At the start of the year, Wall Street investors seemed almost unanimous that the biggest, darkest cloud hanging ove America's stock market would be Europe's sovereign debt problems.
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But day by day, investors in Europe tell me their confidence is growing that the Union is moving decisively towards fixing its problems.
In fact, this month alone, long-only investors are profiting from Europe: Greek 10-year bonds are among the best performing assets in the world; a return of 7.5 percent outpacing emerging markets, US equities and certainly gold.
Check out this Reuters graphic showing the January 2011 returns so far.
The eye of the storm was always Europe's banks and systemic risk that might come from assets turning bad on their balance sheets. But through January, world investors have been progressively closing their underweights on those banks—and again today you see a rally in the big players in the UK, France and Germany.
"There were two fundamental problems why European banks underperformed last year," Arturo De Frias at Evolution Securities tells me. "The sovereign debt threat from peripheral Europe and fears over the large capital holes that exist in non-quoted banks." Like many watching in London De Frias believes substantial progress is being made on both fronts.
Sovereign Debt
The market seems increasingly convinced by media reports emerging from across Europe that constructive negotiations underway behind closed doors that will allow poor nations to borrow from Europe's trillion dollar safety net in order to buy back their own distressed bonds. That would in turn lower the cost of servicing their debt and reduce any need to default.
Indicative of diminishing risk sovereign debt is felt to pose in the Europe is the fact that, with the exception of Ireland, the extra interest the market demands to hold PIIGS government debt is down across the board again today.
Non-Quoted Banks
Last year's stress tests in Europe went some way to provide more details on what assets lay on banks' balance sheets. However many players soon became dismayed that so many small and medium sized banks failed to recapitalize in order to deal with insolvency fears. Spain's savings banks—or Cajas—became poster children for that inaction. But now Madrid is talking action.
"The year has started well," says De Frias. "There appears to be an increased willingness from politicians, regulators and officials to start to fix things."
The expectation is that Spain will force its Cajas to list on the stock market as conventional banks with full transparency. If they fail to persuade investors they're good investments the Spain's state restructuring fund will buy stakes in them in a partial nationalization.
The benefit that all Spanish assets are feeling can be seen in the ADR rally investors in the US have enjoyed in Spain's two banking giants, Santander and BBVA.
If Europe does decisively fix its problems that can only be good for almost all investors, everywhere.