European stocks slip back as Bankia and Caixa tie the knot

European markets came under pressure yesterday as a result of concerns about a combination of concerns about the economic outlook, as well as the timing of a vaccine contributing to a prevailing sense of renewed uncertainty, with the World Health Organisation warning about an alarming rise in coronavirus cases across Europe.

Talk of new localised and targeted lockdowns, as well as curfews and quarantines appear to be becoming more commonplace, raising concerns about the resilience of the recovery we’ve seen thus far across Europe.

Today’s European market open appears to reflect these continued concerns with a fairly weak start as we come to the end of a pretty choppy, but directionless week.

Travel stocks are also coming under pressure again on the back of talks of new lockdowns, quarantines and curfews with IAG and EasyJet leading the fallers.

All the renewed talk of negative rates is also weighing on UK banks with NatWest Group under pressure again in early trade.

London Stock Exchange shares are also in focus on reports that it is now in exclusive talks with Euronext over the sale of its Borsa Italiana business, as it looks to clear the way for regulatory approval for its Refinitiv deal.

Sainsbury’s shares saw a big rise yesterday on reports that Daniel Kretinsky, a Czech billionaire who already has a stake in Royal Mail, had taken a 3% stake in the business. It isn’t immediately clear what plans Mr Kretinsky has for Sainsbury with his decision to make this investment, however it probably won’t be too long before he makes his presence felt.

Rolls Royce shares have continued to fall in the wake of this week’s reports that it may issue new debt or equity, given the difficulties in raising funds quickly any other way.

In Europe we appear to be seeing some progress on consolidation within the banking sector after Caixa Bank and Bankia management agreed the terms of a merger deal, which would create the country’s largest bank with combined assets of €664bn. Caixa is paying a 20% premium to absorb Bankia which has had a rather chequered history.

The Spanish government appears to be keen to hand over control of Bankia, in which it has a 62% stake, having had to step in in 2012, with a €22bn bailout, after a previous consolidation ended in the wipe out of thousands of Bankia’s small shareholders.

Bankia was originally formed in 2010 as a result of the union of seven Spanish regional Cajas, which were struggling under a huge amount of non-performing loans, a monumentally stupid decision as it merely amplified seven small problems into one very large one.

It didn’t take long for that decision to unravel as a series of bad decisions saw the bank floated on the Madrid Stock Exchange in 2011 as the CEO Rodrigo Rato encouraged a host of Spanish small investors to back the newly created bank. It was obvious to a lot of people at the time that the so-called rescue was a disaster in the making, and eventually resulted in Spanish Prime Minister at the time Mariano Rajoy going cap in hand to the EU for a banking bailout. Rodrigo Rato is currently on trial for fraud and false accounting, with a verdict expected soon.

Let’s hope today’s merger of Bankia and Caixa Bank is based on sounder foundations, and better due diligence, with Caixa holding 75% of the new share capital of the new bank, and Bankia shareholders 25%. The Spanish governments stake in the new bank will in turn come down to 14%. It is to be hoped that this merger will result in a better outcome for Spanish taxpayers than the previous one.

There was little reaction in the pound to today’s UK retail sales numbers for August which showed a rise of 0.8%, as the Chancellor of the Exchequer’s “Eat Out to Help Out” helped boost consumer spending, as retail sales saw their fourth successive monthly rise, the best run of gains in years.

Oil prices continued their progress higher yesterday, with Brent prices edging back towards their 200-day MA, after the Saudi energy minister warned rather darkly of betting against a further recovery in prices, while rebuking those who tried to get away with pumping too much.

US markets look set to open close to the flat line after last night’s sell-off with the S&P500 and Nasdaq close to some key support levels.

The ongoing saga over TikTok’s US operation appears to be reaching a conclusion on reports that a deal is close. A deal that involves Oracle and Walmart owning minority stakes, with Oracle having the power to review the source code appears to be in the works, however uncertainty remains as to whether either Beijing will allow it, and even if they were, it’s not immediately clear that President Trump would go for it.

US banks are likely to be in focus after the US Federal Reserve announced a new series of stress tests for the sector, the results of which will be known by the end of this year. The central bank is also considering extending the ban on issuing dividends, and conducting share buybacks.

This would be a disappointment to the plans of some of the banks, who were considering resuming their payouts. This seems an entirely sensible measure by the Fed given the challenges facing the sector over the risks to the US economy, and the increasing risks of a rise in non-performing loans. Sometimes it pays for the regulator to protect US taxpayers from the greed of bank boards and their shareholders.

Dow Jones is expected to open unchanged at 27,902.

S&P500 is expected to open 4 points higher at 3,361.