European Indices fall 1 as banks weigh on stress test and sovereign debt concerns

European indices fell sharply on Monday, with the FTSE 100, DAX andCAC all lower by around 1%. The markets were weighed down by investors selling in banking stocks in reaction to Friday’s publication of the European stress tests and continued concerns over the sovereign debt situation within Europe. A stronger US dollar and weaker crude prices have also sapped risk appetite, locking in the weaker opening to European trade on Monday.

Stress tests compound investor unease
It is the reaction to Friday’s stress tests that has played a role in today’s index weakness with todays session being the first opportunity for equity traders to react to them. Investors were hoping that they would ease some concerns regarding potential capital raising and exposure to sovereign debt, whilst the credibility of the tests themselves was far from certain. In the end, there has been somewhat of a disappointed reaction in the markets to the results on all three of those issues.

Whilst the eight banks that failed the tests were no surprise at all to investors, the amount of capital potentially needed to be raised is naurally an unwanted issue whilst underlying exposures to an escalation in the sovereign debt crisis remains a key concern. The mere fact that the tests did not factor into the equation a default by Greece is somewhat amazing, given most of the market have been pricing in a Greek default for some time. This means that all results have been digested with a heavy pinch of salt. The three biggest UK banks, RBS, Lloyds and Barclays were the top three drags on the FTSE 100 as a result.

Debt a big concern
Investors have big underlying concerns about debt as a whole and this is underpinning flights to safe haven asset classes.

We have the sovereign debt situation seemingly on the verge of escalation in Europe and there exists deep concerns over the political impasse on Capital Hill over raising the US debt ceiling in time for the August 2 deadline. Add into the mix the reactions of credit ratings agencies, who have already issued warnings over further negative actions should each situation escalate, and one can see why investors are naturally concerned with adding too much exposure to European banks in the medium term.

Put simply, the fact that you have Spanish 10-year yields above 6% and threatening new highs, along with Italian 10-year yields also threatening a break above 6%, and gold hitting record highs of $1600 per ounce, this paints a firm picture of a sincere escalation in investor risk fears.

On a brighter note, we have seen demand in shares of Rank Group after 74.5% of the firm’s shareholders finally accepted majority shareholder Guoco’s 150p offer. The 74.5% holding keeps the firm publicly listed. Rank’s shares have rallied some 5% today to top the mid-cap gainers in London. Whilst shares in Centrica also gained 0.6% after a positive note on the stock from Barclays Capital.