This afternoon the Committee of European Banking Supervisors released their bank stress test results. Seven out of the ninety one banks tested failed to meet the Tier 1 capital ratio required to pass. The failed banks were from Germany, Spain, and Greece.
Who really knows what this means. Didn't the European Central Bank (ECB) just bailout these same banks to the tune of $1 trillion? These European banks should not fail any kind of test in the near term. Look at the United States Toxic Asset Relief Program (TARP). TARP reflected a bailout to the tune of $700 billion, and the major banks are still not lending any money to borrowers. This comes as the Federal Reserve Bank’s (U.S. central bank) fed funds interest rate is still at zero percent since December 2008. Therefore, the large major banks in the United States can essentially borrow money for free. Today it appears that Europe Union has taken a page out of the United States play book. We shall see how long this small market increase will last. In my opinion if the global markets stall out with all this stimulus that is being pumped into the system there could be a much bigger problem brewing; deflation anyone?
Today the intra-day action was very choppy after the European announcement of the stress tests. Shortly around 1:00 pm EST the major market indexes all started to trade sharply higher. Commodity stocks began to take off again to the upside. Stocks such as Freeport McMoRan Copper & Gold Inc (NYSE:FCX), and United States Steel Corp (NYSE:X) have surged higher during this rally. However, while the financial stocks are trading modestly higher, they are not explosive. Goldman Sachs Group Inc (NYSE:GS) is trading higher today by 0.69 cents to $147.23. J.P. Morgan Chase & Co (NYSE:JPM) is also higher 0.52 cents to $38.87. Bank of America Corp (NYSE:BAC) is trading higher by just 0.09 cents to $13.75.
While the markets are celebrating today by trading higher there are still a lot of soft patches out there. The European stress test seems to be nothing more than another dog and pony show mimicking the Ben Bernanke and Tim Geithner two step dance. This jubilee rally won't last long.
Chief Market Strategist