Following yesterday's peripheral European poundage over fears of what a Banco Espirito Santo failure could mean to the nation, and to the Eurozone, but most importantly to depositor confidence everywhere, today has been an epic damage control session, with one sellside penguin after another, most notably Goldman (which until hours ago had the cratering bank at a Buy rating, only to switch to Neutral this morning), rushing to release half-baked notes promising that "all is well, please to keep calm" and that nobody should certainly withdraw their deposits from insolvent European banks. This is happening after Banco Espirito Santo itself sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt by a member of the Portuguese group roiled global markets.
As Bloomberg reported "the nation’s second-biggest bank by market value said it had 1.18 billion euros ($1.6 billion) of loans, securities and other items linked to Grupo Espirito Santo as of June 30, according to a filing. The lender also said that it has a buffer of 2.1 billion euros above the regulatory minimum following a capital increase in June." Considering the obscurity of disclosures at the linked entities one would not be surprised if all the revealed numbers this morning are nothing more than yet another fabrication.
This clown parade of clueless opinions (did we mention Goldman had BES at a Buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:
- BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM
Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).
So in an environment in which everyone had done all they could to preserve confidence in the system, moments ago BES resumed trading. In retrospect perhaps that decision was a little rash as after soaring over 10% out of the gates, the stock has since tumbled. It remains to be seen if the BIS and ECB, aka Europe's BTFD crew, can contain the damage since confidence appears to not have been restored after all.
Banco Espirito Santo stock price since resuming trading
Keep in mind this happened even with shorting of BES shares currently prohibited.
So here are some choice excerpts from the "Don't Panic" BES defense, via RanSquawk:
BofAML say Banco Espirito Santo impact on Portugal is limited in the long-term as even in the worse scenario there is still a backstop available for the government to cover any potential needs. In the event of new capital shortfalls, the Bank Solvency Support Facility has resources of around EUR 6.4bln set aside for banking sector support.
Goldman Sachs say Eurozone systemic read-across from Portugal is 'unlikely' due to:
- 1. Portuguese banks assets are limited at EUR 494bln or 1.6% of Eurozone total.
- 2. Foreign bank exposure to Portugal is low with only 2 banks saying Portugal is among their top 10 exposures.
- 3. ECB liquidity backstops in EUR and USD are available to all European banks
RBC say the situation is more likely than not an isolated incident and should not be mistaken for systemic stress as it is more likely than not an isolated incident. The bank also notes that there has been a limited reaction is risk indicators such as EUR or swaption volatility.
Aside from Portugal it has been a relatively quiet session so far, and with nothing on the US calendar, investors will focus on various Fed speakers later today. The sentiment in Asia this morning is fairly cautious with most equity bourses down around one-third to half a percent. The Nikkei is down around 0.4%, weighed by a profit warning from Fast Retailing, one of the index’s largest constituents. 10yr US treasury yields are down around 1bp as we type and yields are on track to close lower every day of this week – which represents an -11bp move over the last five days. The Indonesian Rupiah is slightly weaker today (-0.3%) amid the continued uncertainty over the disputed presidential election result.
In summary: SXXP rises after five-day decline, with the bank and insurance sectors outperforming and basic resources, tech underperforming. The Italian and Spanish markets are the best-performing larger bourses, Swiss the worst. Banco Espirito Santo discloses EU1.2b exposure to GES. The euro is little changed against the dollar. Portuguese 10yr bond yields fall; Japanese yields decline. Commodities decline, with Brent crude, copper underperforming and natural gas outperforming. U.S. monthly budget statement due later.
- S&P 500 futures up 0.2% to 1962
- Stoxx 600 up 0.4% to 337.6
- US 10Yr yield down 1bps to 2.52%
- German 10Yr yield up 0bps to 1.2%
- MSCI Asia Pacific down 0.3% to 146
- Gold spot up 0.1% to $1337.8/oz
Bulleting Headline Summary from RanSquawk and Bloomberg
- Banco Espirito Santo sources indicate that the bank has sufficiently large capital buffers and various tier 1 banks have suggested this morning that the situation carries little in the way of systemic risk to the broader market
- Peripheral stock markets outperform the core and the PO/GE 10yr spread reverses some of the recent widening as markets re-access the impact of the latest Portuguese developments
- Looking ahead volumes expected to remain light with the main data release coming from Canada in the form of unemployment data (1330BST/0730CDT)
- Treasuries headed for their biggest weekly gain in almost four months as renewed financial stress in Europe spurred demand for the relative safety of U.S. debt; 10Y yields at multi-year lows in Japan, Germany, France, Netherlands, Canada and Australia.
