Europe Session Key Developments

• Equities Respond to Corporate Earnings as 2Q Results Continue to Emerge
• Investors Remain Uncertain Regarding the Upcoming Bank Stress Tests

European Equity Trade Mostly Lower Amid Corporate Earnings Season, Stress Test Drama

European Markets finished generally lower after Tuesday’s trading session as corporate earnings reports continue to disappoint and investors begin to fear the results of the bank stress tests due for release on July 23rd. As has been a continuing trend throughout the second quarter earnings season, companies seem to be missing estimates on their revenue figures, inciting fears that demand remains low and the economic recovery may not be as sustainable as originally believed. In the last 24 hours alone, blue chip firms such as Goldman Sachs, International Business Machines, and Texas Instruments have reported weaker-than-expected revenue figures. Companies that managed to beat EPS estimates have seen declines in their respective share prices. As a result, many of the major indices tested significant psychological barriers during intraday trading Tuesday. Nearly all of last week’s gains have been retraced as investors tone down their demand for riskier asset classes such as equities in favor of safe-haven assets, i.e. U.S. Treasuries. Bond yields in the United States have been falling in recent days, possibly in response to growing uncertainty surrounding the bank stress tests set to come out later in the week. A rumor emerged yesterday that Hypo Real Estate, a German bank nationalized during the financial crisis, was the first company to fail the stress test. The report sent shockwaves through the market as investors anticipate the other 91 stress tests due for release. Looking ahead, expect price action to remain choppy as investors avoid risky investment leading into Friday’s big announcement.

FTSE 100                      5139.46                   -8.82               -0.17%

Despite testing the 5100 level during intraday trading, the FTSE 100 finished nearly even. On Tuesday, the index lost just 8.82 points, or 0.17 percent, to close at 5139.46. As of today’s closing bell, the English index has completely retraced its gains from a week ago, when optimistic earnings reports and a return of risk appetite sent the index higher towards 5300. The basic materials sector’s performance was an impressive outlier; it managed to gain 2.87 percent on the day (the financials sector was the only other index to close higher). A 4.08 percent gain in Rio Tinto PLC’s stock price was the sector’s leading performer, though all thirteen companies closed in the black.

CAC 40                        3,468.02                   -18.31                 -0.53%

After opening nearly 20 points higher, the CAC 40 index fell sharply past the psychological 3500 level to close down 18.31 points, or 0.53 percent, to 3468.02. The French index had actually plummeted all the way to 3420 before retracing during the opening hours of the US session. Though not as notably as its English counterpart, the CAC index was led by its basic materials sector. It gained 0.71 percent Tuesday, led by Arcelormittal, which gained 2.13 percent. The financial sector was a disappointment (down 0.36 percent), dragged lower by BNP Paribas, which closed below 47 after peaking near 52 during last week’s rally.

DAX                             5967.49                    -41.62             -0.69%

On Tuesday, the DAX 30 index crossed below the psychological 6000 level for the first time since its impressive rally beginning July 7th. The German index, which has been the best performer among the major European equity indices this year, lost 41.62 points, or 0.69 percent, to close at 5967.49 today. The DAX now sits just 0.17 up on a year-to-date basis; it is the only index that can boast any gains in 2010. The consumer goods sector was the biggest loser on the day, giving back 1.37 percent as a whole. Daimler AG dragged the sector and entire index lower, losing 2.84 percent during intraday trading. The utilities sector was the only one that closed higher, gaining 0.23 percent. However, this sector only comprises roughly twelve percent of the total index and as such, was unable to counteract the broader decline.

IBEX 35                     10061.30                   +131.50                 +1.32%

The IBEX 35 was the outstanding performer on Tuesday, earning the title of the only major European equity index to finish higher. The Spanish index actually managed to a significant gain, adding 131.50 points, or 1.32 percent, to close back above the significant 10000 level at 10061.30. More than one third of the IBEX’s total increase can be attributed to its largest component, Banco Santander, which gained 2.13 percent during intraday trading. SAN alone comprises 22.91 percent of the entire IBEX 35, which makes the broader index particularly vulnerable to the bank’s performance. The health care and consumer goods sectors were the only two that finished lower on Tuesday, losing 1.60 and 0.07 percent respectively.

S&P/MIB                        19985.32                    -132.22                  -0.66%

The Italian index lost 132.22 points, or 0.66 percent, to close back below the 20000 level at 19985.32 on Tuesday. The index has now lost over 14 percent year-to-date, which is approaching the losses incurred by the IBEX 35 (-15.73 percent YTD) as the largest among all the major European equity indices.