It’s all about stress tests … and green shoots.

Key News

Key Reports (WSJ):
8:30 a.m. Initial Jobless Claims For May 2 Week Expected: -1K. Previous: -14K.
8:30 a.m. 1Q Productivity: Expected: +0.3%. Previous: -0.4%.
8:30 a.m. 1Q Labor Costs: Previous: +5.7%.
10:00 a.m. DJ-BTMU Business Barometer For Apr 25
3:00 p.m. Mar Consumer Credit: Expected: -$5B. Previous: -$7.5B.
Apr Chain Store Sales

Quotable

“The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self-appointed, or elective, may justly be pronounced the very definition of tyranny.”

                              James Madison

FX Trading – – It’s all about stress tests … and green shoots.

“It’s all about the stress tests,” exclaimed a Bloomberg news reporter this morning.

She’s got that right. So far the unofficially released results are “reassuring,” and the currencies (with exception of the US dollar, of course) mostly love it.

The generally accepted reason for these stress tests was said to be for replacing uncertainty with transparency. Ahh yes … transparency. Thank goodness for that. (For those unaware, ‘transparency’ is a common buzz word used in the public forum to evoke that warm and fuzzy feeling.)

From this point on, we know where we stand … because we’ve been told precisely the extent of the weakness, or shall I say strength, of several banks’ balance sheets.

Bank Transparency + Green Shoots = Risk Appetite

Consider for a moment that green shoots imply the beginning stages of growth. And economic growth is something we’ve yet to see – we’ve only seen a slowdown in the rate of slowdown. But still the two-word term is popping up all over the place as an indication the worst of the global recession is behind us. Kind of odd, perhaps misleading?

Then there’s transparency. Assuming the review of banks during the stress test process was conducted prudently and adequately, which we must, then the official results will offer a clearer look into the financial situation of its test subjects.

But does it fully erase the uncertainty? I would think not … not on its own, anyway. Rather, already aware that many banks are in bad shape, the tests results simply show how bad ‘bad’ is.   

Here’s where expectations come into play …

Release these stress tests results six months ago and banks’ capital inadequacies scare the sheet off a ghost; fear sends risk-takers reeling. Release the results now, after months of ‘save the world’ rhetoric and artificial implants of green shoots, and everyone’s just happy to know where we stand … just happy to know something, anything.

For the most part, fundamentals are understood to drive prices, in so much as fundamentals impact investor sentiment which explains the flow of investment dollars. But it can also be the case that prices, as far as price action can influence investor sentiment, drive fundamentals.

In other words, the stock market has made a dramatic move higher since March. In and of itself, that’s enough of a confidence boost to invite more buyers into the market. If confidence spreads from Wall Street to Main Street, who knows, maybe the green shoots are a lot closer to the surface than a quick analysis of the fundamental data might lead us to believe.

I know this sounds a little crazy considering the still pathetic condition of most major growth indicators, but it’s the markets – nothing is certain.

Dollar Index Daily:  It doesn’t like those green shoots! The notorious double-trend-line-break is now in play; usually a decent probability trade.