European splash of reality, again

Following last week’s beat the economic #, (as opposed to great data) pre holiday, beginning of the month stock market rally, the WSJ throws some cold water on it with another jolt of reality that Europe’s sovereign issues are far from resolved. We can continue to quibble about the legitimacy of the European bank stress tests, particularly ahead of the potential capital needs demanded by Basel 3, but all still comes down to the financial health of sovereign Europe. The market is saying for now that Spain is less of an issue but Greece, Portugal and Ireland remain much so. Greek 10 yr yields are back to 11.5% from below 10.5% just 3 1/2 weeks ago and Portugal and Ireland’s 10 yr yields are approaching 6%, an important cutoff where both countries have to decide whether to borrow from the market at that maturity or from the EU at 5%. CDS is wider across the board and the euro is suffering its worst day vs the US$ in almost a month.

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