A bailout for Spanish banking firm, Banco Popular, caused European stocks to soar in a market that is preparing for a possibly-turbulent week. Popular was acquired by its larger competitor, Santander, which is also Spain’s biggest banking operator. The failing bank was acquired at one euro, a regime developed during the 2008 economic crisis to solve the problem of non-performing banks. This was the first time it was put it into action.
As a result of the sum, the debt and stock markets in Europe barely moved. The acquisition led to a boost in shares among other banks, allowing for a recovery in Madrid’s stock market while also lightening the overall mood. However, there were some minor disturbances due to the losses experienced by junior shareholders and bondholders in Banco Popular. But, senior bondholders were eventually let go. According to Giuseppe Sersale, a Fund Manager at Milan’s Anthilia Capital, the Banco sale came as good news to the market. Though junior bondholders were hit, the overall perception was that the sale was a rescue and not a sign of bankruptcy.
Sersale also added that the drop in subordinated debt among other banks in Spain didn’t last over an hour. The Banco acquisition emphasizes the problem as a risk only involving capital. Other than that, the acquisition also brings attention to the risks affecting banking, growth, and government debt burdens. These risks will, most probably, bring about a change in the direction of language and policy by the ECB (European Central Bank) at the upcoming meeting. Post-acquisition, the Euro dropped to the Dollar by .5 cents. The drop is believed to have been spurred by a report concerning the ECB’s possible move towards cutting inflation forecasts.
European Blue-Chip shares went up by 0.2% and the IBEX (Madrid) managed to recover from losses to enter a day of flat trading. On the other hand, oil prices dropped by 1% and the Japanese Yen saw more money flowing in due to the perception of security. The Yen actually experienced a 0.6% increase against the Euro and even went as high as 109.11 against the Dollar. This was its strongest performance in the last 50 days. As the U.S. Treasury yields its lowest in 7 months, the Dollar dropped by 1%. Investors are watchful as the week brings in interesting events such as the British election and the Comey Testimony. Comey’s testimony in court could damage Trump, creating a ripple effect that would definitely ruin his plans for a tax and regulation overhaul. These very same plans had caused the dollar to soar to its highest in 14 years.