Continuing eurozone crisis favours bonds over stocks

It seems to be a tale of two financial markets at the moment - home prices rose and consumer confidence unexpectedly rose in July, in the US. Whilst in Europe the woes continue - capital flight from Spain accelerated in the first six months of this year to a total of 163.2 billion euros. This is equivalent to about 16 % of economic output! Madrid has been forced into nationalising the fourth biggest lender, Bankia. Meanwhile, near-bankrupt Greece reported that it is fast running out of cash as it awaits the next installment of aid from international lenders. Unemployment in the euro zone hit its highest level since the single currency was born, bringing the unemployment rate to a record high of 11.2% across the 17 countries that use Euro.But this rate does hide wide divergences, with unemployment as low as 4.5% in Austria and as high as 24.8% in Spain.

There has also been renewed pressure from France, Italy and some central bankers to give the euro zone's future rescue fund a banking license so it can borrow money from the central bank to fight bond market contagion. Germany did agree in principle at an EU summit in June that the euro zone rescue funds could buy bonds of countries that risk losing market access. It appears that time is running out and that all european parties have to agree and get on with a permenant solution, before conditions deteriorate even more.

This year the euro zone debt crisis has sparked a structural shift in global investor decisions favouring bonds issued by the United States, UK, Germany and Japan, over stocks. Stocks have been failing to draw investor appetite despite being left at attractive levels, with dividend and earnings yields well above government bond yields. This scenario would normally trigger a stock market rally. Maybe a sustained rally will eventuate once consensus can be reached over a solution to the eurozone problem!