Seven crap banks failed a crap test

"Seven crap banks failed a crap test" was our favourite summary of Friday, but TMM, ever positive, have put on their rose-tinted spectacles to bring you today's piece.

Figure 1. - TMM at work

Firstly, the release comes on the back of a run of positive European data - PMIs, IFO, and even UK GDP have been well-ahead of consensus (the things a weak currency can do for you...). This, along with a run of weaker US numbers has led European indices to outperform, the Euro has recovered 8% off its June lows, and risk has been put to work more generally. Even the Shanghai Composite has stopped falling.

In the main event, quite a bit of ink/pixels have been spilled across The Street discussing the assumptions, rigour and implications of the Stress Test. It seems that the general consensus is that, in spite of the Sturm und Drang, it's more or less a non-event (aka "damp squib"). 7 out of 91 banks failing with EUR3.5bn of new capital needed was the headline that led to a number of unimpressed punters, but underneath the surface the tests were actually more positive in the amount of data opened up to the public. Indeed, this data has allowed a number of analysts to run their own tests, and show that if the bar had been set 1% higher, 24 banks would have failed, with about 27bn Euros of new capital needed; mere chump change as far as the market is concerned, and on the margins, probably a small positive for Europe.

So where do we go from here, now that the excitement is more or less over? TMM thinks that we all, including Mr Market, go back to sleep for the rest of the Summer. Goodnight and good luck! See you after Labor Day.

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Click here for comments
July 26, 2010 at 4:35 PM ×

I don't blame you at all, this meat grinder market is boring.
Enjoy your summer, love the shades ;)

July 26, 2010 at 4:51 PM ×

I do wonder how long this optimism will last. Stock markets and commodity prices keep heading higher while the US is heading for a distinct slowdown (from already slow growth in Q2).

Re: China.
It is possible that the recent positive China/commodity rumblings is due to the steel inventory cycle? (see )
Or are authorities moving away from the brake? Wildly different implications for whether you should belong Australia or long investment goods companies, I guess.

A simple recession model based on the ECRI weekly gauge indicate a 20-25% probability of a new US recession right now, while that same gauge indicate another sharp slump in the US manufacturing ISM... I wouldn't be surprised if we have ISM below 50 within a month and a half.

July 26, 2010 at 7:32 PM ×

Otto, I think markets are (1) discounting the next 9 months, after which they think things will be better, and (2) are excited by the idea of Republicans winning power, which might be good if campaign speeches matched actions, but in this particular instance will raise the odds of a serious financial crackup as the White House and the Congress struggle over who is in charge of the steering wheel. I would guess that as traders re-think the consequences of divided power, there will be distinctly less enthusiasm. But, as we know, markets always dance up to the edge of the cliff, and usually over, before anyone notices the shifting terrain.