What the stress test results will mean for Europe and the euro

Here are a few things to consider.

  1. It’s very doubtful that any of the major banks have failed and this is what the market really wants to know. If a bunch of piddly little banks in Latvia or Malta fail the market won’t blink. The press has been out in force trying to find out if a big bank will fail. They haven’t succeeded. We may still get a shock but it’s a low risk outcome.
  2. This was always going to be the worst kept secret, as most things in Europe are. In September we heard 25 banks, now it’s 20 banks, and we can pretty much acknowledge that they are going to be the ones we’ve already brought you (Germany 4, others 12). The banks know the results themselves and it would be very difficult for all of them to keep mum about it. Those that have failed are still negotiating their way out of it.
  3. Ultimately Sunday’s event should be a dud IF none of the big boys have problems. Probably the main worry (as has been the case for a while) is Germany’s Deutsche Bank (who today the market has had concerns over their core tier ratios) . What you can be certain of is that individual central banks and governments would have been making very sure that their banks pass. People like Merkel won’t want egg on their faces because their banks failed a test.
  4. Look for what really matters. Any stresses in liquidity, continued bad loans and assets not being knocked off the books, and things like cash shortfalls will need to be monitored to gauge a broad view of the state of European banking

I’m not expecting any shocks from this but that doesn’t mean we won’t get a little market turbulence. In fact, after detailing all that above I’m considering taking a euro long into the weekend as I see the risk of big failures as very low. With the news today that potential failures are still negotiating, even the failures are likely to be revealed alongside their plans to fix things.

Never say never when trading markets and especially Europe but this is one fear trade I’m happy to trade against.

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