Stephen Pope Comments: Equities Gain Ground As Banking Fears Ease

July 7, 2010, Financial Times

Optimism about the outlook for the global banking sector helped lift US and European equities on Wednesday as investors awaited details of “stress tests” on eurozone lenders and took heart from positive earnings news from across the Atlantic.

Details of the method used in the stress tests, which aim to show how individual banks would weather economic and market shocks, were expected to be outlined by the Committee of European Bank Supervisors.

According to unconfirmed reports, the tests will include a “haircut” of 16 to 17 per cent on Greek sovereign bonds, and about a 3 per cent markdown on Spanish government debt. Analysts warned that the tests could backfire if they failed to provide sufficient clarity about banks' doubtful assets and appeared too lenient on lenders.

“To only place a haircut of 17 per cent on Greek debt and 3 per cent on Spanish is too gentle,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald. “It is too light on the Greek condition . . . I believe 20 per cent should the minimum haircut that should be in place for the Greek debt and 5-7 per cent for Spain.”

Meanwhile, an encouraging earnings outlook from State Street, the US custody bank, bolstered sentiment towards the sector ahead of the start of the second-quarter earnings season next week. State Street's forecast – along with figures pointing to a rebound in US consumer spending – helped US and European equities extend the previous session's gains.