July 21, 2020
With the EU’s agreement this morning on a 750 billion euro fiscal package, the long-term prospects for 1) the survival of the euro and 2) a united Europe, just got a significant upgrade.
That should be a greenlight for a higher euro. And that should make European stocks a target for global capital flows (maybe rabid global capital flows).
Let’s take a look at the charts.
First, here’s the euro …
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As you can see, the euro has been in a 12-year downtrend. The value of the euro hit an all-time high and peaked as the global financial crisis was erupting, and the ECB was caught on the wrong foot (raising rates, when they should have been cutting). The future of the euro has been in question ever since, mostly driven by Europe’s inability to unify and respond with expansionary fiscal policies, to help the economy. So, now they have.
And with that, the euro broke above 1.15 today. The mid 1.18s is probably next. And then we may very well see a euro back to 1.30-1.40. The euro story aligns perfectly with the lower dollar story. On that note, we looked at the long-term dollar cycles last month (which argues that we’re less than half way through a dollar bear cycle). Here’s the chart again … |
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With the outlook for a higher euro, that makes European stocks a much easier decision for global investors … The two spots with the most upside here, are not surprisingly, the two biggest pain points for the euro zone over the past 10 years: Italy and Spain. Here’s a look at Italian stocks … |
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Italian stocks were just beginning to break out in February when the virus hit Europe and ravaged Italy. As you can see, with today’s news we have a bullish technical break to continue the “V”shape of the recovery. Here’s a look at Spain … |
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This is the big laggard. If we consider that German stocks are nearing a full V-shaped recovery, and Italian stocks have broken out, Spanish stocks have another 33% upside to recover the pre-virus levels.
And remember, for global investors, they get a euro-denominated asset (in these stock markets), which can amplify the return, if the bullish euro scenario plays out. |