Bloomberg reports today that, “The European Union’s decision to publish the results of stress tests on the region’s lenders was welcomed by shareholders seeking more transparency. Investors still want to know how tough the terms of the tests will be.”
This is what I’ve been warning about for some time about how doing stress testsare great, but there are at least two more steps that need to be taken for reduction of uncertainty over European banks and countries.
The best indicator that things are calming down is that debt issuance and commercial paper issuance are coming back. Spain had a successful auctionyesterday, BofA raised $3 billion in 10 year notes yesterday, and commercial paper outstanding rose by $18.8 billion to $1.08 trillion. Also, US 3m Libor dropped to .53819 from .53925. This is adding to the new theme developing the markets of a stabilizing credit market.
Part of this new theme is something that is unstable. Namely, the lack of job growth in the United States and the problems of US fiscal spending. The employment situation is the major economic story in the country and the weekly jobless claims continue to show no major drops despite +3% GDP growth since the fall. The measly private sector payroll increases are disappointing. The recent weaker than expected housing starts, building permits, Philadelphia Fed index, and retail sales are all generating concern over slowing US growth and potential double dip. The euro has rallied, the US dollar has sold off, equities have rallied and the bond yields have stabilized.
On the fiscal side, the US continues to stick its head in the sand and ignore the animal mating calls of austerity measures from the PIIGS.
When Keynesian intelligentsia like Alan Blinder writes in the WSJthat the US should continue to expand its deficit spending, you realize that a crisis may need to develop before D.C. wakes up and takes action. This fuels paranoia that this is exactly what some lawmakers want to install a VAT-like tax in the United States. As the saying goes, just because you’re paranoid doesn’t’ mean someone’s not out to get you.
Financial market theme shifts need consistent newsflow to perpetuate the direction and momentum. For this truly to be a theme shift, we’ll need to see continued successful sovereign auctions, better than expected European economic news, continued softening US economic news, and continued US political spendthrift mentality. Ahead of the G20 meetings next week, we can expect to see these tested and discussed as the markets lose one theme as another tries to take over.
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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.