Europe’s bank stress testing, the focus of much of the past week’s market debate, may have some impact on Monday but may well pale into insignificance given the most recent numbers on the broader economy.
First there is the United States, which is believed to be facing another slowdown, if not a double-dip recession.
Then there is Europe, suffering a debt crisis and austerity-bound, yet suddenly surprising everyone with an unexpected burst of economic vigour.
Thirdly, comes Asia, growing away so merrily that investors are beginning to be concerned that too much zeal will be exercised in trying to slow things down.
On top of that there is the decoupling of economics and earnings—keeping bond yields down and lifting stocks. The latest investment flow data from EPFR Global showed “yield hungry but skittish” investors flooding into bonds, but world stocks are up more than 7 percent for the month.
“We are really in a much more difficult stage of the recovery right now,” Michala Marcussen, head of global economics at Societe Generale, said at a briefing with Reuters journalists.
She described markets as struggling with a “rotating crisis” in which one problem in one region becomes the focus of concern, only to be quickly replaced by another in another region.
“That ping pong is likely to go on for some time,” she said.
Entering the new week, investors will first have to deal with any fallout from the stress tests of 91 European banks, which showed just seven failed, confirming fears the criteria used had been too soft.
Markets had been fairly calm about the tests, which, withGreeceand other peripheral euro zone economies in mind, were designed to see how banks would fare in serious future crises.
The health check on 91 banks in 20 countries was widely criticized as being too soft. It was also overshadowed somewhat by a slew of data on European economies that suggested the banks may face less pressure and loan defaults than earlier thought.
That leaves investors to make up their own minds about particular banks, armed with the extra data the tests provided, including on sovereign bond holdings, to judge where further weak spots may be.
“With so few banks failing, investors will question whether the economic scenarios are sufficiently severe,” said Jon Peace, analyst at Nomura in London.
“It will be natural for investors to consider the margin by which banks passed,” he added, citing a good pass margin for Scandinavian and British banks, but Greek, Spanish and Italian banks faring less well.
European purchasing managers’ indexes in the past week showed private sector business activity accelerating in July, surprising economists who had expected a slowdown.
They indicated third-quarter euro zone growth of around 0.6-0.7 percent, double the 0.3 percent forecast in the most recent Reuters poll.
This was followed up by German business sentiment posting a record jump in July to its highest level in three years.
Non-euro zone member Britain also surprised with its economy growing twice as fast as expected in the second quarter of this year propelled by a sharp pick-up in services and the biggest rise in construction in almost 50 years.
Investors being investors, of course, these robust numbers triggered some new concerns about monetary tightening—hence the spike in the euro and pound against the dollar.
The biggest piece of data likely to focus investors’ attention in the coming week is U.S. second-quarter GDP, out on Friday.
The U.S. economy is clearly coming off the boil, if, indeed, it was boiling. After three quarters of solid growth it is showing signs of slowing with firms still reluctant to hire and the housing sector seemingly unable to exit a prolonged rut.
It was enough, during the past week to prompt promises from Federal Reserve Chairman Ben Bernanke for more action if there are further signs of faltering.
This would particularly be the case if jobs don’t pick up.
“We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting,” he told the House of Representatives Financial Services Committee.
This admission that all is not well has broad implications for investors even if other global drivers—major emerging market economies, such as China, and now Europe—are still on the upswing.
The question could turn out to be whether markets and other economies can thrive without the U.S. engine. History suggests not.
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