All Eyes Focused on Banking

The financial conditions in the debt markets continue improving, causing yield curves to flatten and spread to narrow further. Indeed, cash and credit default swap spreads have broadly declined in the U.S. and in Europe, driven by receding risk aversion, more confidence in financial institutions (despite additional write-downs and fairly downbeat earning projections), and modestly better-than-expected economic data. Futures markets reflect a substantial shift in sentiment too, and indicate that U.S. and European central bank rate cuts are on hold for the balance of this year (inhibited partly by stubborn inflation pressures trending above mandated targets). Most economists have concurred and have modified their policy forecasts to reflect the same.