%, IBEX +1.3%, FTSEMIB +1.7%, SMI +0.8%. The euro is weaker against the dollar. Spanish 10yr bond yields fall; Portuguese yields decline.
Turning to Asia, it’s been a mixed session this morning with markets digesting the latest monthly data download from China. In terms of the Chinese data, Q2 GDP printed at 7.5% YoY, which is in line with the government’s overall 2014 growth target. This has also marked the first acceleration in growth in three quarters . However risk markets have sold off slightly on the back of the weaker than expected retail sales data (12.4% YoY vs 12.5% expected). June industrial production (9.2% YoY vs 9.0% expected) was slightly better than consensus. Asian equity markets are generally trading firmer on the day though, with the exception of HSCECI (-0.4%) and Hang Seng (unch). In currencies, the AUDUSD (-0.3%) is under some pressure on the back of yesterday’s USD rally and the mixed Chinese data today. 10yr UST yields are down 1bp in Japanese trading. In summary, Asia little changed with the Sensex outperforming and the Shanghai Composite underperforming. MSCI Asia Pacific down 0% to 147. Nikkei 225 down 0.1%, Hang Seng up 0.3%, Kospi up 0%, Shanghai Composite down 0.1%, ASX up 0.1%, Sensex up 0.4%
European shares rise close to intraday highs, to highest since July 8, with the bank and basic resources sectors outperforming and health care, personal & household underperforming. China’s economic growth accelerates for first time in 3 quarters, U.K. unemployment drops more than forecast. The Italian and French markets are the best-performing larger bourses, Swiss the worst.
On today’s calendar we have Yellen giving part 2 of her testimony. It should be pretty identical to yesterday’s so no new surprises are expected. The Q&A could be worth watching though. Bank of America and eBay are amongst the S&P500 constituents reporting. The US data docket rolls on with PPI, industrial production and the NAHB housing index today. The Fed releases its Beige book and the Dallas Fed’s Fisher speaks on monetary policy today. The Bank of Canada and Brazil’s BCB meet though no change in policy is expected from either.
