Europe reports strong economic data, little bank stress

Friday's economic data came mainly from Europe and they were mostly positive. From Bloomberg:

U.K. gross domestic product rose 1.1 percent in the three months through June, almost twice as fast as the 0.6 percent gain predicted by economists in a Bloomberg News survey, the Office for National Statistics said in London today. In Munich, the Ifo institute said its business climate index, based on a poll of 7,000 executives, jumped to 106.2 this month, confounding expectations of a decline.

And the bank stress test showed only seven banks failing. From Bloomberg:

Seven of the 91 European Union banks subject to stress tests failed with a combined capital shortfall of 3.5 billion euros ($4.5 billion), stirring concern the evaluations were too lenient.

Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks have insufficient reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said today.

Analysts don't seem to be too impressed by the test though.

“The amount of capital needed is much lower than the market expected,” said Mike Lenhoff, London-based chief strategist at Brewin Dolphin Securities Ltd., whose parent company oversees $33 billion. “The amount does seem quite trivial considering the concerns about losses from the sovereign crisis.”

Part of the reason the amount of capital needed was lower than analysts predicted may be because the evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity. That means the tests ignored the majority of banks’ holdings of sovereign debt...

“The long awaited stress tests do not seem to have been that stressful after all,” said Gary Jenkins, an analyst at Evolution Securities Ltd., in a note. “The most controversial area surrounds the treatment of the banks’ sovereign debt holdings.”

Cynicism over the stress test aside, markets were generally positive on Friday. From Reuters:

Global stocks rose on Friday on solid corporate earnings while the euro gained against the dollar after fewer-than-expected European banks failed stress tests.

Safe-haven assets such as gold and U.S. Treasuries dropped after European regulators reported that only seven of 91 banks failed the tests, which were designed to show the impact of Europe's sovereign debt crisis on its financial institutions.