European stocks pare losses, but concerns over Portuguese bank linger

The global stock markets have pared some of their losses from earlier in the session but still remain in the red going into the European close. Stocks were sharply lower earlier, led by Europe where concerns about the health of Banco Espirito Santo (BES) dented market sentiment with bank shares losing ground across the board. Trading in shares of Portugal’s largest bank, along with its biggest shareholder Espírito Santo Financial Group (ESFG), were halted after sharp falls. With BES being the largest Portuguese bank, the market was clearly wary of its potential impact on Portugal and other eurozone peripheries: bond yields in the peripheries spiked while those of the core nations fell, with Germany’s 10-year hitting 1.18% – its lowest level since May 2013.

The selling of banks was also driven in part by concerns over lower trading revenues after a very quiet few months in the financial markets. Indeed, financials are the only major sector in the S&P 500 expected to report a drop in Q2 earnings. Also weighing on sentiment was the escalation of the conflicts between Israel and Palestine. Meanwhile, economic data out of the eurozone has been disappointing of late and today saw some pretty awful industrial production numbers from both France and Italy: they dropped 1.7 and 1.2 per cent in May, respectively. On top of this, China’s latest trade figures disappointed expectations, while in Japan core machinery orders plunged almost 20% in May. But some better data from the US helped to soothe the nerves late on in the day, as weekly jobless claims unexpectedly fell to 304,000 from 315,000 the week prior while whole sale inventories rose 0.5%, slightly less than expected. With no further macro pointers scheduled from the US and Friday being a quiet day in terms of data releases, the markets may bounce back as the sellers continue squaring their positions.

The rebound late in the afternoon was partly driven by technical factors. On the FTSE, for example, the selling halted around 6645, a level which ties in with a medium-term bullish trendline. As a result, the UK benchmark stock index has made back nearly half of its losses and is currently trying to climb back above its 200-day moving average at 6685. The FTSE faces further resistance ahead, especially at 6700 which previously support. A potential break above this level would be a bullish development, while a break below the aforementioned trend line would be bearish. If the index were to break further lower then it could easily fall towards 6590 or even 6500 before making its next move.