Hong Kong - The euro slipped on Friday after a Spanish newspaper reported some of the country's 18 savings banks had failed stress tests to see how strong they would be if economic conditions worsened, highlighting nervousness ahead of the release of Europe-wide test results later in the day.
Though some of Spain's smaller banks or "cajas" had been widely expected to fail the tests, European stock futures eased and Asian stock markets gave up some of their strong early gains after the report in the El Pais paper.
It did not identify the savings banks. Analysts had expected no problems at Spain's big banks.
Separately, Manfred Weber, the head of the Association of German Banks, told local radio that he was confident that German banks "all in all" would perform well in the tests.
The euro slipped 0.2% against the dollar to around $1.2868 after the El Pais report, but remained close to its late US levels as traders awaited more comprehensive results from the rest of Europe.
Worries about the health of Europe's banks have weighed on the single currency and global stock markets, and driven up the region's funding costs, since Greece's debt crisis triggered fears that the eurozone could unravel.
The euro had jumped more than 1% against the dollar on Thursday and European bank stocks rose across the board in a sign that investors are starting to hope the worst is behind the region's financial industry.
But a lack of details about the terms of the tests and earlier divisions among European Union members over how much information will be made public has made investors wonder if the assessments would be tough or transparent enough.
Ironically, word of a few small failures in fiscally weaker countries such as Portugal or Spain could actually boost confidence in the vigorousness of the testing process. The official results are expected around 16:00 GMT, though some sources said they could be released earlier.
"There is obviously the risk that if too many banks pass and do so with a comfortable margin, the test may be judged as too easy to have actually been informative about the strength of the banking system," Goldman Sachs analyst Nick Kojucharov wrote in a note.
Analysts say the most concern is over how the banks' holdings of European sovereign debt will be treated and whether the assumed "haircuts" or expected losses on the debt are stringent enough.
"It is very important that banks demonstrate that they have nothing to hide," said Nomura analyst Peter Westaway in a note.
A positive response to the test results would like spur global investors to return to riskier assets, even though the eurozone's deep-rooted debt problems will take years to resolve.
However, even if most banks pass the test, analysts estimate lenders in the region will need to raise as much as
€90bn in fresh capital as they recover from the credit crisis and comply with new regulations, which could blunt any initial gains.
Stock markets supported by strong earnings
Despite uncertainty ahead of the banks test results, Asian stocks rose on Friday as strong earnings from US economic bellwethers such as Caterpillar tempered fears that the global economic recovery may be stalling.
Asian stocks outside Japan pared some gains after the Spanish report but were still up 1.2% by 06:25 GMT. They looked set to gain more than 2% gain on the week, with Asia ex-Japan equity funds seeing strong inflows.
Japan's Nikkei also came off its early highs but ended up 2.3%, snapping a five-day losing streak.
Major US share indexes rose as much as 2.7% overnight as robust quarterly results from construction and mining equipment maker Caterpillar, 3M and other US multinationals suggested the global economy may be on stronger footing than previously thought.
A string of weak US economic data in recent weeks and worries that Europe's debt crisis could derail its already fragile recovery have put heavy pressure on markets, but there are signs that investors are slowly returning to riskier assets.
Emerging markets equity funds retained some of their momentum from the previous week, with Asia ex-Japan Equity Funds taking in over $800m for the second week running, according to data from fund-tracking firm EPFR Global.
Crude oil futures slipped below $79 a barrel after jumping to 11-week highs overnight as a potential storm threatened production in the Gulf of Mexico.
Shanghai copper also rose, chasing London which climbed to near two-month peaks, spurred by a weaker dollar and an unexpected surge in the eurozone's private sector growth.
- Reuters