Hallelujah!! ECB QE is here. And you know the old saying, don’t fight the ECB. But will the ECB pack the same sort of rip your face off sort of umph that Federal Reserve’s relentless bond buying did in a zero rate environment? I have no idea, but one thing I am fairly certain about is that the news this morning from the ECB was well telegraphed and lacked any surprises. And it is also safe to say that the performance in the EuroStoxx 50 (SX5E) over the last two months suggests that the ECB gave European equity investors exactly what they were anticipating as the index has risen 21% from the January lows, and is now up 15% on the year.
The breakout to new 52 highs (circled) on Jan 22nd was the result of Mario Draghi’s statement at the Jan ECB meeting that they would in fact engage in QE.
As regular readers know, I have little to add on most things macro, it’s not my bag. But while the investing universe is in agreement that the ECB buying all sorts of debt from all sorts of countries will be a good thing for European stocks that are cheap to most other developed nations and to their own historical levels my guess is that trying to directly compare our years of QE with what will be a truly unique experiment in Europe is not necessarily a mirror in terms of guaranteed success. The biggest issue is whether or not one size QE fits all with such institutional differences between the EU and the US.
From purely a technical standpoint, the SX5E is right about at the mid point of the 10 year range, and I suspect could use a bit of a consolidation between 3000 and 3500 before mounting that reach for the prior highs:[caption id="attachment_51684" align="aligncenter" width="600"] EuroStoxx (SX5E) 10 year chart from Bloomberg[/caption]
If you are of the belief that the U.S. economy is improving, and our Fed will orchestrate a soft landing from ZIRP, and that coupled with ECB QE makes European stocks an unusual value and a very good shot at getting back to the prior highs over the next year, then defined risk trades in the FEZ (the Spyder Euro Stoxx 50 etf) could make sense.
But I would add that for those looking for a massive laggard then look no further than the Euro Stoxx bank index (SX7E):[caption id="attachment_51685" align="aligncenter" width="600"] EuroStoxx Bank index (SX7E) from Bloomberg[/caption]
Obviously these banks have been far behind ours in shoring up capital reserves / de-leveraging, but if Draghi is going to “do whatever it takes” to keep the EU together, rising tides will likely lift all boats, and Euro banks will play catch up at some point. The problem here is that there are no easy ways to play this group through etfs and will likely have to express a view through individual stocks like Deutsche Bank (DB) that are also listed here in the U.S.
But, In the near term I am inclined to make a contrarian play that a lot of good news is in European stocks, possibly a short dated put spread in the FEZ as I suspect any further goofiness in Ukraine by Russia will result in another round of harsh economic sanctions which could have a negative spillover effect on large Russian trading partners like Germany. Oh, and lets not forget that Greece’s can keeps getting kicked down the road.
For now let’s see what our jobs data brings tomorrow and the market’s reaction and what sort of follow through European equities get. But I could be Euro-tripping soon.