Wall Street Journal
March 4, 2012
Not that they need reminding, but this year has got off to a disastrous start for euro-zone bears.
Spanish and Italian 10-year bonds are back below 5%; Italian government bonds have so far returned 12% in 2012–unheard of in developed country sovereign bond markets.
Corporate bond markets have rallied hard. Euro-zone equities have soared, with major markets up more than 20% from their November lows; bank stocks have led the way, many up more than 50%. Fund managers left behind in this rally are now sitting on the sort of underperformance that typically induces night sweats.
Yet curiously it's hard to find anyone who admits to being optimistic about the euro zone. Markets have rallied on thin volumes. Sure, all those insisting the euro was certain to fall apart this year and that a Greek exit was inevitable have gone a little quiet. But economists and investors remain deeply skeptical of the rally, which is widely dismissed as a short-term European Central Bank liquidity-induced confidence trick: Peripheral sovereign bond yields are being held down by domestic bank carry trades; corporate bond and equity rallies are being driven by excess liquidity; tellingly, there has been no sell-off in German bunds that might signal a genuine increase in risk appetite. Bankers say corporate chiefs show no appetite for the deals or investment spending that might really signal a durable recovery. No one believes the crisis is over.
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