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Market implications of the European stress tests

- "Only 7 of 91 banks failed the European stress tests published by the Committee of the European Banking Supervisors (CEBS) on Friday. While this put into question the severity of the stress tests, the results are close to market expectations based on what has been leaked from the National Supervisors in recent weeks."
- "The amount of disclosure was the positive surprise. Most banks, apart from a few German banks, have released detailed information about their sovereign debt exposure. This may aid the market in differentiating between banks’ risks."
- "However, we do not expect the stress tests to be the big game changer in Europe. With the apparent weakness of the stress tests, financial markets are probably not convinced that the European bank sector as a whole has sufficient capitalisation."
- "In Europe, confidence in the banking sector and in the sustainability of public finances are highly interwoven and in that sense restoration of confidence in peripheral countries in particular will still depend on Europe’s ability to convince the market that a sovereign default is unlikely."
- "The market reaction in US trade Friday evening was slightly positive after some initial jitters. EUR strengthened slightly and European banks traded in the US ADR market gained modestly. As a direct consequence of the release of the stress tests the Bund future lost around 30 cents (around 3-4bp in 10Y yields)."
- "On balance we regard the stress tests as slightly positive, but a significant near-term reduction in the risk premium levied on the single currency appears unlikely. The market impact could be slightly positive for risky assets including peripherals’ government bonds."
DenDanske Research Euroland 20100726

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