Epic Portugal Damage Control To Preserve Bank Confidence: BES Resumes Trading, Surges Then Tumbles

Following yesterday's peripheral European poundage over fears of what a Banco Espirito Santo failure could mean to the nation, and to the Eurozone, but most importantly to depositor confidence everywhere, today has been an epic damage control session, with one sellside penguin after another, most notably Goldman (which until hours ago had the cratering bank at a Buy rating, only to switch to Neutral this morning), rushing to release half-baked notes promising that "all is well, please to keep calm" and that nobody should certainly withdraw their deposits from insolvent European banks. This is happening after Banco Espirito Santo itself sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt by a member of the Portuguese group roiled global markets.

As Bloomberg reported "the nation’s second-biggest bank by market value said it had 1.18 billion euros ($1.6 billion) of loans, securities and other items linked to Grupo Espirito Santo as of June 30, according to a filing. The lender also said that it has a buffer of 2.1 billion euros above the regulatory minimum following a capital increase in June." Considering the obscurity of disclosures at the linked entities one would not be surprised if all the revealed numbers this morning are nothing more than yet another fabrication.

This clown parade of clueless opinions (did we mention Goldman had BES at a Buy until this morning?), stretched all the way to the very top with Bank of Portugal itself issuing the following pearl:

• BANK OF PORTUGAL SAYS BES DEPOSITORS CAN STAY CALM

Uhhh, what else would the Portugal central bank say? Panic and withdraw your deposits from a bank whose exposures to insolvent entities have been largely unknown until today (and even now).

So in an environment in which everyone had done all they could to preserve confidence in the system, moments ago BES resumed trading. In retrospect perhaps that decision was a little rash as after soaring over 10% out of the gates, the stock has since tumbled. It remains to be seen if the BIS and ECB, aka Europe's BTFD crew, can contain the damage since confidence appears to not have been restored after all.

Banco Espirito Santo stock price since resuming trading

Keep in mind this happened even with shorting of BES shares currently prohibited.

So here are some choice excerpts from the "Don't Panic" BES defense, via RanSquawk:

BofAML say Banco Espirito Santo impact on Portugal is limited in the long-term as even in the worse scenario there is still a backstop available for the government to cover any potential needs. In the event of new capital shortfalls, the Bank Solvency Support Facility has resources of around EUR 6.4bln set aside for banking sector support.

Goldman Sachs say Eurozone systemic read-across from Portugal is 'unlikely' due to:

1. 1. Portuguese banks assets are limited at EUR 494bln or 1.6% of Eurozone total.
2. 2. Foreign bank exposure to Portugal is low with only 2 banks saying Portugal is among their top 10 exposures.
3. 3. ECB liquidity backstops in EUR and USD are available to all European banks

RBC say the situation is more likely than not an isolated incident and should not be mistaken for systemic stress as it is more likely than not an isolated incident. The bank also notes that there has been a limited reaction is risk indicators such as EUR or swaption volatility.

Aside from Portugal it has been a relatively quiet session so far, and with nothing on the US calendar, investors will focus on various Fed speakers later today.

In summary: SXXP rises after five-day decline, with the bank and insurance sectors outperforming and basic resources, tech underperforming. The Italian and Spanish markets are the best-performing larger bourses, Swiss the worst. Banco Espirito Santo discloses EU1.2b exposure to GES. The euro is little changed against the dollar. Portuguese 10yr bond yields fall; Japanese yields decline. Commodities decline, with Brent crude, copper underperforming and natural gas outperforming. U.S. monthly budget statement due later.

