Stocks are indicated to open modestly on the lower side today.
But there is nothing on the data front, and the subdued sentiment
at this stage is perfectly normal following strong gains in recent
days. Keep in mind, however, that the gains are not restricted to
the U.S., as markets across the pond are in as much a bullish
My focus today is on the recent momentum in the European market,
particularly the region's government bonds. We knew all along that
central banks were powerful (remember the don't-fight-the-Fed
instruction), but it's nevertheless instructive to see central bank
power in action this way.
Favorable data out of the U.S. and Asian regions has been
driving the European markets as well, with the after-glow from the
ECB's moves last week adding to the momentum, pushing Germany's DAX
made a new all-time high on Monday. But more than stocks, it's the
region's government bonds that are reflecting extremely bullish
sentiment. Yields on government bonds have fallen to levels not
seen in years. In fact, the yield on the 10-year French government
bond is now at its lowest level in history, going as far back as
the 18th century to find lower yields.
One could try to explain the momentum in French yields with the
help of the country's central role in the common currency project
even though its current economic picture is anything but
satisfactory. But hard to say the same for Spain and Italy who are
experiencing even more pronounced yield compression lately. Heavily
indebted Italy's 10-year government bonds are currently yielding
only 134 basis points more than comparable German government bonds,
while the spread for Spanish government bonds over comparable
German bonds is even narrower.
Market behavior along these lines would have been called
'irrational exuberance' in the old days. But this a New World of
central bank dominance all over the world. For the Euro-Zone,
Draghi's 'whatever-it-takes' comment changed everything. But this
backdrop may not last long if these countries don't use this
'honeymoon' period to strengthen their financial profiles. I am of
the opinion that all of this wouldn't end well, but mine is a
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