Continued uncertainty about Greece and the exposure of banks to the eurozone crisis have created ongoing market uncertainty.
The publication on Friday of the European Banking Authority stress tests on European banks failed to calm market concerns about the exposure of the financial system to the economic problems affecting primarily Greece but also Portugal, Ireland and now Italy.
Monday trading on the London Stock Exchange saw Lloyds and Barclays suffer in particular, with both banks seeing a two year low for their share price.
Commenting on the EBA stress tests, credit analyst at Schroders, Roger Doig, said from a credit perspective – views on the ability of an institution to meet its financial liabilities – little had changed.
“The German response to the Italian, and other periphery sovereign debt situations, is by far the most important near and medium term factor for bank credit spreads and the ability of banks in those regions to access wholesale funding,” Doig said.
Haven assets, those seen as offering protected value, such as gold or currencies like the Swiss franc, have seen their value driven up by demand in recent days. Meanwhile, equity markets have been broadly hit by the ongoing crisis in Europe.
Commenting before the EBA stress test, the fixed interest team at Invesco Perpetual said: “A failure to resolve the crisis in Greece has led to a significant increase in volatility in other peripheral Eurozone government bond markets in recent days. We think the crisis will force a response from a combination of the EU and ECB [European Central Bank]. Some high quality corporate bonds are now looking attractive.”
The team’s view is that the contagion effect of broad concerns over the crisis can create selective investment opportunities in high quality corporate bonds. “As active managers, it is incumbent on us to take risk in those periods in which the risk/reward is attractive and to protect capital when markets fail to offer value.”
Turbulence in the market has led to attractive yield levels on bonds issued by high quality Spanish and Italian companies, the team said on 13 July.
Many commentators are pressing for a political resolution to the market turbulence centred around the EU’s response to Greece’s debt.
One of the proposed solutions is to issue a eurozone bond to help countries under pressure meet their liabilities.
Commenting on a eurozone bond, Tom Higgins, global macroeconomic strategist at Standish part of BNY Mellon Asset Management, said the bonds could be issued through the European Investment Bank or the ECB.
“These could be globally traded and would probably attract inflows from the central banks of emerging economies and sovereign wealth funds, thus funding growth in the Eurozone and helping bring down borrowing costs,” he said.
William Dinning, head of strategy at Aegon Asset Management, said recently that a euro-wide bond could act as a stop-gap solution.
“This too is a transfer from the core to the periphery of Europe as the borrowing costs of the core are lower than the 4.8% or so that a weighted average 10-year bond yield would be for the whole eurozone. But, politically, this type of transfer may be more palatable to electorates, rather than the direct payment by the taxpayers of the core to those of the periphery,” he said.
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