Article / 02 August 2016 at 12:15 GMT

Daily Shot: Italy falling further behind Spain Team / Saxo Bank
  • EBA's stress test send Italian banks down 5%
  • Banca Monte dei Paschi's rescue brings also bad news for the sector
  • Spanish 10y government bond yield is approaching one percent
  • Spain is one of the few countries with improved productivity since Great Recession
By Walter Kurtz*

We begin with the Eurozone where the troubled Italian bank Monte dei Paschi arranged a last-minute sale of its bad loans just as the EBA and ECB stress test results were released.
Monte dei Paschi
However, while Monte dei Paschi shares were up, other Italian/Eurozone banks, such as UniCredit (which is to report earnings on Wednesday - see this piece by Peter Garnry), tumbled. In fact, trading in UniCredit was halted for a while due to this sharp selloff.
Also other bank's shares as Raiffeisen, Bank of Ireland and Banco Popular tumbled around five percent or more. 

Why is the Monte dei Paschi rescue not received well by the banking sector investors? Here is a good summary from the WSJ.
WSJ on Monte dei Paschi
As a whole, Italian banks were down 5% on the day. 
A comparison of non-performing loans in the banking system for select Eurozone economies shows that Italy is worst of with its share closer to 20% than 15% while in Portugal the share is above ten percent and Spain has brought it heavily over the last years, now approaching five percent. 

This next chart shows the "expected default frequency". The Italian banking system remains a major issue for the Eurozone.
Italian banks are a huge issue
Nonetheless, Monte dei Paschi's success sent Italian government bond yields to below 1.16%, the lowest level since early 2015. 

Speaking of falling yields, Spanish 10y government bond yield is approaching one percent.
Spanish yields
Separately, while the overall Eurozone manufacturing sector growth remains stable (albeit slow), Spanish and Italian manufacturing has been softer than expected (although still expanding).
Spanish and Italian PMIs
One area of contrast between Spain and Italy is the growth in productivity. Spain is one of the few countries that saw its productivity improve since the Great Recession. Italy, on the other hand, is all the way on the right side of the chart. 
Spanish and Italian productivity
Norway's manufacturing surprised to the upside as the PMI hit the highest level in over four years. 
Norwegian PMI
In asset management, the State Street's large institutional investors survey tells a story of a horrible mismatch in expectations. Institutions are targeting 11% returns in their overall portfolios. Someone forgot to tell them that the 90s are over. 
Back to the 90s?
Turning to Food for Thought, we have 3 items today:
1. Goldman Sachs uses an economic model to predict the 2016 Olympics medal count by country.
Goldman Olympics predictions
2. Europe is processing thousands of unaccompanied refugee minors. 
unaccompanied refugee minors
3. The US has far more sunshine than Europe. 
 — Edited by Clemens Bomsdorf

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.



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