At least for a moment, investors seemed oblivious to the economy’s latest flirtation with misfortune.
Rising to their highest levels since May, equities spiked last week in spite of discomfiting readings on corporate earnings and economic growth.
The rebound in stock markets belies that, as recently as last Wednesday, Treasury yields were exploring impossible lows on speculation of renewed Fed intervention.
These are not textbook days for free market economics. Whether into stocks or commercial properties, capital is shifting in response to anticipated policy interventions and the continued distortion of private markets.
Capital flows and data diverged sharply by the end of last week. Weighed down by drags on consumer spending and investment, advance estimates showed the economy struggled in the second quarter, delivering one its most disappointing post-recession results. Consumer confidence has ceded gains from earlier in the year, pushing retail spending lower in each of the last three months. These findings have been offset, however, by favorable rhetoric from across the pond, where European Central Bank president Mario Draghi has adopted a “whatever it takes” strategy to safeguarding the eurozone and its currency. Wagering that the sovereign bond crisis and the attendant threats to global stability may be abating, investors lifted the euro to its highest level in several weeks. Spanish bond prices rose while Treasuries briefly lost some of their safe haven appeal.
The problem for Europe and for the United States: president Draghi’s rhetoric will be put to the test. His promise to do whatever it takes is both encouraging and disconcerting because nothing less may be enough. Within the scope of its current mandate, the ECB is ill equipped to offset injudicious national spending policies and the resultant buffeting of sovereign bond markets. A prohibition on central bank financing of its member governments sits at the crux of the ECB’s perceived weakness. In their positive response to the latest extravagance, investors are ignoring that Europe’s problems are structural as well as motivational and that differences of opinion remain unresolved beneath the veneer of agreement.