While equity markets had a decent run in July, they began the month on the wrong foot as dropping oil prices and banks saddled with bad loans inspire doubts.
According to a commentary piece on the CMC Markets website, downward movements in oil prices were largely unnoticed throughout July, but selloffs have accelerated over the past week or so.
Brent prices have plunged over 15% from their peaks as the true extent of the oil supply glut has become clear. Rig counts continued to rise and gasoline inventories remained up, inspiring a 9% decrease in US prices.
In addition, news and speculations on plans to deal with Italian bank Monte dei Paschi di Siena’s problematic loan book have shaken investor confidence. If other Italian banks follow the same course, they would need to find billions of euros’ worth of replacement equity–an astronomical challenge given that estimated NPLs could be as high as 360 billion euros.
The results of the European Banking Authority’s stress test also failed to reassure, as it did not factor in current conditions such as the prevailing negative rate environment and the fiscal health of Portuguese and Greek banks.
The piece also cites that lingering uncertainty over Brexit is a concern. With the time of invocation of Article 50 as yet undecided, businesses in the UK are likely to remain in limbo as they continue to be saddled with a weak pound.
The Bank of England has an opportunity to allay fears somewhat as investors wait for its latest rate announcement. Whether that will be enough to stop the advance of the bears and the blues, however, is still up in the air.
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