Stocks lower again as traders eye bank stress results

European stock indices traded lower by between 0.2% and 0.3% on Friday as investors awaited the outcome of the latest round of European banking stress tests.

We have seen continued weakness in the mining sector, which has fallen 1% in early trade with traders looking to downsize risky asset classes into the weekend. A fall of 0.3% in the price of Copper has also weighed on the mining sector somewhat too. The banking sector has however traded relatively flat today swinging between small gains and losses as traders position themselves ahead of the stress test results.

Bank stress tests credibility question remains
Naturally there is a degree of apprehension towards the outcome of the bank stress tests and this is curbing buyer demand and trading activity so far. Previous stress tests have seen a somewhat muted trading activity in the run up to the results being published and today is no different.

There remains a broader question as to the legitimacy of the stress tests themselves. Previous results have done little to ease investor concerns that they are rigid and credible enough. This time around the European Banking Authority has tried harder to bridge that credibility gap by claiming that the tests are more in line with the forthcoming Basel III regulations. That said, it will be interesting to see how the market reacts to this, though with the results coming after the european closel, we are going to have to wait until Monday for stocks to react.

One aspect traders will certainly keep a close eye on is bank holdings of sovereign debt. Given the fragility of the eurozone debt situation, this is a good opportunity for investors to see a transparent picture of the likely impact on European banks to a sovereign default. It is in this area that banks could see some of the more volatile share price swings as a result.

Later in the session investors will also keep an eye out for earnings from Citigroup, out at noon UK time, particularly after JP Morgan’s pleasing results yesterday. It may be questionable however that a strong set of results could trigger a jump in share prices of european banking stocks given the cloud of the stress tests to come after the close.