By Bryan Rich
September 13, 5:00 pm EST
Those that look for reasons to pick apart the bull case for the economy and markets were disappointed by the ECB this morning.
As we discussed earlier in the week, the improvements in the U.S. economy and the trajectory of U.S. rates has cleared the path for Europe to finally exit QE. And the ECB confirmed this morning that they remain on that path — to end QE into the year end.
The idea that Europe can exit QE is a huge positive for both the European economy and the global economy – a confidence signal.
With that, German stocks are a big buy here. As you can see in the chart below, while the S&P 500 is on record highs, the DAX has been well underwater on the year (down more than 6%).
The index also trades well under the 200 day moving average (the purple line). To close the performance gap in this chart, German stocks could be in the early stages of a 13%-15% run.
And stocks in Europe should be supported by a strengthening euro.
Remember, as the global economy improves, the dollar should get weaker. The growth and rate gap (between the U.S. and the rest of the world) will be narrowing from here, which will promote foreign capital to flow into currencies like the euro. But most importantly, the exit of QE means Europe has escaped the dangerous crisis era, which means money will flow “back home“ out of/from the world’s safe-haven asset (dollar-denominated U.S. Treasury market).
I suspect the euro will trade closer to 1.30 by this time next year, as the ECB will begin raising rates in 2019, and likely follow the U.S. lead on fiscal stimulus to drive growth.
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