European stocks higher after bank doubts ease

European stocks advanced yesterday in line with a positive start on Wall Street where investors welcomed a rise in US new-home sales and as banks found some support in the results of European stress tests.

The gains in Europe came after Asian stocks closed higher, taking in their stride the stress test results released Friday which showed the European banking sector to be generally in sound financial shape.

On the currency markets, the euro firmed on relief that the tests revealed no unpleasant surprises.

In London, the FTSE 100 index added 0.72 per cent to finish at 5,351.12 points while in Paris the CAC 40 rose 0.81 per cent to 3,636.18 points. The Frankfurt DAX climbed 0.45 per cent to 6,194.21 points.

Elsewhere there were gains of 1.14 per cent in Madrid and 1.05 per cent in Milan. The Swiss Market Index slipped 0.03 per cent.

Driving the action late yesterday was a report that sales of new one-family homes in the United States jumped in June after plunging to a record low the previous month.

The Commerce Department said sales increased 23.6 per cent to 330,000 units from the May rate of 267,000, which was revised down from the previous 300,000.

Most economists had expected June sales to hit 310,000 units.

The Dow Jones Industrial Average was up 0.64 percent to 10,491.75 points at mid-day, with the tech-heavy Nasdaq composite rising 0.82 per cent to 2,288.11.

In Europe, there was little overall reaction to the European bank stress tests, which showed that only seven of 91 banks examined were under-capitalised and therefore vulnerable to a another severe financial downturn.

The capital shortfall at the seven banks – five in Spain and one each in Germany and Greece – came to only €3.5 billion, according to the Committee of European Banking Supervisors.

“The stress tests contained neither good nor bad surprises,” commented one Paris trader.

The tests were immediately scorned by financial analysts who said the examiners had set the bar too low to effectively assess if a bank could survive another shock.

In particular, they criticised the procedure for failing to take account of a potential default by an EU government, several of whom are struggling with debt and whose bonds are held by European banks.

The Financial Times newspaper reported yesterday that six German banks did not reveal full details of their sovereign debt holdings as part of test.

The six German banks included the country’s biggest, Deutsche Bank, as well as Deutsche Postbank, which has the nation’s largest retail network, and Hypo Real Estate, which failed the stress tests.

The German banks said they sought to provide updated information rather than data on March 31 as requested by test officials.