Market Wrap

• S&P 500 futures up 0.2% to 1962
• Stoxx 600 up 0.4% to 337.6
• US 10Yr yield down 1bps to 2.52%
• German 10Yr yield up 0bps to 1.2%
• MSCI Asia Pacific down 0.3% to 146
• Gold spot up 0.1% to $1337.8/oz

Bulleting Headline Summary from RanSquawk and Bloomberg

• Banco Espirito Santo sources indicate that the bank has sufficiently large capital buffers and various tier 1 banks have suggested this morning that the situation carries little in the way of systemic risk to the broader market
• Peripheral stock markets outperform the core and the PO/GE 10yr spread reverses some of the recent widening as markets re-access the impact of the latest Portuguese developments
• Looking ahead volumes expected to remain light with the main data release coming from Canada in the form of  unemployment data (1330BST/0730CDT)
• Treasuries headed for their biggest weekly gain in almost four months as renewed financial stress in Europe spurred demand for the relative safety of U.S. debt; 10Y yields at multi-year lows in Japan, Germany, France, Netherlands, Canada and Australia.
• Banco Espirito Santo sought to reassure investors by revealing its exposure to related companies after a missed payment on short-term debt roiled global markets
• Allianz SE CIO Maximilian Zimmerer said the “euro crisis is not over,” as “the fundamental problems are not solved and everybody knows it”
• The ECB’s newest stimulus package has had an impact on markets and there is no urgency to take additional steps, according to Governing Council member Ewald Nowotny
• Despite a 30% decline in the yen since 2011 against the currencies of its trading rivals, Japan’s exports of goods fell 0.6% in the same period, according to an analysis published on the Federal Reserve Bank of New York’s blog
• Israel called up 33,000 reserve soldiers and may bolster infantry brigades, intensifying its military campaign against Hamas
• Ukraine hit separatists near Donetsk with air strikes, saying it killed more than 50, as the European Union geared up to expand sanctions
• Sovereign yields mixed with Greek, Portugal, Spanish and Italian 10Y spreads all tighter. Euro Stoxx Banks index rises 2%; previous day hit lowest level (140.89) since January. Asian stocks mixed; Japan falls, China rises. European equities, U.S. stock futures higher. WTI crude and copper lower; gold higher

EUROPE NEWS

• 16 out of 19 Stoxx 600 sectors rise; bank, insurance outperform, basic resources, tech underperform
• 62% of Stoxx 600 members gain, 36% decline
  Eurostoxx 50 +0.6%, FTSE 100 +0.2%, CAC 40 +0.6%, DAX +0.1%,  IBEX +1.1%, FTSEMIB +1.6%, SMI -0.1%

ASIA

• Asian stocks fall  with the Shanghai Composite outperforming and the Sensex underperforming.
• MSCI Asia Pacific down 0.3% to 146
• Nikkei 225 down 0.3%, Hang Seng down 0%, Kospi down 0.7%,  Shanghai Composite up 0.4%, ASX up 0.4%, Sensex down 1.4%
• 3 out of 10 sectors rise with health care, staples outperforming and utilities, tech underperforming

FIXED INCOME

Bund futures fell in early trade as the German 10yr yield moved back above the 1.2% level. Alongside this, the PO/GE 10yr spread has been the tightest of all major European countries (-11bps), reversing the widening seen in the past few days as Banco Espirito Santo sources indicated that the bank has sufficiently large capital buffers, a sentiment echoed by most of the large institutions this morning (see above). However, after disappointing demand in the Italian 2017 and 2021 BTPs bonds have come back to flat in on the session, albeit in light volumes (Sep 195k).

EQUITIES

After initial strength following the European cash equity open, EU stocks are seen range bound with financials leading the way amid a dissipation of concerns regarding the systemic risk of Banco Espirito Santo (BES PL) as echoed by several tier 1 banks this morning. With the bounce in the peripheral stock indices the PSI 20 index (+1.9%) is the outperformer with EDP and Portugal Telecom the biggest percentage gainers in Europe.

FX

EUR/USD is seen stronger, back above the 1.3600 handle as USD suffers from a reversal of the flight-to-quality seen yesterday, with the USD-index marginally lower on the session. Although GBP/USD was well supported in early trade the steepest fall since February in the latest UK construction output knocked the pair from its highs. UK Construction Output SA (May) M/M -1.1% vs. Exp. 0.9% (Prev. 1.2%).

COMMODITIES

In commodity markets WTI continues its decline, despite some recent strength, amid little new developments in some geo-politically tense regions such as Iraq, or Ukraine. Spot gold (USD 1337.01, up USD 2.01) remains steady after 4-month highs yesterday, as confidence returns to risker assets with the yellow metal still on course for a 6th consecutive week of gains.