Markets had an impressive rally yesterday. The Dow Jones sprinted back above the 10,000 mark, while the S&P 500 leapt to around 1,060.
Why? I’ve used the “more buyers than sellers” crack once too often. But investors were certainly looking for reasons to buy. And they got one.
Apparently, US retail sales are going to come in stronger than expected. The International Council of Shopping Centers (not the most high profile research body, I admit) reckons that sales “probably expanded at an average monthly rate of 4%” in the five months since 31 January. That’s the biggest gain since 2006.
According to Bill Dreher, a Deutsche Bank analyst, sales reports for June will beat expectations and “the positive comparable-sales trend will continue.”
Sounds impressive. But as always, there’s a catch…
Good retail news isn’t all it seems
US retail sales data may have looked healthy yesterday. But Mike Shedlock over at the Global Economic Trend Analysis blog
makes rather a good point.
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“All of these pundits are barking about same-store sales.” Trouble is, this is “an extremely misleading sign given retail stores are closing like mad.” After all, if you have three coffee shops in one street, and two of them shut, then the other one is almost certain to see a rise in business, even if the overall spend on coffee falls heavily.
In fact, shops are closing so fast that the vacancy rates in malls are close to their 1991 peak. And, reports Reuters, Victor Canalog at property research group Reis reckons that there won’t be a recovery in the sector “until late 2012 at least.”
A better indicator of retail health, says Shedlock, is the sales tax collections by individual US states. And, while the data takes a while to come through, these have been declining all year.
The other problem with retail sales is that comparatives are still extremely weak, reports Reuters. “A June increase would mark the 10th consecutive month of rising sales after a year of declines during the recession.” But it’ll get tougher in the second half.
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Banks are exciting the markets
But it wasn’t just about retail sales yesterday. Markets were also getting rather excited about banks. On the one hand, in the US, Boston-based money manager State Street said that its second-quarter profits would thrash analysts’ expectations. That helped lift financial stocks across the board.
But markets also rather liked the news that the European stress tests will cover 91 banks accounting for around 65% of the European market. Why was this good news? Well, as an analyst at Credit Suisse put it, “we doubt that stress tests would be announced if they were going to disappoint the market. If banks were going to fail the stress test, then surely the announcement would happen at the same time as a planned restructuring / capital raising.”
Better yet, it included some of what are thought to be Europe’s ropiest banks – the German Landesbanks, and the Spanish cajas.
So you can see that the optimistic conclusion is that if the dodgy banks are on this list, then they can’t be that bad.
But again, it’s a little more complicated than that. You see, we don’t actually know what will be in the stress tests yet. And that’s where we have to ask ourselves – what do the European Central Bank and Europe’s national regulators want to achieve here?
These stress tests won’t reflect reality
What you and I want to know is – what happens in a worst-case scenario? What happens if Greece defaults on its debt? Which domino would topple first and who would get hit on the way down? And how is that situation going to be rectified?
But what Europe’s authorities want is for the problem to go away without causing any fuss. Investors are questioning whether Europe’s banks can stand up to another major crisis. So the best outcome for the European authorities is that they demonstrate that the banks are broadly fine. Maybe a little bit of capital raising for some of the more troubled ones will be in order, but nothing more than a bit of affordable tinkering.
So chances are, the stress test won’t be designed to reflect reality. It’ll be designed to push the banks as hard as is possible, without breaking them. And so when we see how high the hurdle is set, that’s when we’ll really know just how ugly the European banking sector is.
We’ll find out later this month – on 23 July, we’re told. But as Patience Wheatcroft puts it in the Wall Street Journal: “an optimistic or opaque stress test will be worse than none at all.”
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