Sometimes I can sound a bit like a broken record. I see risks to the current market / economic backdrop and feel that other market participants / pundits are overlooking given their long biased mandates. And so once again I want to highlight one four letter symbol that has stuck in my crow. It’s signalling something very different from the buy the dip mentality surrounding the S&P 500 (SPX) In fact it’s been signalling a sell the rip mentality since making then all time highs in May 2015. It’s the Euro Stoxx Bank Index (SX7E). There was a strong correlation between the SPX and the SX7E. But now the recent divergence speaks for itself:
For those used to looking at things like spot VIX for indications signs of an impending large cap equity sell off, you’re probably looking at the wrong thing. A subteens VIX is a function of the SPX at all time highs, with continued accommodation monetary policy crushing volatility. But that monetary policy is due to a fragile economic recovery marred by spotty data and 4 consecutive quarters of SPX eps declines. The situation is even worse across the Atlantic as the collapsing fortunes of Euro Banks are also a result of accommodation monetary policy, but one that has increasingly taken on the appearance of crisis policy. And that’s the reason for the death spiral that dozens, and possibly hundreds of European banks find themselves in.
I’ve also said this a hundred times in the last year… the SPX will be the last battle fought. While its levitation of late above the prior highs is impressive, it is clearly a function of the horrid rate differential between the U.S. and regions like Europe & Japan, the relative strength of our recovery to those regions and the fact that our financial institutions actually had their blood-letting years ago and no longer pose systemic risk. The last statement can no be made for the many of the components of the SX7E, which is why this chart , and its ability to hold above the 2012 may be one of the most important charts in the world for financial risk assets: