January was a down month for European equities. So far, February has been coasting along with nothing much to write home about. Especially when compared to a 8% surge in the NDX and almost a 5% move up in the SPX this year. Even the Hang Seng has blasted to a 9% move year to date. European equities are just not on the same page. Something is clearly wrong here. Europe is in dire need of a Donald of its own. Someone who it can latch onto as the messiah for business, taxation, infrastructure & jobs. Europe used to be the centre of global civilization. Someone needs to make Europe great again. Alas, there is simply no one in sight. The big risk opening up is a reversal back down that pulls the rug on everything.

In yesterday’s press conference, the Donald suggested that he’s achieved more in a month as the President of the United States than any other President in history. He obviously comes from the Muhammed Ali school of training when it comes to talking to the world. “I’m the greatest already. And it has only been a month.”, he said. Who talks like that? Ali was a true genius. You could argue that he commanded and owned his audience for justifiable reason. One just wished that the President of the United States showed a bit more humility. He even went onto say—”Look at the stock market. It only goes up since I came into power. ” Someone should have told him to watch his words because the stock market loves taking down people with hubris. Could Donald’s utterances prove to be a kiss of death? We’ll see. We are putting up our guard.

EU Cyclicals are starting to lose their bid against the Defensives and this is something we are starting to see early traces of from the US market too. Even there, Defensive and hitherto underperforming names like PG, CL, PEP, STZ, KMB, WBA, DPS, XLV, XLU and IYR—have started to catch relative outperformance, while Energy, several Materials (AKS, FCX) & Retailers (M, KSS, JWN) have started to underperform. Financials are making new highs in the US on waning momentum while EU Financials are clearly starting to lose their bid. Mild sector rotation themes are starting to play out. And this is worth monitoring. Another thing to watch is the Citigroup Index of Economic Surprises in EU. The 2nd chart below shows the trend break and this Index seems to have peaked in early Jan. While it is early days to read too much into it, this is something worth following closely. New lows here could lead to nastier price moves in stocks.

What is likely to tell us whether or not this rally in European stocks is going to continue unabated or not?

In our last European note, we pointed to the German bunds as a potentially leading indicator for banking stocks. This is what we wrote: “A surge higher in yields is what the market needs next to produce the next leg up. Bunds need to race past 70bps, the US 10 year needs to close above the “Bill Gross start of a big bear market in bonds once the 10 year closes above 2.65%” level and Eurostoxx needs to close above 3325.”

Bunds are trading at 30 bps, the US 10 year is at 2.4%, French CDS spreads are blowing out to the upside and Eurostoxx futures are at 3287. Doesn’t look like any of our conditions that are needed to announce a new bull market in equities are being met. You can buy the Donald’s view of staying all-in long on US stocks which will now only go up OR you can do what we are supposed to i.e. watch price action closely, make sure we tick the boxes and not get carried away by all the global reflation chat everywhere. Look...if there is one thing that will reflect the reality eventually, it will be the stock market. In the short term, it’s a voting machine but in the long term, it’s a weighing machine. The US market is tearing to new highs but European equities are not confirming the big bull from the US. This divergence is something you should care about.

Contacts:

Ashwani Mathur | ashwani@deydun.com | +44 (0) 207 725 1008

Kasim Ahmed | kasim@deydun.com | +44 (0) 207 725 1005

Sujit Kapur | sujit@deydun.com | +44 (0) 207 725 1009

Satwinder Sehmi | sat@deydun.com | +44 (0) 207 725 1004

We can also be found on Bloomberg at DEYD<GO> and via our website at www.deydun.com

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