08.12.2021
New regime, new optimism
in European equities
in European equities
European equities are in a new macro regime. After 3months below the Qi threshold, model confidence has risen 19% over the last 2 weeks & now stands at 67%.
Two drivers dominate the new regime. European equity bulls want low risk aversion (VIX, VDAX etc) & tight credit spreads. In fact, between them, those two factors account for almost 60% of the variance in Euro Stoxx 600.
The latest recovery in global equities has pushed the Stoxx 600 0.5 sigma (1.9%) above macro model value. That is not a big FVG in absolute terms, but the model has a tight distribution & this is towards the rich end of more recent ranges.
Risk appetite is skittish. For those inclined to fade the rally, the new macro environment suggests European equities have, to a degree, discounted the retracement in equity vol & credit spread widening. Put another way, while Europe was lagging before Omicron, it may now be a bit late to chase it as the best catch-up, risk on play.
It’s also worth updating European Travel & Leisure which has been a lead indicator. October's “The European re-opening trade” flagged the sector looked rich & vulnerable.
After a brutal sell-off that saw Qi FVG hit -3.9 sigma (-18.3%) at the end of November, the FVG is now 1.3 sigma (8.3%). SXTP vs. SXXP shows a similar profile. The sector is still cheap to macro & RETINA has a bullish inflection signal but it has already travelled a long way off recent lows.
Risk appetite is skittish. For those inclined to fade the rally, the new macro environment suggests European equities have, to a degree, discounted the retracement in equity vol & credit spread widening. Put another way, while Europe was lagging before Omicron, it may now be a bit late to chase it as the best catch-up, risk on play.
It’s also worth updating European Travel & Leisure which has been a lead indicator. October's “The European re-opening trade” flagged the sector looked rich & vulnerable.
After a brutal sell-off that saw Qi FVG hit -3.9 sigma (-18.3%) at the end of November, the FVG is now 1.3 sigma (8.3%). SXTP vs. SXXP shows a similar profile. The sector is still cheap to macro & RETINA has a bullish inflection signal but it has already travelled a long way off recent lows.
