The ECB did what it did. Lots of peeps more tuned into macro than moi are parsing through it, but equity markets are ripping, with the Euro Stoxx 50 up 3.5%, the DAX up 2.5% and out futures are up 1% (when I started writing thats what they were up at 8:40am, now gains cut in half, and SPX up 25bps). It’s comments like the following that suggest investors might want to curb their enthusiasm about buying stocks on greater than expected monetary stimulus:
*DRAGHI SAYS RISK TO EURO-AREA GROWTH OUTLOOK TILTED TO DOWNSIDE
Why? If stepped up bond buying and lower negative bound rates can’t do the trick, then risk assets bought in reflex of late stage easy money policies will see lower lows.
There’s an equity index that I keep a close eye on to get a sense for investor sentiment in Europe, and that is the Euro Stoxx Bank Index (SX7E). It’s up 7% as I write! But negative rates in the region has set off a whole host of profit worries for Euro banks, and fears of leverage ratios and potential credit contagion from weak commodities and emerging markets have throttled the group. A failure on this bounce and any inability to find their footing in the near future could be a tell for broader European equity markets.
The SX7E has obvious technical resistance just above 120 euros, which was the early January breakdown level, and also the steep downtrend that has been in place late July:
The five year chart shows the importance of the 120 euro level:
And for those of you wondering why the ECB is bringing out the big guns 7 years from the lows in our markets? My view is quite simple. The credit crisis that started here in the U.S. nearly a decade ago has merely been rolling across the globe and the Sovereign Debt Crisis that brought European markets to their knees in 2011/2012 has really never ended and elements of credit strain are now peculating in emerging markets. So why now? Europe’s banks are still poorly capitalized, unlike ours, Sovereign debt across the region has negative yields, there is little appetite for fiscal stimulus due to a growing migrant crisis, no inflation, high unemployment and no growth. Monetary policy is not going to fix these problems anytime soon. So I’ll leave you with this, the 10 year chart of the SX7E. Maybe it’s bottoming out, but aside from accommodative monetary policy they got very little going for them:
Let’s see how far this rally goes, but short trades in etfs like FEZ (S&P Euro SToxx) and EUFN (iShares MSCI Europe Financials) could be in the offing.