European Markets EXPLODE Higher And Investors Wonder If The Rally Can Last

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European markets shot higher, marking a huge day for equities.DAX: +1.84%

CAC 40: +1.53%

FTSE 100: +1.27%

Some analysts are waxing more and more optimistic about the prospect of continued bullishness in equities and euro strength, as the rally that started in the wake of coordinated central bank dollar action and liquidity support measures led by the European Central Bank continues.

However, general consensus from economists continues to emphasise that this bullishness cannot last. That is the sentiment not only coming out of Davos, but encapsulated in Ben Bernanke’s press conference yesterday, where he stressed that continuing “global strains to the financial system” are causing “subdued” risks to price stability.

Talks about private sector involvement in the Greek bailout have restarted in Athens, and the European Central Bank is getting involved, but continued resistance by EU leadership to more extreme measures (like ECB involvement in the bailout or lower coupons) has left the talks gridlocked. While it appears as though a deal will eventually be signed, it is unlikely to go through.

Ominously, Portugal is beginning to draw a spotlight in the crisis, as investors and politicians question whether or not it will need another bailout. We have argued that a default in Portugal (or the prospect of one) could be a trigger that pulls the eurozone into disaster.

This is what’s happening in Portuguese 3-year yields:

Portugal has not seen the same reprieve on short-term (here, 3-year) borrowing costs since December as have Italy and Spain.

[credit provider=”Bloomberg”]