This Foreign Market “Contagion” Is About To Go Viral

Europe has always played a huge role in the US markets. The US Treasury reported that European investors and central banks held $1.6 trillion of US Treasury securities in June. More importantly, they had purchased $114 billion of that over the past year, including $32 billion from April to June.

And although there’s no breakdown of US stock and corporate bond holdings by country, Treasury holdings are about one-third of total foreign securities holdings. Assuming that ratio applies to European holders, then they hold a total of roughly $4.8 trillion in US assets, and added nearly $100 billion of that over the April-June period.
There’s little doubt that this has helped drive the stock market blowoff.

That cash flows into the US markets. Even if they are not direct purchases of US stocks, when European investors buy Treasuries, most of those purchases are from US Primary Dealers. The dealers use some of that cash they get in those sales to Europeans to buy stocks. When European investors, or US corporations in Europe, buy US assets, that adds liquidity to the US system and fuel for the inflation of the US stock market bubble.

So I have always found it important to track the monthly data on the European banking system for you. Its growth, or lack thereof, matters to the US market – whether that growth is intrinsic, or smoke and mirrors.

To find out whether European banking is really obscuring the truth about the US market, we must take a deep dive into the data. That’s what I’m doing here for you today.

Unfortunately, what we find might not lead to the most heartwarming reassurance about the US stock market’s current trajectory.

That’s because a looming, so far unseen contagion is currently buried in the heap of it.

The Contagion Is Hiding Amid Misleading European Lending

Lo and behold, smoke and mirrors continue to drive lending and deposit growth in the European banking system. The inflation of a European housing bubble, with increases in mortgage balances outstanding, plays a huge role.