Thursday, July 8, 2010

Will The European Bank 'Stress Tests' Be A Catalyst For A Global Relief Rally?

The financial press has been abuzz with speculation, mostly negative in nature, regarding the “stress tests” being performed on the banking systems of Europe.

Let us put this in perspective: Do folks remember how stressful the stress tests were in the US? As many will recall, the stress tests created a great deal of uncertainty in US markets before they were finally released. This is similar to what has occurred in Europe. But as details emerged in the US as to the likely results of the stress tests in March and April of 2009, and when they were finally revealed in May, the stress tests turned out to be a major positive catalyst for the US financial sector and the stock market as a whole.

Bank regulators and central bankers are not in the business of creating runs on banks. Thus, I think that we can be reasonably certain that the results of the stress tests will be crafted in such a way that show that European banks are generally sound and that with a few well placed capital raises and plenty of assistance for the European Central Bank, the European banking system “will be as strong as ever.”

Thus, chalk up one more factor favoring a global equities relief rally in the next 10-20 sessions......

No comments: