European Market Wrap for the Week- Irish Banks Feeling Pain- ECB lent money to Banks for the first time in two months

Europe – equities in Europe outperformed the US in aggregate this week, although there are large variations w/the different countries (i.e. the FTSE fell only 1% while Greece dropped 5%, Spain fell 3.5%, and Italy was down 2.9%).  The DJ Euro Stoxx 50 fell 2.5%.  Financials were the weakest performing group among the Continental Europe equities (AXA, Aegon, Agricole, Santander, Intesa, BBVA were all off at least 5%) followed by industrials/materials (Arcelor was down 5.7%).  Banks in some of the weaker sovereigns were hit (Allied Irish fell 9% and Bank of Ireland was down 4.8% on the week while Spanish and Italian banks lagged as well).  On the upside, there was a rebound in some of the staples stocks – this group had a pretty tough earnings season and has been for sale over the last couple wks, but a strong Anheuser report (that stock climbed 7% on the week) and a dip in wheat prices helped sentiment in the group (in addition to Anheuser, Danone and Unilever both traded higher).  Telecom services stocks have been some of the best performing stocks in both the USand Europe in the past few weeks (TI, DT, FTE all were up 2% at least in the last 5 days and extended their gains).  There aren’t a ton of big tech stocks inEurope, but the few large companies were laggards (i.e. Infineon dropped ~7% on the week, about inline w/the SOX performance).  In London, there was strength in some insurance stocks (helped by takeover activity in the space) and health care (Glaxo was up 8% on the week). 

• European Sovereign CDS – after tightening for much of Jul, sovereign spreads have started to move back out in the last couple wks, rekindling market worries (spreads hit their tights in the wake of the stress test publication in early Aug).  Ireland was the big focus point of the week – spreads there have gone from 197bp on 8/3 to 274 on 8/13; Greece has gone from 733bp on 8/3 out to 841 by this Fri; Portugal from 217bp on 8/3 out to 275bp on 8/13; Spain was 179bp on 8/3 and finished the week at 218.  There were a bunch of various items cited for the widening (see the list below), but overall they are really just trading inline w/other risk assets (stocks were at there near-term highs and sovereign CDS their near-term tights around the same time in early Aug).  Some of the fundamental items being pointed to for the sovereign widening:
• 1) Ireland received European Commission approval this week for an additional 10 billion euros ($12.9 billion) in capital for state-owned Anglo Irish Bank;
• 2) ECB forced to ramp back up its debt buys after drawing down their purchases for the last several weeks - the WSJ reported that the ECB was back in the market buying Irish sovereign debt to help calm spreads;
•  3) reports that Spain is going to be reviving some infrastructure projects (raising concerns their budget deficit could start to widen out again);
• 4) Bloomberg reported this week that the ECB has lent European banks dollars for first time in two months (the ECB allotted $430M in a 7-day refinancing plan at 1.18% for the first time since May 26);
• 5) Slovakia's parliament on Thurs voted against providing a bilateral loan to Greece;
• 6) the Bank of Spain reported on Fri that Spanish banks took EUR130.21 billion in funding from the ECB in July, up 3% from EUR126.3 billion in June.