Does the price action on major banks in Europe tell investors that the continent is now not a threat to risk appetite and that Wall Street can mount a sustained rally without a repeat of May’s negative blow-up?
The power of the rally would say yes.
Of course, banks were never the eye of Europe’s storm: It was governments in Greece and Spain.
But today the market forced even Deutsche Bank to detail its sovereign debt holdings after Friday’s stress tests.
All this extra transparency can only make banks an even better proxy for the debt threat from Europe.
Switzerland’s UBS today joined Deutsche in reporting earnings above expectations.
Moreover, in seven weeks, these two global names have clocked up gains of 31 percent and 25 percent respectively.
The French banks rallied again today, because they are big beneficiaries of that breakthrough agreement by banking regulators to "soften" and "delay" new capital requirements under Basel 3.
But as major holders of European sovereign debt in those seven weeks, their stock prices have risen 23 percent and, in the case of Societe Generale , a staggering 43 percent.
Finally, for Banco Santander , Friday’s stress tests were a crowing glory on a phenomenal rally, back from assumed weakness.
Investors may have booked some profits over recent sessions, but the Spanish banking giant is still up an eye-popping 53 percent.
Of those seven weeks, much of the real price action came in the last three. That’s because the fear that governments would default and that the balance sheets of bank would be seriously compromised has fallen.
The Markit iTraxx Europe index tracks the cost of insuring against default among Europe's biggest 25 banks.
For more information on the index and other topics related to these banks, watch Simon Hobbs' report here.
Similarly, the premium that the Spanish government pays above the Germans for investors to hold its debt has plummeted from 210 basis points to 140.
All this may be the result of paralysis and foot-dragging that characterized Europe’s politicians, which climaxed in May, when they went on the offensive with such actions as cutting deficits and promising a sovereign stability fund of half a trillion dollars.
Or it might simply be that the economic data from core Europe looks increasingly robust. For investors searching for yield in a low interest-rate environment, Europe is an attractive destination when the probability of a sovereign default lessens.
The fact remains that before big investors go on summer holiday, they are closing their underweight positions on European banks.
And that is surely a sign of confidence.