Summertime Blues

The U.S. is advising Europe to conduct stress tests of its banks to indicate potential writedowns should one or more sovereigns fail. Last year, EU officials declared European banks healthy stating that they were not very exposed to the kind of toxic assets which plagued U.S. banks. However in this go around, it is not toxic mortgage assets which worry government officials and investors alike, but sovereign debt form the so-called PIIGS. U.S. officials are vocally advocating European stress tests. Although some countries are agreeable, others (most notably Germany) are reluctant to do so. One official called last year's U.S. stress tests a public relations ploy and stated that the tests were designed for the banks to pass. He is not incorrect, but at least it gave a picture, albeit an optimistic one, of the conditions of large U.S. institutions. Ten banks were forced to raise capital. Even if the criteria of the stress tests was not very stringent, raising capital did make some banks materially stronger. That instilled confidence in the banks and led to the recovery of the financial markets. At some point the Europeans will have to accept reality for the markets will foist it upon them.

The capital markets may have a case of the Summertime blues. Today's economic data was, for the most part, encouraging (however the Dallas fed report was disappointing). The markets responded positively. Concerns about global growth and BP's inability to cap its underwater gusher sent the markets into negative territory and bond yield lower late in the trading session. It appears that market participants are awakening to what many of us have known all along. The recovery was a stimulus driven market recovery.

All eyes will now turn to this week's employment data. The street consensus is calling for the addition of over 500,000 jobs (up from a prior 290K). There very well could be a healthy jobs report. Before the European crisis the dollar was weak which helped U.S. exports. the key will be if the U.S. can add jobs based on domestic economic growth now that the dollar has strengthened. Unless Europe can embrace reality, there ain't no cure for the summertime blues.