BANK WOES IN EUROPE RATTLE US SHARES ANEW

Shares of U.S. stocks are under pressure in pre-market trading due to an old worry that had faded from view but has suddenly resurfaced: fears about the health of a European bank.

In a flashback to the euro-zone banking crisis that roiled markets in the summers of 2011 and 2012, questions over the health of large Portuguese bank Banco Espirito Santo  has caused a stock selloff in Europe. The angst has spread to Wall Street, where Dow Jones industrial average futures are down more than 170 points in pre-market trading.

So-called havens, such as U.S. government bonds and gold, are rising in value Thursday as investors seek perceived safety. Rising bond prices have pushed 10-year Treasury yields, which move in the opposite direction, down below 2.5% for the first time since May 30. And an ounce of gold is up 1.3% to $1340.50.

The pre-market weakness in the USA follows a rebound Wednesday after two days of losses. Wednesday’s gains in the USA were driven by the release of the minutes of the Federal Reserve’s June meeting, which suggested that the first interest rate hike in the USA is still a far ways off, despite the fact the Fed is looking to end its bond-buying program in October.

Shares of Portugal’s main PSI index were down around 3%, with other European bourses also in the red. Shares of Germany’s DAX were down 1.4%, the CAC 40 shed 1.5% and London’s FTSE 100 was off 0.8%.

Portuguese government bonds were also selling off, with the yield on its 10-year note climbing to 3.885, up 0.15 basis points, according to The Wall Street Journal. Banco Espirito Santo shares were down as much as 14%.

Here’s what market strategists at Barclays had to say about the latest banking scare in the euro-zone:

“European equities are down by over 1% as concerns persist over the financial health of Portuguese banks,” the bank said in an early market report. “Banco Espirito Santo shares slumped a further 14% this morning, dragging the Portuguese PSI all-share index down by over 3%. … The trigger for the turbulence was a Bloomberg report on Tuesday of delayed payments of short-term debt obligations. “

Portuguese bonds were hit hard, Barclays adds “with yields rising by almost 0.19 during European trading.”

Whether the issue at Banco Espirito Santo can derail global financial markets in a major way depends on how deep the banking problem is in southern Europe, says Boris Rjavinski, global rates strategist at UBS.

“It all depends if this is an isolated event or a sign of a systemic risk,” says Rjavinski. “If this is isolated to one bank and something that can be fixed quickly then markets may get over this pretty quickly. If it turns out more banks in Portugal and elsewhere in the European periphery may have similar problems, then this can quickly become a broad issue. I do not have a good read on this right now.”

“A large-scale deterioration in the eurozone, including return of funding troubles for banks and sovereigns,” Rjavinski adds, “would certainly be negative for the global growth picture. That may in turn affect risk assets, including global and domestic equities.”

Weak economic data in Europe also weighed on investor sentiment. On the data front, Italian industrial production fell more than expected, as did IP data in France, Barclays said.

But its fears of another banking crisis that got Wall Street’s attention.

“Shares in Banco Espírito Santo have been under pressure since accounting irregularities emerged in its holding companies in late May,” according to a report in today’s Wall Street Journal. “But the declines mounted drastically Thursday after investors learned that parent company Espírito Santo International had delayed coupon payments relating to some short-term debt securities.”

The market’s jittery response signals that with U.S. stocks trading near record highs, any fresh question markets could give investors pause, adds Mark Luschini, chief investment strategist at Janney Montgomery Scott.

Asked if the Portugal bank scare is it a legitimate threat to U.S. markets, Luschini said: “Not directly, but by way of uncertainty it can be. It seems to not be a systemic issue but rather one contained to Banco Espirito Santo. Still, risk aversion at a time when valuations in the U.S. are full leaves markets vulnerable to a news item like this to trip the correction switch. More details need to come out as to why the debt payments were missed but this does not seem related to the broader financial crisis where countries, including Portugal, required bail outs.”