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European Stocks Rebound as Stability Returns

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ivan Martchev for InvestorPlace

NEW YORK (InvestorPlace) -- The massive rebound in European equities -- particularly in eurozone financial stocks like Deutsche Bank (DB)and BBVA (BBVA) -- is due to the aggressive monetary and fiscal actions taken to stabilize the eurozone sovereign debt markets.

Since many indicators of eurozone financial stress are improving, the above stock market reaction is normal and likely will continue should formerly problematic sovereign bond markets continue to stabilize.

When I was asked to comment on the European multi-asset rally this week, I almost called up a familiar bond expert, as this eurozone rebound is as much about stocks as it is about sovereign bonds.

But at the risk of sounding like a Spaniard trying to speak Portuguese, I decided to take a crack at the sovereign bond side of this massive European rally, as I had been following the issue for some time.

Related Article: Are U.S. Banking Stocks Finally Safe Investments?

The eurozone sovereign bond markets look like the mirror image of last summer. At the time, most spreads to the German benchmark bunds were expanding; now, most -- except for Portugal -- are contracting. Bigger sovereign PIIGS markets like Spain and Italy are well off the yield highs seen last November and currently are allowing those governments to borrow at much more affordable rates.

The same banks that seemed like pretty decent short candidates in an environment of rising financial stress during the summer of 2011 seem to have survived the storm and now are seeing their shares rally and re-price for the new, more benign market environment.

I think this is the stock market reacting to the normal resolution -- if there is such a thing -- to the Greece default and the subsequent orderly CDS Greece bond auction. As the Greece default did not drag Europe down into a black hole, the current 66% likelihood that Portugal will do the same is not bothering investors, as the much larger sovereign debt markets in Spain and Italy indicate. They show sovereign 10-year yields of 4.84% and 5.20%, respectively, which are very close to 52-week lows.

Related Article: Dividend Failures: 6 Big Stocks Refusing to Reward Shareholders

Stock quotes in this article: DB, BBVA, BFR, BMA 

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