-- The unique ability of sports to bring people together and make them forget -- at least for a spell -- their troubles with each other is never more on display than during the World Cup soccer tournament every four years -- even more so than the Olympics. And this summer has been no exception.
The last four weeks marked a welcome relief from the climate of fear that gripped world markets in April and May, as names like Villa, Sneijder, Kaka, and Muller rose to prominence in the headlines and action photos, replacing the tired old shots of names like Trichet, Blankfein, Geithner, or Hayward, entering hearing rooms or press conferences. People gathered throughout Europe -- from the Villa Borghese Park in Rome to the Santiago Bernabeu stadium in Madrid -- not to light fires and protest the dreaded "austerity" measures from their governments, but to watch "the football" on big screen televisions together. Predictably, the games caused more heartbreak and controversy than joy. After all, 31 countries have to lose before one can win it all.
Markets reflect public perception and were quick to fall in step with the sports-induced lull. The plunging euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2922, -0.0005, -0.0387%) recovered a bit against the dollar during the tournament. So did the British pound /quotes/comstock/21o!x:sgbpusd (CUR_GBPUSD 1.5436, -0.0004, -0.0259%) . Credit markets were calm while stocks in Europe -- and indeed globally -- were flat, rising earlier in the tournament then falling back to end a terrible quarter weaker. But lack of fear and nervousness about China's economy or the future of the euro helped pave the way for some feel good stories that have the bulls rearing their bruised heads again.
Europe's banks survived a deadline for repaying short-term loans to the European Central Bank last week, and borrowed far less than expected going forward. Agricultural Bank of China got its massive initial public offering launched this week amid high hopes from investors tied to the China growth story. And bankers from London to New York took advantage of the break in hostilities toward their industries to make a series of bold, new money grabs. Three ex-Goldman Sachs bankers in London priced a money-losing online grocery service called Ocado Ltd. this week, and hope to make away with some 90 million pounds ($136 million) in an initial public offering before investors realize the company is simply Webvan with a British accent.
And two of the co-founders of Kohlberg Kravis Roberts -- the original barbarians at the gates -- hope to throw open the doors and make a dash for it in a public stock offering to investors next week, a la Blackstone Group's /quotes/comstock/13*!bx/quotes/nls/bx (BX 10.56, +0.28, +2.72%) success.
But the stress of the last six months in global markets, particularly in Europe, is set to resume almost immediately after the final whistle at Sunday's World Cup final in South Africa. Earnings season in the U.S and in Europe begins on Monday, and with it expectations for some dire forecasts on business conditions for the rest of the year. Oil giant BP remains in critical condition as investors bet heavily on its future ahead of its earnings at the end of the month. But the most important event for the market right now at least is the coming stress tests for banks in Europe, results of which are set to be announced in about two weeks.
There is great concern that some of the 100 or so banks tested -- particularly the regional German landesbanks or the Spanish cajas -- will reveal enough weakness to trigger more concerns about larger bailouts and sovereign debt defaults in places like Greece, Portugal, and Spain. These concerns are likely unfounded. Anybody that remembers the U.S. stress tests on banks last year will recall that they were designed by the Treasury specifically not to add to the stress levels of investors. Indeed, weeks of concern about the U.S. stress tests ended with a rally in the market after Wall Street realized the last thing the Treasury was going to do was announce a major fault line in the banking system. Expect the ECB to finesse the European stress tests in the same way, causing a rally in stocks and bonds in Europe later this month.
But after that artificial event, there is indeed real reason for concern in Europe. Indeed, my personal stress tests revealed beneath the veneer of World Cup fever a deep fear about the economic future in specific countries. In Spain, a series of transportation strikes in Madrid layered on pain to a population suffering 20% unemployment, and facing a restructuring of its financial services system, with thousands of more job losses. In Italy, residents spoke of tourism being down noticeably and of concern that the contagion in other parts of Southern Europe could spread there. In the U.K., financial engine to Europe if not the world, the new government's emergency budget has staved off debt concerns for now. But nobody is under the illusion about the challenges that Prime Minister David Cameron's new coalition government faces in turning the economy around while also cutting billions of pounds in costs. So while the true European holiday season begins this month, it's unlikely the lull in the markets will make it until September. Market historians note that August is one of the worst months on record for stocks, something to remember before heading to the beach.
Still, any trip around Europe, its museums and its landmarks, reminds the observer that it's an ancient place, which has survived countless wars, crisis and lately, terrorist attacks, specifically in Madrid and London. This morning in London, commuters were quietly reminded of the fifth anniversary of the July 7 tube and bus bombings that killed 52 innocent people and injured more than 700. A heightened police presence around Trafalgar Square and the Houses of Parliament, combined with a surge in auto traffic in the city's already jammed streets to reflect a society that remains cautious, but steadfast in its desire to move ahead.
That's a pretty good way for investors to look at opportunities in Europe and globally in the markets in the coming months. There are many reasons to be cautious, but keep looking ahead. The economic recovery is still coming; it just might take a while longer. Alas, after Sunday we can no longer count of the World Cup for help. The next one isn't for four years, in Brazil.
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