While everyone is busy buying American equities while shorting US bonds, many traders are overlooking a fantastic setup in the European markets.
European stocks are finally breaking out.
Just to get a sense of how long any sort of European stock market uptick has been in the making, take a look at this long term chart of the percentage appreciation of the S&P 500 versus the Eurostoxx 50:
The S&P 500 is up over 100% since 2003 while the Eurostoxx is basically unch’d. I guess that’s what years of austerity will do for you, but that’s a story for another day.
Over the past month US stocks have rocketed higher while bonds have been gutted.
Donald Trump’s win was the catalyst, but this move is more than that. The global environment is shifting away from monetary stimulus and is focusing on finding fiscal solutions. The Donald has been more aggressive than most other leaders, but it is a world wide phenomenon.
European rates are still bat shit crazy low, and their stock market is priced for never ending deflation.
Buying European stocks while shorting German bunds offers a terrific opportunity.
These two asset classes are set to diverge even more violently than the American experience. European prices have been stretched all that much farther. Rates went way lower than in the US and the stock market has been languishing for decades. The snap back will be even more violent.
I am buying European stocks while shorting American equities, and at the same time, buying US bonds while shorting bunds. All four sides of this trade make sense to me.
Thanks for reading,