Terra Firmer

06/17/2010 12:14 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

While you were out burying your gold in the backyard, the financial markets discovered an entirely new continent. Its name is Europe, and unlike the namesake basket case that apparently sank without a trace, this one is a bedrock of stability as well as a font of short-term trading profits.

It’s blessed with such hot stock markets as Athens and Madrid. The former was up 10% over a recent five-day span before a cold shower courtesy of Moody’s, which graciously acknowledged the long-term potential of Greek reforms in downgrading the country’s bonds to junk. Buyers have been getting junk-like yields for months, suggesting that Greece’s risks were news to no one but the credit oracle.

Meanwhile, Spanish banks are so strong that their regulator in Madrid is downright eager to share the results of their stress tests with the world. The world will, after all, need to refinance its 393 billion euros of Spanish bank debt maturing this year, so it was overjoyed to hear the boss of Banco Santander (NYSE: STD) write off the crisis in his homeland as a mere hiccup to be offset by gains in Latin America. Madrid stocks regained 12% in five days before Wednesday’s stumble, but are still down 14% over two months.

The weakened euro is working for European exporters like a charm, fueling a bigger-than-expected rise in industrial production. But industrial production reflects orders placed months ago, while the plunge in German investor confidence reflects much more recent market conditions.

Still, even Germany must be feeling a bit better: After reluctantly giving in on financial aid for Greece and the rest of the euro zone, it seems to have taken some satisfaction in stiff-arming Opel, the European arm of General Motors.

Europe, at least, is finally confronting impediments to long-term progress, from inflexible labor rules to the big budget deficits. To this point, labor protests have been, for the most part, restrained. As the Socialist government pushes for less generous severance for laid off workers, Spain’s unions have scheduled a nationwide strike—for late September.

Europe is hardly the only continent dotted with disgruntled employees. North America’s remain a grumpy lot as well, and China’s are becoming more militant by the day as they campaign for sharply higher wages. This only adds to the pressure to raise Chinese living standards by revaluing the yuan, even at the cost of hurting exporters. Congress isn’t in the mood to wait, either, given the upcoming midterm elections and stubbornly high unemployment.

Meanwhile, Brazil and Chile are raising rates amid strong growth. Tires and beer cans are in short supply. Euroskeptics note: Latin America was the original basket case but never quite came undone. It now boasts a regional economy much more balanced than China’s and much less credit-driven than that of the US.

Lawrence Roulston expects Europe to muddle through as the emerging world races ahead and gold continues its rise. And even slow-growing economies have pockets of strength. Yiannis Mostrous highlights a Japanese retailer that’s turned its customers’ growing frugality into a virtue. Peter Shearlock recommends a UK turnaround specialist with a track record of profitable overhauls.

The eurozone’s crisis is probably not over, with Spanish banks increasingly reliant on the European Central Bank for funds, borrowing costs for core EU countries on the rise, and Spain and Portugal facing continued pressure to specify budget cuts.

So, the dismal Europe of old is liable to resurface at any time. But the rest of the world seems ready to get on with it regardless. 

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