Thursday, October 17, 2013

Eurozone: Rising Like A Phoenix, Part 2

About two months ago, I wrote about how Eurozone equities were taking off despite perceptions that the region was still mired in a painful recession. As is often the case, stock prices were discounting the end of the recession and looking ahead to brighter days of resumed economic growth.

I felt it would be worthwhile to update the August blog post and add a few more comments. The following chart shows respective equity returns since the end of June:

Although U.S. stocks have enjoyed a nice run with the S&P 500 up over 7% in the period, the Eurozone equivalent equity index has more than doubled that return at nearly +16%. It was not long ago when Greece, Spain and Italy were in dire straits and yet they have performed spectacularly over the last several months, far surpassing the STOXX50 return as the ETFs for all three countries have appreciated by more than 30%. Greece was on the verge of financial collapse, teetering on the abyss, but leads the pack with a striking 37% return. 

I thought the following chart was interesting.

It shows YTD equity returns for five Eurozone countries. See a pattern? A fairly well-defined double-bottom, as each country established the W-shaped formation at about the same time (April and July), including a bullish breakout in September.

Readers know I'm always looking for evidence of price leading news or reported data. The chart below shows the Conference Board Leading Economic Index (LEI) and Coincident Economic Index (CEI) for the Eurozone.

The CEI (red dashes) has remained repressed, which is not especially surprising given it's a coincident index and the recession only recently ended. The LEI (blue line) didn't begin to trend higher until the start of this year (intersection of orange lines) -- not bad for a leading index, but I would argue that equity prices did an even better job of discounting the recession.

The chart above of the STOXX50 shows the index putting in a double-bottom by the summer of last year and then breaking out in September, successfully getting through the declining trend line. The Index then underwent a pullback -- very common to follow a breakout -- before resuming its ascent in the latter half of November through December. 

The STOXX50 has recently ripped to new highs; the fact is the days of the Eurozone appearing moribund and left for dead are seemingly long past. And once again equity prices reacted well ahead of any news suggesting that such a confounding change in fate was in the cards. It frequently pays to consult the charts!

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