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Bank stress test relief lifts European assets

European stocks, low-rated government bonds and the single currency all rose on Monday as financial markets gave a tentative thumbs-up to euro zone bank health checks.

[LONDON] European stocks, low-rated government bonds and the single currency all rose on Monday as financial markets gave a tentative thumbs-up to euro zone bank health checks.

Fewer than one in five of the bloc's top lenders failed the tests at the end of last year and many have since repaired their finances, results released on Sunday showed.

The bloc's banking index rose 1 per cent in early trading, powering a 0.5 per cent rise in the index of top European shares. The euro nudged higher but was contained by key German data due out at 0900 GMT.

Italian and Spanish bond yields - the bellwether for the euro zone's southern periphery - opened down 5 bps even though nine Italian banks fell short in the tests, with two still needing to raise funds. "There's some relief this morning that there were no Spanish banks in the test that failed. As for Italy - that was already priced in," said Emile Cardon, market economist at Rabobank.

While the stress tests were slightly better than markets had expected, they serve as a reminder that much work remains. The euro zone banking sector's long-term attractiveness has been damaged by revelations of extra non-performing loans and hidden losses that will dent future profits. "Banks face a significant challenge as the sector remains chronically unprofitable and must address their 879 billion euro exposure to non-performing loans as this will tie-up significant amounts of capital," accountancy firm KPMG noted.

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Asian equities also rose on Monday, propped up by the ECB's test results and buoyant US and British data on Friday which allayed some fears the global economy is deteriorating.

The MSCI's broadest index of Asia-Pacific shares outside Japan closed up 0.1 per cent.

Data on Friday showed new US home sales rose to a six-year high, while Britain's economy expanded 0.7 per cent in the third quarter, still on track to outpace other advanced economies.

Elsewhere, Brazilian markets looked set to open with big losses after incumbent President Dilma Rousseff won the election, beating her pro-market opponent by a narrow percent majority.

Next Funds' Tokyo-listed Ibovespa exchange traded fund (ETF), which tracks Brazil's equity index, dropped almost 7 per cent to seven month lows.

Russian stocks rebounded 1.4 per cent after Standard & Poor's kept the country's sovereign credit rating steady at one notch above junk, despite fears of a downgrade.

The rouble was flat and just off record lows against the dollar following central bank interventions and a 35 kopeck widening in the rouble's trading band on Friday.

Among commodities, Brent crude extended losses, falling 13 US cents to US$86.00 a barrel, after Goldman Sachs cut its price forecasts. Crude continued on a months-long rout as signs of rising global supply threatened deeper losses.

Iraq increased its oil supply in October and Libya's output remains high, despite instability in both countries.

Gold edged lower as robust equity markets and strong US economic data dented demand for the precious metal.

Spot gold edged down to US$1,228.90 an ounce.


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