ECB and OPEC are the stories of the day. Sadly, I have little intelligent to add. So I won’t attempt to opine on what Mario Draghi, or the Saudi’s did or didn’t do. All I know is that the Euro is down a touch, EuroStoxx 50 (SX5E) & European bank stocks (SX7E) are down 2% from their session highs, now flat on the day, and crude oil down about 1.5%, nearly 2.5% off of the morning’s high. Expectations were not exactly high heading into either event, but jawboning by both institutions over the last few months is one of the main reasons economic conditions have eased since the start of the year.
We spend most of our time focused on U.S. stocks and indices here at RiskReversal, and an important part of that is relative strength. We are not confused for a second why the S&P 500 (SPX), the largest equity index in the world is within a couple percent of its all time highs made last spring, and why small cap stocks, measured by the Russell 2000 (RTY) remain 10% below its all time highs made last year. We get money flows.
But the German DAX, down 5% on the year, and 18% from its 52 week highs is a bit of a trainwreck:
European Banks (SX7E), down 36% from their 52 week highs, and only up 16% from their 52 week lows is downright nasty. Maybe it’s trying to bottom, but given NIRP throughout the Eurozone and the anemic growth prospects, I suspect we see 80 before 120:
Japan’s Nikkei? Yuck, down about 20% from its 52 week highs, and down 13% on the year:
And the Shanghai Composite? I can’t even. Down 17% on the year, down 43% from its 52 week highs, and most troubling only 11% from its 52 week lows:
It’s long been our view that the U.S. is not, and will not be the problem for global risk assets on a massive scale, like the lead up to the dotcom implosion in 2000 or the subprime crisis that caused the crash in 2008. Yes, the unwind of U.S. induced QE strategies linked to a depressed dollar and the end of ZIRP certainly caused some palpitations in commodity, credit and currency markets, but it will be the divergence of our monetary policy and those of countries and regions who continue to de-lever and struggle to find innovative policies to stimulate growth that will drive risk asset volatility in the near future.
But here is the thing. It’s not like things are that rosy here. Yet most market participants view a sharp economic slowdown in the U.S. as a sort of an outlier / long tail risk. Which is somewhat surprising when you consider the corporate profit environment and U.S. companies’ dependence on sales outside the U.S.
So from where I sit, new highs in the SPX mean little and less in the grand scheme of things, and rather than focusing on 2100, or 2134 as a barometer for the health of stocks globally, it may make more sense to look abroad, and that also means looking down.