MARKET COMMENT: Banks Weigh On FTSE As EU Stress Tests Raise Concern

LONDON (Alliance News) - UK stocks ended lower Monday amid concerns over the health of the European Union banking system, despite weekend results of the EU bank stress tests initially being positively received. Investors also showed caution ahead of Wednesday's Federal Reserve policy meeting, at which the US quantitative easing programme is expected to be brought to an end.

The FTSE 100 closed down 0.4% at 6,363.46, the FTSE 250 down 0.3% at 15,040.39, and the AIM All-Share down 0.3% at 706.76.

Major European markets also ended lower, with the French CAC 40 down 0.8%, and the German DAX 30 down 1.0%. After the European close, US markets continued lower, with the DJIA down 0.1%, the S&P 500 down 0.3%, and the Nasdaq Composite down 0.2%.

EU regulators on Sunday failed 25 of the 130 banks being stress-tested as part of the Asset Quality Review. This was in line with expectations following a leaked communique last week and was initially taken positively by the market given that none of the big names were failed. The tests were based on balance sheet figures at the 2013 year end, and since then 12 have already made up their capital shortfall, leaving 13 that must bolster their position over the next two weeks.

Italy caused the main concern, accounting for 9 of the 25 problem banks. Shares in Italy's Banca Monte dei Paschi di Siena has fallen more than 20% after showing the biggest capital shortfall out of all the banks being tested.

"It was always going to be a tightrope walk for the ECB; if too many banks failed there’d be panic in the markets but if not enough fail then the results are not deemed credible," said market analyst at CMC Markets, Jasper Lawler.

The aim of the tests was to provide credibility and confidence in those that passed, and the FTSE 100 and other major European stock markets did open the week higher on the news that most banks are in a strong position to lend. But concerns over the wider health of the eurozone economy, as well as tougher domestic tests that the UK banks still face, soon pushed stocks into the red.

Yet more disappointing economic data from Germany didn't help. The German IFO business climate survey fell to 103.2 in October from 104.7 in September. That's the sixth consecutive monthly fall, the lowest confidence reading since December 2012 and worse than the 104.1 print that had been expected.

The disappointing business confidence in Europe's biggest economy heightened concerns that, no mater how well capitalised the banks might be, it is a lack of demand for new loans that is the real problem in the eurozone, rather than a lack of ability or willingness to lend.

US economic data also underwhelmed Monday, with the Markit services PMI falling to 57.3 in October from 58.9 in September and missing expectations for a print of 58.8. That brought the composite PMI for October down to 57.4 in October from 59.0 in September.

Meanwhile, US pending home sales increased by only 0.3% in the month of September, missing expectations for a rise of 0.5%.

The disappointing data comes ahead of Wednesday's Federal Reserve policy meeting, which is expected to bring the final "taper" of the central bank's massive quantitative easing programme. A recent pick-up in market volatility has prompted calls from some quarters for the end of QE to be delayed, but most analysts still expect the programme to end, making the exact wording of the Fed's policy statement a key market focus this week.

The UK banks provided the main drag on the London stock market Monday, despite all passing the EU stress tests, as the results highlighted weaknesses ahead of stricter testing of the UK banks still to be carried out by the Bank of England. The stress tests are designed to test the balance sheets of the banks under the scenario of a financial disaster, and on December 16 the BoE Prudential Regulation Authority will apply a UK-specific disaster scenario to the banks.

Most notably, the EU tests assumed a 20% house price fall, but the UK tests will apply closer to a 35% discount to the property assets on the UK banks balance sheets. As the Bank of England has consistently warned over recent months, it sees a potential house price bubble as the biggest threat to the stability of the UK economy.

Lloyds Banking Group performed worst of the UK banks, given that it passed the EU tests by a relatively small margin, and that it has a relatively large exposure to the UK mortgage market, putting it most at risk ahead from the UK tests. Lloyds closed 2.3% lower, Royal Bank of Scotland down 1.4%, Barclays down 1.9%, and HSBC down 1.2%.

Outside of the banking sector, travel stocks enjoyed a positive day, as the global effort to contain the Ebola outbreak appears to have been stepped up. There was no news of a further spread of the virus into Europe or the US over the weekend. The Texas nurse that had the first US case received the all-clear on Friday, and the US is implementing quarantine measures for health workers returning from Ebola effected nations. While this has created some controversy amongst health workers, and friction between US state and federal governments, it has been well-received by the markets.

Holiday operator TUI Travel was the best performer in the FTSE 100, closing up 2.5%. Intercontinental Hotels Group gained 2.3%, and British Airways parent International Consolidated Airlines Group rose 1.7%.

Smiths Group shares fell 2.7% after the engineering group said Finance Director Peter Turner will step down to pursue other opportunities, although he will stay on for another six months while the company looks for a successor.

FTSE 250-listed Renishaw rose 4.8% after the electronics group said it expects the revenue growth trend it experienced in the first quarter to continue through the second half of its financial year, extending the guidance it gave for the second quarter.

At the other end of the mid-cap index, Ophir Energy ended down 4.7% on concerns that it might be about to make a poor investment. The energy company is one of two companies in talks with Salamander Energy over a potential takeover offer. Liberum Capital said, "at first sight, it is difficult to see where significant value could be added" for Ophir.

Salamander Energy shares ended 16% higher on the acquisition interest.

Separately, Ophir said it has entered a deal to buy seven deepwater production-sharing contracts in Indonesia from Niko Resources, expanding its South East Asia presence. Ophir will pay USD31.3 million for interests in the seven contracts, six of which it will operate itself.

The banks will be back in focus on Tuesday, when both Lloyds and Standard Chartered release interim management statements. Energy companies BP and BG Group also are due to release third quarter results, while AIM-listed business service group Utilitywise will release full-year numbers.

Tuesday is relatively quiet in terms of economic data, with nothing due from the UK. The highlights come from the US, with durable goods orders for September and the consumer confidence survey for October in the afternoon.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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