Article / 01 August 2016 at 8:12 GMT

From the Floor: A relatively unstressful stress test

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• In Friday's stress test, European banks did largely better than in the last one
• Garnry is positive on European banks and recommends a Dec 2017 call
• Bunds are at minus 0.11 and Fasdal expects them to turn positive again


By Clemens Bomsdorf

It is only today that market participants get a chance to trade the results of the latest stress test held Friday by the European Banking Authority. This is because they were only disclosed after European and US stock markets had closed for the week. 

"The stress test should bring some relief into financials this morning," says Simon Fasdal, head of Saxo's fixed income desk. "We expect quite positive sentiment in Spanish and Italian banks," he adds. This is despite the fact that Italian bank Monte dei Paschi – as expected – did poorly and was one of the two banks that failed the adverse stress scenario, the other one being Allied Irish

CET1 capital ratio in the adverse scenario by bank in alphabetical order (%) , click to enlarge 
Source: EBA

Peter Garnry, Saxo's head of equity strategy, is positive when it comes to European banks, particularly in in the longer run. Therefore he recommends a December 2017 call on European banks with an 8.3% premium, which he sees as low. 

“If Europe improves over the next six quarters this can lead to a big change in banks' profitability as non-performing exposure will be reduced," says Garnry. He adds that the improvement does not have to be that big, but the small reduction in unemployment seen of late is a positive The stress test it includes some good data points, according to Garnry, but he adds that "the real stress test is what happens in the markets daily,”

Also, Garnry is positive about emerging market equities, which long-term investors are beginning to overweight. In the short term German carmaker BMW, US financial AIG, and Brazilian financial Itau Unibanco have the potential to positively surprise when reporting earnings tomorrow. 

From Asia, Edmund Liu of Saxo's APAC Global Sales Trading reports equities are aiming higher pushed by poor US economic data, which saw the chance of a 2016 rate hike reduced to 30% from 50%. 

Despite the risk-on mode core bonds still remain supported, says Fasdal. He underlines that the old correlation pattern between increasing yields and increasing share prices has been offset for some time now.
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more

Bunds reached minus 0.11 and still most of the market believes it will retest minus 0.2 in the short-term. "But I am a bit more cautious," says Fasdal. Instead, if we see the moderate positive market in equities continue, bund yields should be expected to go positive in the medium term says to Fasdal. 

He also states that “there is too much cash in the system and most is going to European core bonds despite very low yield levels.”
 Welcome! Do you need a stress test? Photo: EBA

Clemens Bomsdorf is consulting editor at

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios 


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