Tuesday, January 14, 2014

A one-way bet for eurozone equities

There seems to be no lack of stock market friendly news in the eurozone. Good news is construed as good news for the stock market. Eurostat reported that industrial production blowout numbers for November:
Industrial production across the euro zone jumped by a faster-than-expected 1.8 percent on the month, the biggest increase since May 2010 and rebounding after an upwardly revised 0.8 percent drop in October, the EU's statistics office Eurostat said on Tuesday.

"Today's industrial production figures make for encouraging reading and will fuel hopes of a sustained recovery in 2014," said ING bank economist Martin van Vliet.
On the other hand, bad news can be good news too. ECB chief Mario Draghi recently reiterated the Draghi Put, though he is holding his fire because the risk of deflation is not imminent:
European Central Bank President Mario Draghi said that deflation in some Eurozone member states is the result of a necessary adjustment process but added that he does not see a risk of broad-based deflation across the currency area.

In a letter to European parliamentarian Auke Zijlstra published on the ECB's website Monday, Draghi also said he expected annual inflation to remain near its current level over the next few months. Annual EMU inflation stood at 0.8% in December, according to Eurostat.
He did reassure the markets that he would continue to do "whatever it takes" to save the eurozone:
Draghi reiterated that the ECB stands by its forward guidance and is "ready to use all available instruments to fulfil our mandate."

A constructive technical picture
From a technical viewpoint, the outlook for eurozone equities is constructive. The chart below shows the relative ratio of the ETF for the Euro STOXX 50 (FEZ) against the ETF for the MSCI All-Country World Index (ACWI). All prices are in USD as to neutralize the currency effect.

This technical pattern looks very much like a bullish cup and handle formation. Should FEZ stage a relative breakout against ACWI, it could be a signal for further significant gains for eurozone equities.

For now, eurozone equities appear to be a one-way bet.

Full disclosure: Long DFE

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

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