Panic Like It’s March 2009

As everyone is well aware, Europe is an absolute mess and while the U.S. stock market has been remarkably resilient, it has finally succumbed to news across the Atlantic and is now the final region to experience a decline. The U.S. economy has been fairly strong this year with a continued improvement in the labor market at the same time inflation has been kept at bay. While Fed Chairman Bernanke would like to launch another round of quantitative easing (QE3), he has not had the latitude to do so as weakness in Europe and a declining stock market have not provided the Fed with enough of cover to hit the print button.
However, things are changing in Bernanke’s favor as odds for QE3 to be announced at the June FOMC meeting are rising. As every investor across the globe should realize by now, if central banks step up to the plate we are likely to see the market’s “switch” tuned back from risk off to risk on. While it is anyone’s guess at which point central banks will intervene and where stock prices will be when they do act, we can expect a capital flight out of bonds and into stocks when it occurs as stocks’ investment appeal over the U.S. Treasury market is back to levels not seen since March 2009. Given that investor sentiment is also back to the depths of despair seen at the March 2009 lows, the stage has been set for central bankers to spring the market higher at a point of near maximum pessimism.
Europe Unraveling
The market’s selloff accelerated this week partly on news that Greeks have pulled about $898 million in deposits from Greek banks since the May 6th elections (see article) and market participants feared a bank run on Spanish and Italian banks would be next. Their fears soon materialized as Spain’s Bankia shares plummeted as much as 29% yesterday on concerns about a deposit drain (see article). Spanish banks have been absolutely decimated and have taken out their March 2009 lows as the following equally-weighted Spanish Bank Composite shows.

Source: Bloomberg

While not shown, European bonds have been selling off strongly and pouring into German Bunds which have soared as European investors seek safety. Momentum is building to the point that central banks will be forced to act or watch things unravel before their eyes.
Bernanke Has His Trifecta!
read full article here Panic Like It’s March 2009