European stocks edge down; banks slide after stress tests

Stocks in Europe reversed gains to trade lower Monday as investors reacted to European banking stress tests and new Chinese data which showed its official manufacturing gauge unexpectedly slumped in July.

The pan-European STOXX 600 was down 0.2 percent with most major bourses and sectors mixed. European investors were analyzing the results of the European Banking Authority’s latest stress tests.

The EBA found that that Italy’s Banca Monte dei Paschi di Siena (BMPS), the world’s oldest bank, would have the greatest difficulty out of 51 of Europe’s top banks covering its toxic loans between now and 2018 in adverse economic conditions. Other banks that performed poorly in the stress tests were Austria’s Raiffeisen, Allied Irish Banksand Spain’s Banco Popular.

Banking shares were higher in early trade but reversed gains, although a handful of Italian lenders were still trading higher. BMPS shares were near the top of the STOXX 600 after it unveiled a rescue plan after the close on Friday that involved raising capital from the private sector. Banco Popolare was among the other Italian banks in positive territory.

Unicredit, which was flagged up as a concern during the stress tests, was sharply lower and was briefly halted from trade.

Some investors have expressed concern about how clear a picture the stress tests painted of the European banking sector given that they didn’t test certain scenarios such as a negative interest rate environment.

“When you have a test that doesn’t even take into account the effect of the current environment of a prolonged period of negative interest rates then you have to question their efficacy,” Michael Hewson, chief market analyst at CMC Markets, told CNBC by email.

“Markets appear to be rallying on the basis that the tests on the whole didn’t paint an immediate doomsday scenario, however the proof of the pudding is likely to be whether the gains seen in this initial relief rally are sustained over the next few weeks.”

Source: CNBC