Last Week In Review

“Over there… over there…” The old patriotic song hit it on the head, in terms of what has been driving market action lately… news from overseas.

In the absence of US economic reports last week, Stocks received some help from headlines “over there.” Late last week, the European Central Bank (ECB) left interest rates at a record low – which wasn’t really a surprise, given the sharp economic slowdown and uncertainty in Europe.

But in a separate briefing, ECB Executive Board member Juergen Stark stated that “the worst of the sovereign debt crisis seems to be over.” He went on to say that tensions within the financial markets have “calmed down” as the enormous $442 Billion collection of one-year loans by the ECB went without any problems. Although the Stock market may benefit from such calming commentary, the reality is the worst may not be over yet. In fact, rumors are surfacing that Italy may be the next country to reveal debt problems – making this a story to continue watching.

There was also a lot of talk overseas last week about bank stress tests – and the positive buzz helped Stocks around the globe move higher. Similar to what took place in the US a couple of years ago, these stress tests may provide some transparency and help differentiate which financial institutions are strong – so they’re not lumped in with some of the more troubled ones.

Although the official reports will not be released until July 23rd, French Finance Minister Christine Lagarde indicated last week that the final results will show that European banks are “solid and healthy.” When stress tests were conducted on the US banks, the positive results helped boost financial Stocks nearly 40% over the following several months. It is possible that favorable results from the European stress tests could bolster confidence in the Eurozone, which would unwind some of the trading activity that has taken place during the past two months – that being the flood of money out of Europe into the US and purchasing our debt securities and Bond instruments, including Mortgage Bonds.

If this starts to reverse, home loan rates will worsen… and this can happen very quickly. I’ll be watching this closely – but would highly recommend contracts lock in as quickly as possible.

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