Investors in the stock market liked what they heard out of Europe last week. Some progress was made, for sure, but we remain cautious and more than a little skeptical about what the news really means in terms of actual progress.
The situation in Europe is a holy mess, and political posturing will only take you so far. In order for real progress to be made, money has to change hands. Promises of support and accommodation by the European Central Bank are nice, but the proof will be in the Yorkshire Pudding.
We are watching the interest rates that are set by market participants – not politicians – for clues about how substantial these proposed new changes are. Italian government debt had been trading above 7% prior to the big confab last week, and it will take a few days to get a feel for where that rate will settle.
In the optimistic case, yields on sovereign debt across the Eurozone will begin to decline as borrowers become more willing to hold that kind of paper. In the pessimistic case, yields will remain stubbornly high and possibly go even higher. To us, this is the canary in the coal mine.
The other indicator we have our eyes on is the price action in the large European banks. So far, the action has been good. We’ve seen bounces of 10% to 15% across the board in banks like Lloyds, Credit Suisse, and UBS. If prices stall next week, or begin to decline, we would be very concerned that the market participants don’t believe that this latest deal will gain traction.
Don’t listen to the politicians. Listen to the folks whose livelihoods are on the line when it comes to buying European sovereign paper.