Summary
The side lines are the most popular investment choice for equity investors so far this week.
Euro buoyed by dollar pause
After the European shares saw their second-worst week of the year, the side lines have been the most popular choice so far in the new one. Easier Italian yield spreads to bunds all the way up to as short as the two-year duration owe a little to the CSU’s ‘humbling’ Bavarian defeat. A splintered vote for the main coalition partner of Chancellor Angela Merkel’s CDU in favour of the far right and left is being interpreted as slightly market-friendly for now, as it vindicates Merkel’s decision not to tack right. But Italy’s Budget is waiting in the wings on deadline day. The coalition repeatedly stresses it won’t back down. The Commission will respond within a week.
With 10-Year BTPs just 14 basis points down from last week’s 4½-year high of 3.712% a short while ago, there’s not a great deal of confidence in view that further market ructions will be avoided. In the meantime, less demanding yield spreads allows the euro to drift back up toward last week’s failure high of $1.161.
The facility looks even more a reflection of dollar weakness for sterling. It erased sub-$1.31 lows to rise back to $1.3169, even after the EU again ended the latest Brexit reverie by rejecting revamped ‘backstop’ plans ahead of this week’s summit. The greenback’s consolidation of a gain since 21st September of as much as 2.5% threatened to come to an end last week though has resumed. Most conditions that accompanied the surge remain in place.
Europe is due a squeeze
Despite challenges it’s worth noting Europe’s STOXX 600 aggregate, and thereby perhaps many individual stock markets, may soon benefit from mean reversion strategies. Longer-term technical oscillators having been flashing ‘oversold’ indications for weeks.
More objectively, the index slipped below two standard deviations rolled over a quarterly view last week for the first time since February’s global market volatility. Before this year’s mayhem, the last time these long-term norms were broken equated to market melt downs in 2016. The market returned to the rolling range within weeks, coinciding with a sustained recovery. On that basis, with Europe’s broadest stock average down 9% compared to a newly and still only mildly negative S&P 500, risks of a ‘squeeze’ in Europe, even if solely in terms of overly pessimistic expectations, should be rising.
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