• 144 days Could Crypto Overtake Traditional Investment?
  • 149 days Americans Still Quitting Jobs At Record Pace
  • 150 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 154 days Is The Dollar Too Strong?
  • 154 days Big Tech Disappoints Investors on Earnings Calls
  • 155 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 156 days China Is Quietly Trying To Distance Itself From Russia
  • 157 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 161 days Crypto Investors Won Big In 2021
  • 161 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 162 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 164 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 164 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 168 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 169 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 169 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 171 days Are NFTs About To Take Over Gaming?
  • 172 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 175 days What’s Causing Inflation In The United States?
  • 176 days Intel Joins Russian Exodus as Chip Shortage Digs In
  1. Home
  2. Markets
  3. Other

Another Ominous Euro Divergence

China's latest action to raise banks' reserve requirement ratios is no longer weighing on market sentiment as participants expect the more aggressive option of higher interest rates (borrowing and lending). The overnight decision to hike RRR for the 6th time this year is seen as part of a broader tightening. With 1-year lending rates standing at 5.56% and deposit rates of 2.50% below 4.40% CPI, the case for higher rates into 2011 remains intact. This helps explain why Shanghai Composite Index is down 11% YTD even as US indices are up +10% on the year. This divergence is largely explained by the contrasting monetary policies involving the Fed and the rest of the world. But as the rally in US yields makes the transition from reflecting higher GDP growth to fiscal concerns, US equities may be in for a needed correction. (See more on EUR-stocks relation)


Euro Bulls Beware of the Divergence

The euro's divergence from rising US and European equities is growing similar to the divergence prevailing in Jan-April (see 1st red circle) when EURUSD fell 15% and S&P500, Dow-30 and FTSE-100 rose 16%-19%. If the Jan-April pattern repeats itself, then it is feasible to expect equities to catch "down" with the euro. The fundamental rationale would be based on i) broadening Eurozone concerns weighing on UK and Eurozone banks; ii) prolonged rise in US yields and iii) growing doubts upon the completion of the $600 bln QE2. We stick with our technically negative euro stance based on: i) the inability to regain the all important 55-week MA (1.3370); ii) the inability to regain the Nov 4 trendline. EURUSD eyes short term target of $1.3070, followed by $1.26 in mid Q1 2011.

Euro Divergence with S&P500

 

Back to homepage

Leave a comment

Leave a comment