Chart of the Day – EuroTrip: $/€ & SX7E

by Dan January 7, 2015 11:50 am • Chart of the Day

The investment world seems obsessively focused on the rise and fall of crude oil and the knock-on effects on other risk assets. This morning, oil is green, equities are green and bond yields are green. All’s right in the world again!  Well, not really. There are other trouble spots that seem to be unrelated to oil’s decline and the never-ending saga which is the Eurozone is a good example.

It has been well telegraphed that ECB head Mario Draghi would like to stop talking and start buying following the central bank’s policy meeting on Jan 22nd.  But of late Zee Germans are raising a fuss about full scale Euro QE, and the Euro and Euro bank stocks don’t like the prospect one bit either.

Meanshile, the Euro is on its way to fresh 10 year lows vs the dollar:

Euro vs USD 10 year chart from Bloomberg
Euro vs USD 10 year chart from Bloomberg

And I suspect more importantly, the Eur/USD cross is breaking below the downside of the Triangle of Death:

Eur/USD 15 year chart from Bloomberg
Eur/USD 15 year chart from Bloomberg

And then there is the Euro Stoxx bank index (SX7E) which is about to make a new one year closing low, and threatening to act like it did during the sovereign debt crisis a few years back as Greece is once again on the precipice of leaving the Union:

Euro Stoxx Bank Index (SX7E) 1yr chart from Bloomberg
Euro Stoxx Bank Index (SX7E) 1yr chart from Bloomberg

Taking a peek at the five year, that included the debt / Grexit crisis you see that the index is about to cross back below what looked like a meaningful head and shoulders bottom from 2011 to 2013:

Euro Stoxx Bank Index (SX7E) from Bloomberg
Euro Stoxx Bank Index (SX7E) from Bloomberg

So for those solely focused on cratering oil prices it may make sense to pay a a little attention other hot spots that have the potential to increase risk asset volatility.

I would have to guess a lot of people got offsides as it relates to European risk assets when Euro QE rumors first started to float. Buying stocks on easy money rumors has been the global playbook the past few years. But so far in this instance, the correct play was to sell the rumor. It’s unclear so far if you buy the news.  I would add one more point, the big money may be forcing the ECB’s hand with continued selling into the Jan 22nd policy meeting.  Another take-away is the potential for the increasingly strong dollar to have an adverse effect on U.S. corporate earnings, which could be manifested in Q1 guidance.