In Europe, the ECB announced largely benign results from its stress test of 120 banks last week, the toughest since the financial crisis.  Previous stress tests have been dismissed as failing to adequately account for potential risks.  Although 25 banks failed the test, with a €25 billion capital shortfall (using backward-looking balance sheet data from the end of 2013), 17 of them have already raised enough capital this year to meet requirements, and the remaining 8 only need to raise an additional €6 billion. 

We believe this rigorous stress test lowers financial market uncertainty and clears the way for increased lending and investment in Europe.

David Fuller's view

Here is The Weekly View.

Some commentators have been considerably more critical of the stress tests, saying they were inadequate.  It all depends on what happens to the European economies.  If they were to slide into a lengthy, negative deflation of falling GDP growth, sales, and profits, then the stress tests will clearly have underestimated risks.

Conversely, if European leaders manage to revive their moribund economies, then the stress tests will prove to have been prescient.  The RiverFront team have a good track record but I do not think that the EU’s situation is comparable to the US several years ago (see last paragraph, front page), although I hope to be wrong in this view. 

These are socialist economies, harnessed in an ill-fitting single currency.  As such, they could too easily remain perpetual underperformers, as we have long seen.  With the exception of the EU’s Autonomies, which are undervalued and have access to international markets where they increasingly have factories as well, I would be cautious about EU investments.  At minimum, European stock market indices require sustained breaks in their progressions of lower rally highs to indicate additional recovery scope.