Banks remain firm in falling broader market despite Moody s cuts

European markets have cautiously gained ground this morning following a three-day sell off and the worst one day fall in the previous session since the beginning of June. The eurozone crisis remains in focus after Moody’s, the credit rating agency, further downgraded 28 Spanish Banks late yesterday and Cyprus confirmed it was applying for a bailout. Spanish and Italian debt auctions are also due out, however despite the uncertainty stocks edged higher helped by a surprise improvement in German consumer sentiment.

Volumes for European equities have remained thin and below average showing how cautious traders, prefer to sit on the sidelines rather than put their money back into high risk asset classes such as equities. This is likely to continue to be the case until the EU Summit has a clear outcome or global Central Banks start to act with much more aggression in topping up liquidity. For this reason any rally could be short lived based on traders buying into a bounce rather than looking for long term positions.

Late yesterday Moody’s downgraded the long term debt and deposit rating of 28 Spanish banks shortly after Spain applied formerly for aid. Moody’s cited a lack of detail in the application as the reason for the downgrade; however the fact that this further downgrade was widely anticipated meant that it had already been priced into the markets. The bailout for Cyprus was also very much already priced into the markets, and although Cyprus is relatively small in comparison to Greece and Spain it still highlights the tough economic situation facing peripheral European countries.

A mid morning Spanish government bond auction did little to help the markets. The auctions of three and six month bills were met with weaker demand than the previous auctions. The yield of 3 month bills up from 0.85% in May to 2.36% today, which is an increase of 270%. This has resulted in the banking sector facing a choppy trading session.

Here in the UK, RBS is the top loser for the FTSE 100, down over 3.3% on a mixture of negative news from Europe but mainly due to the technical issues at NatWest over the past few days and the likely direct costs associated in terms of loss of commercial and retail business as well as damage to brand.

When investors are looking to invest in equities, more recently they are being drawn towards the traditional defensive stocks such as pharmaceutical companies. These firms tend to have a large holding of cash and also pay strong dividends therefore offering a form of protection to the investor’s portfolio. Shire is currently up 2% on bargain hunting having fallen 11% yesterday on a US ruling against the firm who were looking to stop the production of copycat drugs.

On a more positive front the markets have seen an unexpected support from a shock improvement in German confidence data. The consumer confidence figure for July rose 5.8 points which has undoubtedly helped the markets in morning trade. However we will need this to be translated into strong fundamental macro data on how the economy is actually performing in Germany before the markets really stand up and take notice. For now, it has helped to inspire some short term risk taking by investors although this remains few and far between.