The much awaited Euro zone bank stress tests have released a set of results that showed little strain in the Euro banking system.  After providing a temporary relief rally......the Euro has weakened very slightly this morning as investors now see the tests as being not robust enough.

Let me summarise the Euro Bank Stress test  results here:

a) The tests were conducted by the European Committee of Banking Supervisors

b) 91 European banks were tested with 7 failing the test.  The 7 had a combined capital shortfall of US$4.5bn.

c) Regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1 percent on Greek debt, 12.3 percent on Spanish bonds, 14 percent on Portuguese bonds and 4.7 percent on German state debt

The reason for the lack of belief is that these losses in c) above are seen as too smal.  A similar test was conducted in the US in 2009 - and while many there also believed it was inadequate or insufficient in its robustness, it did have the effect of calming markets.  I think a similar strategy and outcome was intended and anticipated here.  Like the US tests,  markets are likely to remain bumpy and uncertain.  From the US example, the US market took about six months from the Lehman collapse to stabilise......by the same measure, the Euro crisis should fine some stability by the end of Q3-2010.  The major difference is the response because Europe is a combination of many different soverign entities compared to the US so unless we have a Europe wide agreed and co-odinated policy response, it may take a little longer for Europe to some market stability.

Notwithstanding the views on the Eurobank tests, the key to stock markets coming out of their current doldrums is corporate earnings.  On currrent forecasts, stock markets in most major markets are cheap compared to risk free rates and to their historical ranges, if these forecasts can be affirmed and validated during this Q2-2010 reporting season, I believe this will be one of the catalysts to allow markets to resume their uptrend albeit at a more modest pace compared to 2009.