- Banco Espirito Santo sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt roiled global markets
- Allianz SE CIO Maximilian Zimmerer said the “euro crisis is not over,” as “the fundamental problems are not solved and everybody knows it”
- The ECB’s newest stimulus package has had an impact on markets and there is no urgency to take additional steps, according to Governing Council member Ewald Nowotny
- Despite a 30% decline in the yen since 2011 against the currencies of its trading rivals, Japan’s exports of goods fell 0.6% in the same period, according to an analysis published on the Federal Reserve Bank of New York’s blog
- Israel called up 33,000 reserve soldiers and may bolster infantry brigades, intensifying its military campaign against Hamas
- Ukraine hit separatists near Donetsk with air strikes, saying it killed more than 50, as the European Union geared up to expand sanctions
- Sovereign yields mixed with Greek, Portugal, Spanish and Italian 10Y spreads all tighter. Euro Stoxx Banks index rises 2%; previous day hit lowest level (140.89) since January. Asian stocks mixed; Japan falls, China rises. European equities, U.S. stock futures higher. WTI crude and copper lower; gold higher
- 16 out of 19 Stoxx 600 sectors rise; bank, insurance outperform, basic resources, tech underperform
- 62% of Stoxx 600 members gain, 36% decline
Eurostoxx 50 +0.6%, FTSE 100 +0.2%, CAC 40 +0.6%, DAX +0.1%, IBEX +1.1%, FTSEMIB +1.6%, SMI -0.1%
- Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming.
- MSCI Asia Pacific down 0.3% to 146
- Nikkei 225 down 0.3%, Hang Seng down 0%, Kospi down 0.7%, Shanghai Composite up 0.4%, ASX up 0.4%, Sensex down 1.4%
- 3 out of 10 sectors rise with health care, staples outperforming and utilities, tech underperforming
Bund futures fell in early trade as the German 10yr yield moved back above the 1.2% level. Alongside this, the PO/GE 10yr spread has been the tightest of all major European countries (-11bps), reversing the widening seen in the past few days as Banco Espirito Santo sources indicated that the bank has sufficiently large capital buffers, a sentiment echoed by most of the large institutions this morning (see above). However, after disappointing demand in the Italian 2017 and 2021 BTPs bonds have come back to flat in on the session, albeit in light volumes (Sep 195k).
After initial strength following the European cash equity open, EU stocks are seen range bound with financials leading the way amid a dissipation of concerns regarding the systemic risk of Banco Espirito Santo (BES PL) as echoed by several tier 1 banks this morning. With the bounce in the peripheral stock indices the PSI 20 index (+1.9%) is the outperformer with EDP and Portugal Telecom the biggest percentage gainers in Europe.
EUR/USD is seen stronger, back above the 1.3600 handle as USD suffers from a reversal of the flight-to-quality seen yesterday, with the USD-index marginally lower on the session. Although GBP/USD was well supported in early trade the steepest fall since February in the latest UK construction output knocked the pair from its highs. UK Construction Output SA (May) M/M -1.1% vs. Exp. 0.9% (Prev. 1.2%).
In commodity markets WTI continues its decline, despite some recent strength, amid little new developments in some geo-politically tense regions such as Iraq, or Ukraine. Spot gold (USD 1337.01, up USD 2.01) remains steady after 4-month highs yesterday, as confidence returns to risker assets with the yellow metal still on course for a 6th consecutive week of gains.
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We conclude as usual with Jim Reid's overnight recap:
With the market recently asking for a bit more volatility, I'm not sure it had days like yesterday in mind. The news that trading was to be suspended in Espirito Santo Financial's equity and listed bonds, and the equity of its 25%-owned subsidiary Banco Espirito Santo seemed to help catapult a story that had been bubbling just beneath the surface to one of global importance. I had numerous calls/emails from all round the world yesterday asking for my thoughts on the Portuguese banking sector. Although I've been monitoring the situation it wasn't until yesterday that I sat down and tried to fully understand the ownership structure of the group. It’s fair to say that it is very unusual which makes me think that this will be a fairly contained event as the vast majority of European banks have totally different and simpler structures. Also when there's talk of financial irregularities (as there has been here for a few weeks) that's usually something that is idiosyncratic rather than systemic.
However it reminds us of the stresses that still are present in the global system and in particular in Europe and in parts of the financial sector. This won't help the already weak sentiment to such names but it also shouldn't escalate much beyond the immediately impacted entities. The ECB has so many facilities still on offer to help bank liquidity which can be accessed in the vast majority of cases. So while we're the first to say there are huge unresolved issues arising from the pre-financial crisis bubble and subsequent bust, we need to acknowledge the artificial support mechanism that seems to grow and grow. The plumbing has survived much greater shocks than this in the last few years due to the extraordinary levels of intervention/support.
Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn't matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story. So when the big story/event comes credit could be in a fair bit of trouble but I suspect this isn't it. For the record iTraxx Main, Fin Senior, Fin Sub and Crossover were around 0.5, 3, 6 and 4 bps wider yesterday after having peaked at 2, 6, 11 and 10bps wider earlier in the day. Not huge moves but the market felt pretty fragile at the wides. Peripheral government debt ended closer to the day's wides with core debt rallying again. 10Y government yields in Portugal, Greece, Spain and Italy were 21, 19, 7 and 6bps higher respectively whilst German and French debt rallied by around 3 and 2bps. The Stoxx 600 banks index ended the day down 1.6% having been down 3% at one point.
Late last night, Banco Espirito Santo issued a statement that may pave the way for the bank’s shares to resume trading today. The bank said its exposure to the companies of Espirito Santo Group was EUR1.18bn. The bank also revealed that it has a capital buffer of EUR2.1bn above the regulatory minimum defined as a common equity tier 1 ratio of 8% as of March 31, taking into account a capital increase undertaken in June. Management says that it can’t estimate potential losses on its Group exposure at this point, but based on the numbers above, the exposure does represent a material portion of the bank’s capital buffer. The figure for exposure includes loans, securities and other items as of June 30 (Bloomberg). Interestingly amidst the selloff yesterday, it was announced that a well-known US value investor had taken a 2.3% equity stake in the bank even though apparently the bank was not required to report it under Portuguese law.
The sentiment in Asia this morning is fairly cautious with most equity bourses down around one-third to half a percent. The Nikkei is down around 0.4%, weighed by a profit warning from Fast Retailing, one of the index’s largest constituents. 10yr US treasury yields are down around 1bp as we type and yields are on track to close lower every day of this week – which represents an -11bp move over the last five days. The Indonesian Rupiah is slightly weaker today (-0.3%) amid the continued uncertainty over the disputed presidential election result.
Outside of the events in Europe, Stanley Fischer gave his first major speech as Fed vicechair last night, but he did not discuss the economy. His speech was focused on financial sector reform and he expressed support for the Fed’s stress test regime and new capital regulations. Fischer also said that it is not clear that breaking up the largest banks would end the need for government bailouts of the financial sector. Elsewhere it was one of those days where the data didn’t seem to matter much but we noted that US jobless claims were firmer (304k vs 315k prior week) while wholesale inventories were largely in line with expectations (+0.5% MoM vs +0.6% expected). There were some relatively hawkish remarks from the Fed’s Esther George and the ECB’s Nowotny. Nowotny argued that there was no need for further ECB action in the near future and said that the ECB did not need to show a new trick at every meeting. In terms of potential ABS purchases, Nowotny argued “If we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense”. As mentioned above, though we saw a recovery into the European close, the sentiment at the worst part of the day was sufficient to see a number of primary corporate bond deals get postponed, which is something we haven’t seen on a wider scale for a while.
Scanning some of the overnight headlines, the FT’s Robin Harding reports that the Fed could overhaul how it defines the Fed Funds rate in preparation for potential rate rises next year. The Fed could redefine its main target rate so that it takes into account a wider range of loans between banks including eurodollar transactions, in an effort to make it more reliable. Other closely related rates that it could include are those on transactions for bank commercial paper and wholesale certificates of deposit between banks. The Fed hinted at a change in the minutes of its June meeting. “Participants examined possibilities for changing the calculation of the effective Federal funds rate in order to obtain a more robust measure of overnight bank funding rates,” the minutes said.
Looking at the day ahead, in Germany we get the final June CPI readings for Germany (prelim 1.0% YoY) and Spain (+0.1% YoY). The events in Portugal’s banking sector will continue to be a major focus today. There are no major data releases scheduled in the US today aside from the monthly budget statement from the Treasury. Consensus is calling for a $79bn surplus. Wells Fargo reports earnings today before the opening bell. The Fed’s Lockhart and Evans will be speaking on the economy at the Rocky Mountain Economic Summit in Jackson Hole. Over the weekend, the EU will reportedly publish the names of an additional 11 Russian nationals to be subjected to sanctions for their connection to the conflict in Ukraine (Bloomberg) and the Bundebank’s Weidmann will be speaking on Saturday. But all eyes will be on the World Cup final on Sunday night. My pre-tournament pick was Argentina but I now have a sneaky feeling Germany will win!