London: European stock markets and the euro edged up on Monday, but share gains were held back by growing doubts over the credibility of “stress test” which has cleared all except seven European banks.
But despite scepticism, there was some relief that the exercise was over and that European banking was cleared, and banking shares in Continental Europe were generally firm.
The results of the tests, published after the close of trading on Friday, found that only seven banks were under-capitalized, and by far less than expected, to face a new financial crisis.
German state-owned lender Hypo Real Estate, five regional savings banks in Spain and ATEBank of Greece failed the test of whether they could resist a new financial shock.
In morning deals, the Frankfurt stock market gained just 0.03%, London rose 0.15%, Madrid increased 0.02% and Paris added 0.23%, as European investors gave their first tentative reaction. The initial trend when European markets opened had been firmer.
The euro firmed against the dollar on investor relief that the tests had brought no nasty surprises. It rose to 1.2919 dollars, up from 1.2906 dollars in New York late on Friday.
In Asia, Tokyo stocks advanced 0.77% and Sydney gained 0.62%, as investors found reassurance in the stress tests and a strong pre-weekend performance on Wall Street.
“The results of the European banks stress have provided some degree of comfort to equity markets,” said analyst Bernard McAlinden at NCB Stockbrokers in Dublin.
“The key criticism is that the stress tests in respect of exposures to peripheral euro zone sovereign debt were rather light.
“However, the key positive is in respect of disclosure, with most of the tested banks now providing detail on total exposures to the sovereign debt of each of the problematic peripheral euro zone governments.”
“Publication brought many critics to the fore,” said Commerzbank analyst Ulrich Leuchtmann.
“Their main argument was based on the assumption that the test had been too easy and therefore did not provide a real indication of the situation of the financial sector.
“The markets are obviously not sharing this concern: at prices above 1.29 dollars, the euro seems strong.
“After all, the main test scenarios had been known for some time, and as a result the overall positive outcome supports the euro.”
The Financial Times newspaper reported on Monday that European banking regulators said that six German banks did not reveal full details of sovereign debt holdings.
The six German banks included the biggest, Deutsche Bank, as well as Deutsche Postbank, which has the nation’s largest retail network, and Hypo Real Estate, which failed the “stress tests,” the newspaper said.
The other German banks which did not disclose all the details on holdings of public debt were identified as the mutual banks DZ and WGZ and the regional state-owned lender Landesbank Berlin, according to the paper.
“Undoubtedly, the early part of this week will be spent trying to establish a more considered market reaction to these tests, after the knee-jerk price action on Friday,” said Credit Agricole CIB analyst Daragh Maher.
“Sadly for those hoping for some drama, sufficient to prompt a major break-up or breakdown in the euro, the stress tests have been reassuringly dull.”
The London-based Committee of European Banking Supervisors (CEBS), which issued the test results, had added on Friday that authorities in each country were working with the failed banks to address their recapitalization.
McAlinden said the market focus could now switch to the batch of banks who had only just passed the key stress assessments.
“With only seven of the participating banks failing, the perception of the tests being too lenient may arise,” he said.
“Therefore the spotlight could possibly fall on the next tier of banks that managed to scrape a pass, with the market potentially forcing them to raise further equity.”
Markets are concerned that a default by a euro zone country such as Greece could cause some banks to collapse, and the stress tests were aimed at showing where each stood to restore confidence and boost interbank lending.
In Athens on Monday, a team of European and IMF experts will begin a second visit to Greece to assess the impact of government austerity measures aimed at taming the country’s debt crisis, the Greek finance ministry said.
Encouraging earnings propelled Wall Street higher last week, with the Dow Jones Industrial Average jumping 3.2% in value.