Markets Higher Post Positive European Bank Stress Tests

Good morning,

Markets are trading higher in Europe post the stress test results on European Banks. 25 banks of the 130 banks failed the test. However, most of the 25 banks which failed the test have already got their capital base up to the required level. This is because the stress tests were done on balance sheets as at end 2013. During 2014, banks raised capital and improved their capital base. Another positive for the markets is that there were no French, German or Spanish banks which need to raise further capital. The market took this news as a positive because investors were expecting larger capital shortfalls, with banks in more countries emerging with a capital gap especially in Spain and Germany. The negative news is that Italian banks remain the weakest link in European Banking system. Banca Monte dei Paschi di Siena SpA has the single biggest gap, and got told to raise an extra 2.11 billion euros.

The other news which hit the markets this morning was the re-election of President Dilma Rousseff in Brazil. Rousseff, who has maintained record-low unemployment even as the economy recorded the slowest growth under any Brazilian president in more than two decades, had 52% of the vote with 99.99% of ballots counted by the electoral court in Brasilia. The Ibovespa lost 25% since Rousseff took office in January 2011, while shares of state-owned oil producer Petroleo Brasileiro SA tumbled 40% and the real weakened 33% against the dollar. There’s going to be enormous disappointment in the markets that we have not had an opposition victory.

Goldman Sachs cut its forecasts for Brent and WTI crude prices next year on rising global supplies, predicting OPEC will lose influence over the oil market amid the US shale boom. The bank is becoming more confident in the scale and sustainability of US shale oil production and said US benchmark prices need to decline to $75 a barrel for a slowdown in output growth. Brent will average $85 a barrel in the first quarter, down from a previous forecast of $100, and West Texas Intermediate will sell for $75 a barrel in the period, from an earlier estimate of $90.

In corporate news, Toyota Motor Corp. said global sales climbed 2.8% in the first nine months of this year as the carmaker battles Volkswagen AG for leadership. Worldwide deliveries for Toyota, including its Hino Motors Ltd. and Daihatsu Motor Co. units, climbed to 7.6 million vehicles through September. Volkswagen has reported sales of 7.4 million vehicles, excluding results for its two heavy-truck units. The tight race between global giants is playing out as automakers, their customers and regulators contend with mounting recalls and rising scrutiny over the safety of vehicles. The industrywide struggle with defective cars poses risk to both Toyota and Volkswagen, which are benefiting from increasing demand in the China and U.S. markets.

Saab AB has signed a contract valued at $5.4 billion with Brazil for the development and production of 36 Gripen NG fighter, a victory for the Swedish company after it lost a deal with Switzerland. The order comprises 28 single-seat and eight two-seat Gripen NG aircraft, with deliveries to Brazil’s air force expected to start in 2019. Saab and Brazil’s government also signed an industrial cooperation contract to deliver “substantial technology transfer” from Saab to the Brazilian industry.

Good day and happy trading!

Kristian Camenzuli