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Euro And The Stock Market

* November 13, 2014


Unlike other major currencies, the euro has a strong and persistent positive correlation with the domestic stock market.



For Japan, the U.S. and the U.K., the correlation between the stock market and the currency has tended to be negative (or at least not positive). In an era when a main aim of central bank policy is to drive up asset prices, this is significant – because the negative correlations mean that higher asset prices are entirely consistent with a weaker currency.

However, in the euro area the correlation between the stock market and the currency has been consistently and strongly positive. Therefore, while the ECB’s monetary loosening may initially weaken the euro, if it also lifts asset prices, the second-round impact works in the opposite direction. It strengthens the euro. In effect, the euro is caught in this tug-of-war which constrains a permanent move.

According to European strategists, the implication of the above is that a full-scale QE in the euro area might not have a lasting downward impact on the euro. Also, such QE in itself is unlikely to change banks’ all-important lending behavior. More important for bank lending is the recent publication of the stress test results – as it has diminished a major incentive for euro area banks to aggressively shrink their balance sheets.

http://blog.bcaresearch.com/euro-and-the-stock-market

George.

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