Irrational Exuberance in Europe? (excerpt)

There does appear to be some irrational exuberance over in Europe. One of the greatest dichotomies in the global bull market in stocks is the stellar performance of European equity prices despite the ongoing recession in the euro zone. The MSCI Europe stock price index is up 81.2% since March 9, 2009 to a new cyclical high. The euro zone’s real GDP is down 1.5% over the past six quarters. It’s hard to imagine that investors are turning more optimistic on the future over there. For now, it still looks to be mostly a relief rally. Stocks have risen in Europe mostly on relief that the ECB has averted a Lehman-style financial meltdown, so far.

Monday’s FT included an article titled, “Wall of money eases Eurozone funding.” The print version of the same story yesterday was titled, "Eurozone makes hay while bond market shines.” It notes: “Encouraged by low market borrowing costs and strong investor demand, finance ministries are further ahead in funding programmes than at this stage in at least the past three years. France, Spain, Italy, Belgium and the Netherlands have raised more than half the year’s expected total, according to estimates by Barclays." That’s even though the region is in the worst recession since the monetary union started in 1999.

Investors are clearly reaching for yield all around the world, including in the peripheral countries of the euro zone. The FT reports: “When Spain last week issued 10-year bonds, demand was three times greater than the €7bn raised. Italy raised €6bn from 30-year bonds, the first with such a long maturity since 2009. Earlier this month, Portugal issued €3bn of new 10-year bonds, its first since the country requested an international bailout programme two years ago.”

Today's Morning Briefing: Group Hug. (1) One of the greatest relief rallies on record. (2) The Bullish Strategists Society. (3) Another 2-4 years for the bull? (4) Starting to believe in tomorrow again. (5) Irrational exuberance or rational relief in Europe? (6) Making hay in Europe’s bond market. (7) Not all profit margins have peaked. (More for subscribers.)