Financial Problems in European Periphery Showed Signs of Reemergence

Peripheral European bonds weakened after Espirito Santo Financial Group, which holds a 25% stake in Banco Espirito Santo (BES) and is the bank’s largest shareholder, requested to suspend its shares due to “material difficulties” at its own largest shareholder. The BES noted that it “waiting for the release of the restructuring plan of Espírito Santo Group in order to assess the potential losses related to its exposure”. BES’s shares plummeted -17% yesterday before trading was stopped. Being the largest listed bank of Portugal, the selloff dragged Portuguese PSI all-share index -3% lower. More importantly, the incident has raised concerns about the financial health of European banks. European markets tumbled with the Stoxx600 losing more than -1% while periphery sovereign spreads continuing to widen. The 10-year Portuguese bond yields rose +21 bps while 10-year German bund yield fell -3 bps. Safe-haven demand soared with gold reaching a 4-month high. Treasury yields also dropped while the Japanese yen rose against the major currencies.

The benchmark Comex gold contract soared to as high as 1346.8 before ending the day at 1339.2, up +1.13%. India, the world’s second largest gold buyer (after China), did not relax the gold import duty (10%) in its latest budget. Finance Minister Arun Jaitley indicated that the country’s current account deficit was brought under control by the measure which restricted non-essential imports. Jaitley stressed that it is necessary to continue to be “watchful of the current account deficit”. Despite the belief that the measure would weigh on gold demand from India, price of the yellow metal gained after the announcement as investors expected that the announcement would force jewelers, who refrained from purchasing gold amidst expectations of a duty cut, to enter the market again.

On the dataflow, US’ initial jobless claims fell -11k to 304K in July 5, compared with market expectations of 316K and 315K in the prior week. The 4-week moving average dropped -4K to 312K, compared with the post-recession low (311K) reached at the end of May. Continuing claims increased +10K to 2 584K in the week ended June 28 while the prior week reading was revised -5K lower to 2 574K. Note that last week’s reading can be volatile due to the July 4 holiday and seasonal layoffs in the auto industry related to factory retooling. In the UK, the BOE left the Bank rate unchanged at 0.5% and the size of the asset purchase program at 375B pound. Minutes of the meeting would be published on July 23.