Market Looking To Open On Lower Side? - Economic Highlights

Stocks are indicated to open modestly on the lower side today. But there is nothing on the data front, and the subdued sentiment at this stage is perfectly normal following strong gains in recent days. Keep in mind, however, that the gains are not restricted to the U.S., as markets across the pond are in as much a bullish mood.

My focus today is on the recent momentum in the European market, particularly the region's government bonds. We knew all along that central banks were powerful (remember the don't-fight-the-Fed instruction), but it's nevertheless instructive to see central bank power in action this way.

Favorable data out of the U.S. and Asian regions has been driving the European markets as well, with the after-glow from the ECB's moves last week adding to the momentum, pushing Germany's DAX made a new all-time high on Monday. But more than stocks, it's the region's government bonds that are reflecting extremely bullish sentiment. Yields on government bonds have fallen to levels not seen in years. In fact, the yield on the 10-year French government bond is now at its lowest level in history, going as far back as the 18th century to find lower yields.

One could try to explain the momentum in French yields with the help of the country's central role in the common currency project even though its current economic picture is anything but satisfactory. But hard to say the same for Spain and Italy who are experiencing even more pronounced yield compression lately. Heavily indebted Italy's 10-year government bonds are currently yielding only 134 basis points more than comparable German government bonds, while the spread for Spanish government bonds over comparable German bonds is even narrower.

Market behavior along these lines would have been called ‘irrational exuberance' in the old days. But this a New World of central bank dominance all over the world. For the Euro-Zone, Draghi's ‘whatever-it-takes' comment changed everything. But this backdrop may not last long if these countries don't use this ‘honeymoon' period to strengthen their financial profiles. I am of the opinion that all of this wouldn't end well, but mine is a minority view.

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