Thursday, June 6, 2013

Update on Eurozone: Equities versus Economy

It's been awhile since I first commented on the divergence between equities and economic conditions in the Eurozone. To be exact, it was March 25th, but I offered follow-up commentary on April 2nd and April 26th. I figured it was time to do another update.

Since March 25th, the Citigroup Economic Surprise Index (CESI) for Eurozone has declined from 10.9 to its current value of -53.2, or a sizable -64.1 point drop in that time. Meanwhile, equities as represented by the Euro STOXX 50 Index have appreciated by 4.6% in that period. In other words, the divergence has expanded since I first wrote about it.

The chart below helps to make it quite clear.

Source: Bloomberg

Just weeks ago, the CESI hit a low and yet around that same time the Euro STOXX 50 was making a new 52-week high. I would definitely call that a divergence (!). Granted, more recently the CESI has been trending up, but it has a ways to go to establish a meaningful uptrend and until then this move is too brief to conclude anything for certain. A similar divergence developed in early 2011 and it did not turn out well for equities -- we'll see what happens this time around.

I would add that a similar divergence has emerged for the U.S., with the S&P 500 reaching new highs as the CESI has been in a protracted downtrend:

 Source: Bloomberg

The chart above shows divergences occurring in 2011 and in early 2012 and in both cases equities eventually gave way. As with the Eurozone, we'll see if the same happens this time around....

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