By Ovunc Kutlu & Gulbin Yildirim
Frankfurt letter, week beginning August 8

- European banking sector

On Friday July 29, 2016, after the close of financial markets, the European Banking Authority (EBA) published the results of its "stress test" of 51 banks of which 37 is regulated by European Central Bank (ECB).

EBA’s stress test points that conditions in European banking sector have improved compared to 2004.

A drop in the shares of leading European banks such as UniCredit, Deutsche Bank and Credit Suisse show that that investors see things differently and still worry about the future of banks across Europe.

Italy's Monte dei Paschi, Austria's Raiffeisen, Spain's Banco Popular and two of Ireland's main banks received the worst results in performance in the EBA's test.

After these developments, international media claimed that two of Europe's largest lenders, Deutsche Bank and Credit Suisse, will be forced to leave the STOXX index of the Continent's top 50 blue chip companies as of August 8.


- The European Central Bank (ECB)

According to the ECB’s latest monthly Economic Bulletin, financial market volatility following the referendum in the United Kingdom on EU membership has been short-lived.

The bulletin also suggests that the economic recovery in the euro area is continuing, supported by domestic demand, while export growth remains modest. Looking ahead, the economic recovery is expected to proceed at a moderate pace.


- Economic data

In June 2016 compared with May 2016, the seasonally adjusted volume of retail trade remained stable in the euro area and declined by 0.2 percent in the European Union, according to estimates from Eurostat, the statistical office of the European Union. In May the retail trade volume increased by 0.4 percent in both zones.

The final Markit Eurozone PMI Composite Output Index rose to a six-month high of 53.2 in July, above the earlier flash estimate of 52.9. However, the data pointed to a moderate growth in the Eurozone.


- News from Germany, low interest rates and more building permits

According to figures of Destatis, the number of building permits has steadily increased since the end of 2009. In 2015, the number of dwellings for which building permits were granted (309,000) exceeded the threshold of 300,000 for the first time since 2000. Compared with a year earlier, this was an increase of just over 8 percent.

The positive trend continued between January and April 2016. In this period, building permits were granted for 117,000 dwellings, just over 31 percent more than in the first four months of the previous year.

One reason may have been that extremely low interest rates have made buildings financially attractive.


- The week ahead

This week, the focus will be on the European banking sector as investors closely monitor the development of Europe’s banks.

On the data side, industrial production, flash estimate EU and euro area GDP will be on the top of the agenda of the markets.


08 Aug,2016