Is Europe turning Japanese?

by Chris Becker

Are European stocks turning Japanese? The very high correlation between the USDJPY and the Nikkei 225 stock market has long been observed, where a weakening Yen supports higher stock prices (and vice versa, obviously):

n225_ix14dec12_to_15jun15

And now it looks as long positions in USD unwind and QE begins in Europe, which is ultimately deflationary, the Euro is pushing European stocks the same  way.

Here’s an interesting chart courtesy of Callum Thomas:

callumthomas

If you’re a local investor and are thinking “So what?”, well look closely at this chart and tell me the difference between Australian bank stocks and the main component of the EuroStoxx 600, the German DAX:

gdax_ix17may12_to_12jun15

 

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Comments

  1. Excellent article, very thought provoking. I come for the FMG jokes but I stay for the macro..

  2. Still getting used to the idea of QE being deflationary. Quite hilarious, unless you’re a central banker of course.

    • It’s deflationary because it’s a reflection, not driver of the economy. Risk returns are +5% or -100%. Risk free returns are 0% no matter which way you look at at. People don’t take risks for 5% unless it’s not their money. Which means QE is targeted poorly. It should go into “tax returns” for the people, not as free chips to the gamblers.

    • QE works a wee bit if done early and before anyone else, preferably with a large fiscal stimulus [like a nip of hair of the dog and a big B12 injection] . Its not so great if some one else or others beat you to the punch or all dog pile in.

      That some are surprised that its deflationary is monetarist – QTM thinking [more like ridged ideological profiling]. QE is dead money as its parked as reserves which have zero velocity.

      Skippy…. Bonus question….. last 3 Fed chairs were beholden to what profiling????

    • I don’t get how it works either. More money supply into the system, and yet prices of goods and services go down?

      • Groan…. Too reiterate… QE [portfolio swap] does not increase the broad money supply M1-3 as reserves have zero velocity and hence not a metric to quantify inflation by…. stoopid QTM monetarists AET and the neo mobs.

        That Milton wanted a quasi gold standard w/ 2% PA on a non convertible medium of exchange [at least Jefferson had slaves @6% PA snort] and error was compounded by the John Birch Society (JBS) shenanigans [Koch funded by selling oil gear to Stalin {libertarian meta burn}] which resulted in a bastardized quasi monetarist Fed and international CBs w/ lunatic taxation minimization wrt mutli – transnational corporatist gone wild.

        Skippy… the really sad bit is some payed lots of money and spent heaps of time on defective educations [Bernays – Skinner box ideological cortex injections].

      • This post and comment thread might help unpack events a bit in a more inclusive historical context.

        Ben Johannson
        May 6, 2015 at 6:39 am

        It seems all but forgotten the Big Three, while losing market share to the Japanese in the 1970s, were still profitable until Volker’s relentless rate increases forced a 60% appreciation of the dollar. U.S. manufacturers saw a rapid collapse in their overseas sales as American goods became totally uncompetitive in terms of price.
        Reply ↓

        Larry
        May 6, 2015 at 7:49 am

        That was kind of the point though, wasn’t it? To break the back of labor unions the big three had to suffer a bit. But Uncle Sammy is always there with a bail out as long as union membership goes down, manufacturing shifts to right to work states and Mexico, and what remains of the union keeps getting chopped down with two-tier wages.

        http://www.nakedcapitalism.com/2015/05/first-quarter-gdp-likely-negative-trade-deficit-soars.html#comment-2440011

        Skippy… economics which comports history and human activity to simple graphs with axis plots and ex nihilo axioms is just ideological subterfuge.

    • the colonialMEMBER

      economics has its roots in thinking about the allocation of scarce resources – such heritage doesn’t have much to offer in dealing with the contemporary implications of saturation

  3. DAX vs ASX look tightly correlated. If europe is going the way of japan, then so is Australia?

  4. It’s called the carry trade. It has gone from JPY to USD and up until recently EUR

    QE hasn’t created inflation because it has created zombie corporates/economies. It has kept too many loss making cash burning rubbish companies and public servants alive by allowing a perpetual roll of credit lines.

    7 years on and nobody wants to pull off the bandaid. Governments love the enabling of moar deficit spending with apparently no effect on yields.

    Interesting watching the new bond yields shoot higher recently. Hopefully this is the beginning of the end of the Cemtral Banker cult – the whole thing needs a reset.

    Can’t wait to see these deadbeats try and balance their budgets when the bond markets say no to more of this nonsense.

  5. That is the assertion, especially if we are targeting 60 usd. I think it is time though we all understand that Australia is not Europe and that we are mostly commodity backed.

    Famous saying correlation is not causation we are merely repeating low IR whilst USA enjoys buying opportunities in Europe due to strong exchange.

    Our reality is really lower IR all the while the one thing we are “good at” commodities gets shredded. Lower exchange in my opinion will not equate to higher share value by mere proxy of lower exchange like Europe. (I’m suggesting foreign money has pumped euro stocks during the period shown)

    It’s all down from here regarding Australia long term 10 years~

    • Remember one thing Europe had a massive crisis internal consumption died hard, financials went mad unemployment went off the charts whilst exports remained.

      My point is basically out exports our trade balance that has juiced this country up so well will not and is not remaining. Lower IR more and we get lower exchange whilst declining exports tank our sharemarkets. Double negative..

      That’s my view explained as well as I can via text. Macroeconomics is so so varied with so many factors a few sentences and charts means nothing, look at the big picture – Exports.