European bank bailout soothes anxious markets

Reuters London | Updated on January 12, 2018 Published on June 07, 2017

People walk past a Banco Popular branch in Madrid, Spain. (File photo: Reuters)

The smoothly executed rescue of Spain's struggling Banco Popular prodded European banking stocks higher on Wednesday in financial markets dominated by caution ahead of a trio of major events on Thursday.

The absorption of Popular by Spain's biggest bank Santander for a nominal one euro was the first use of a regime to deal with failing banks adopted after the 2008 financial crisis and made barely a ripple in Europe's stock and debt markets.

Indeed, as the morning wore on the success of the process pushed shares in many major banks higher, supporting a recovery for Madrid's stock market and fending off this week's broadly weaker mood.

But the rescue also underlines the risks to growth, banking and government debt burdens that are likely to delay a major switch in language and policy direction by the European Central Bank at its meeting on Thursday.

That in turn has kept the euro in check this week and it was down 0.15 per cent against the dollar in morning trade in Europe.

“Maybe tomorrow's ECB meeting sees nothing but platitudes and disappoints a market that is getting ahead of itself,” said Societe Generale analyst Kit Juckes,

“But (for us) that would be a huge euro buying opportunity, because ECB normalisation IS coming. And when it does, the euro simply won't be able to sustain undervalued levels for long.”

European blue chip shares had risen by 0.1-0.2 per cent by 0850 GMT and Madrid's IBEX recovered from early losses to trade flat on the day. European banking shares rose 1.2 per cent.

Oil prices, however, were again almost 1 per cent lower and the flood of money into the perceived security of Japan's yen this week continued.

It was up another 0.2 per cent at 109.17 yen per dollar - a 7-week high. The greenback has lost more than 1 per cent so far this week, pressured by a sharp drop in US Treasury yields to seven-month lows.

A surprisingly closely-fought British election set for Thursday is weighing on investors' minds along with Senate testimony from James Comey, the former FBI chief fired by President Donald Trump.

Any damaging revelations in Comey's testimony are likely to further hurt Trump and take the wind out of his plans to roll back regulations and overhaul the tax system - an agenda that had sent the dollar to 14-year highs earlier this year.

“Tomorrows what is being dubbed as 'Triple Threat Thursday', ... an event-filled day that could send global markets on a bumpy ride,” said ING currency strategist Viraj Patel.

Published on June 07, 2017
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