Tuesday, September 18, 2012
2-yr swap spreads have declined dramatically this year, and that's an excellent indication that the Eurozone financial system is once again liquid and healthy. This in turn is a good sign that the Eurozone economy is likely to be improving in coming months (i.e., swap spreads are good leading indicators of financial and economic health).
We can't say that the Eurozone is out of the woods yet, since more than a few countries have yet to address their fundamental problem: excessive public sector bloat and chronic deficits. But with the health of the financial markets restored, there is hope that fundamental reform is in the offing.
The Euro Stoxx index is up over 20% since early June, another early sign that things are starting to improve on the margin. I note that with this index is trading at about 10 times expected earnings, it is fair to say that Eurozone markets are still suffering from deep pessimism. As in the U.S., the Eurozone equity market is being driven not by optimism, but by a slow decline in pessimism; conditions have not turned out to be as bad as the market had feared.
Posted by Scott Grannis at 10:23 AM