MARKET COMMENT: UK Stocks To Open Higher Amid EU Stress Test Relief

Mon, 27th Oct 2014 07:33

LONDON (Alliance News) - UK stocks are set to open higher Monday as European investors take some consolation from the results of the EU bank stress test results released over the weekend, which all of the UK banks passed.

Futures indicate that the FTSE 100 will open 40 points higher at 6,429.

UK stocks had their best week in five last week with the FTSE 100 gaining 2.6% between Monday and Friday. Friday itself took some of the shine off, however, with the FTSE 100 dipping 0.5% as investors exercised caution ahead of the results of the EU bank stress tests.

US stocks went on to record gains, with the DJIA, S&P 500, and Nasdaq Composite all ending up about 0.7%. A more mixed session in Asia Monday has seen the Nikkei gain 0.6%, while the Hang Seng continues down 0.9%, and Shanghai down 0.7%.

European markets Monday look set to open a little higher following the results of the European Central Bank's stress testing, revealed at the weekend. Investors already had a fairly good idea of what to expect, as there had been reports of a leaked communique on Friday, and the fact that there was no big upsets in the published results is being received positively by the markets.

"The ECB?s Comprehensive Assessment will be taken positively by the market given there were few surprises," says Berenberg analyst Nick Anderson

Of the 130 banks tested by the European Central Bank, 25 failed the stress scenarios. The tests were based on balance sheet figures at the 2013 year end, however, 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 or the 25 problem banks. All of the UK banks passed.

The stated aim of the testing was to provide credibility and confidence in those that passed, rather than a black mark against those that failed, and the market is taking the results in that fashion Monday, although there remains significant concern over the wider health of the eurozone economy.

The capital shortfall left to cover over the coming months by the failed banks stands at EUR9.5 billion, which UBS economist Reinhard Cluse calls "a manageable amount". However, while the banking system may be properly capitalised again by the middle of next year, which should make banks more comfortable with lending, low demand for those loans remains an issue, the economist says.

Market analyst at Alpari Craig Erlam says: "With the stress tests now completed, it will be interesting to see what the demand is like for the next offering of cheap loans (TLTROs)."

For now, equities are set to push a little higher as they digest the results of the stress tests, and also start to look ahead to Wednesday, when the US Federal Reserve is due to meet and is expected to bring an end to its asset purchase programme. The meeting will be a market focus for the week.

Later Monday, the German IFO business confidence survey for October will be released at 0900 GMT, with economists expecting a lower confidence reading of 104.1, down from 104.7 in September.

In the afternoon, US home sales data, the US Market services PMI for October, and the Dallas Fed manufacturing business index are due.

From the UK corporate calendar Monday, a third quarter interim management statement has been released from APR Energy, while Renishaw had published a trading statement.

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