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Things are looking up for the UK and for GBP

Things are looking up for the UK and for GBP

Given the lack of market credibitility placed on the EU bank stress tests, it is perhaps unsurprising that the market reaction to their publication on friday evening has been largely neutral thus far. There was little fallout for currencies from the release of the much-awaited stress tests on 91 European banks. If anything, the seven banks that failed the stress tests, needing to raise a combined €3.5bn of capital, was a better result than expected, though this, of course, increased doubts that the testing wasn’t very rigorous. The methodology for the stress test was reasonably simple. Banks’ performance was modelled against three theoretical scenarios. Firstly the benchmark case, which looked at a bank’s financial strength over the next two years assuming current growth trends were maintained.This was followed by two “adverse scenarios”, the first involving two years of worsening economic conditions, and the second based on a “sovereign shock” whereby European government bond values would fall to rock bottom levels. Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland all passed the test with flying colours, surviving even the most difficult scenarios set for them by European Union regulators with far more capital than required to pass. Given that  the FSA had already run similar exercises with them recently this was unsurprising, though the true effect of the results, however, will be best seen in the interbank lending markets in the coming days and weeks. Of the 7 banks that failed the test, five were Spanish, one German and one Greek. All five of the Spanish lenders that failed were the unlisted property-heavy ‘cajas’, whose perils have been well reported recently, and in Germany it was Hypo Real Esate, the bailed out commercial property lender. Given that one of the simulations was for a 28% drop in property prices it is unsurprising that these struggled.

On friday the one release which did make the markets take note was the surprising uplift in UK GDP, surging past the expected 0.6% QonQ increase to 1.1%, catching many by surpirse. There were several mitigating factors for this, such as increased spending during the world cup (particularly in electronics/ TVs) as indicated in thursdays retail spending figures, and an artificially depressed figure for Q1 due to the bad weather experienced in January. Despite many questioning whether this would be repeated in 3 months time, it was enough to see propel Sterling by around 2 cents against both the Dollar and the Euro, to currently near 1.55 and 1.20 respectively, capping off a good week for Sterling overall.

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