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Portuguese Bank Insolvency Puts Investors on Edge


Today's financial recap and tomorrow's financial outlook.

Additional concerns surfaced in Europe today with news that Espirito Santo International (ESI), the international arm of Portugal's second largest bank, Banco Espirito Santo (ELI:BES),  was likely to file for insolvency after it failed to partially repay some of its outstanding commercial paper yesterday. BES' holding company indirectly owns 49% of ESI, which transfers a considerable amount of risk to the bank itself. Many of the holding company's bonds traded at pennies on the dollar, implying that market participants viewed ESI's bankruptcy as a precursor for a bankruptcy of the holding company itself. Trade in Banco Espirito Santo remained suspended pending an announcement from its securities regulator.

European bank stocks represented by the Euro Stoxx Banks index (INDEXSTOXX:SX7E) fell as much as 5% during the day, and was down 13% from its high two weeks ago. Investors scrambled to ascertain which other European banks were exposed to Banco Espirito Santo. Most Spanish and Italian banks traded limit down early in the session, but recovered as the day progressed.

US markets followed Europe lower at the start of the day. The S&P 500 (INDEXSP:.INX) opened down more than 1% early on, but recovered as the day progressed. The benchmark index has not had a session where it traded in excess of 1% in almost four months. At one point the Nasdaq-100 (INDEXNASDAQ:NDX) actually traded positive after opening down 1.45%, but that strength did not persist. Small-cap stocks continued to underperform.

Initial jobless claims fell to 304,000 from last week's 315,000, which was also the economist estimate. Johnson Redbook reported that US retail sales rose 5.9% year-on-year through June, helped by Independence Day holiday and World Cup sales. In the week ending July 5th, retail sales were the highest of any single 7-day period of the past five years.

Tomorrow's Financial Outlook

To wrap up what has been a slow week on the economic reporting front, only the Treasury's June budget statement is scheduled to be reported tomorrow. Fed Presidents Plosser, Lockhart, and Evans are scheduled to speak on monetary policy in Jackson Hole.

Overnight, Australia will report home loan growth, and Germany will report the final estimate of its June consumer price index. Canada will release its June employment report in the late morning.

Wells Fargo (NYSE:WFC) will be the first bank to report earnings for the second quarter. It is scheduled to report tomorrow morning at 8:00 a.m. EDT. Wells Fargo has the highest return on investment of all US banks and is also the largest mortgage lender.

Twitter: @Minyanville

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