European Assets Reap Benefit of Weaker Markets Elsewhere

TheStreet.com

NEW YORK (TheStreet) -- I have mentioned in various articles this week that investors have been reallocating funds to European markets and out of both emerging and U.S. markets due to the relative stability of European monetary policy.

In the charts presented below I will show the current price action of European assets and the risks responsible for the money flow out of both U.S. and developing economies.

The first chart below is of the euro over the dollar. The euro broke to new highs Tuesday vs. the greenback, moving to more than the 1.34 area. This level has only been crossed twice this year.

An exchange-traded fund that closely tracks the movements of the euro is the CurrencyShares Euro Trust .

Investors have sold dollars due to uncertainty surrounding the future of U.S. monetary policy. This has created a sort of paradox as investors have sold both Treasuries (thus increasing interest rates) and dollars in order to avoid incorrectly guessing the Federal Reserve's next action. As rates rise, the dollar is expected to become a more attractive investment, but the uncertainty over monetary policy is keeping money on the sidelines.

As long as the future of U.S. monetary policy remains uncertain, the relative certainty and stability seen in Europe should keep the euro moving higher.

The next chart is of the Deutscher Aktien Index, or DAX, which is Germany's blue-chip stock index. The DAX has been a strong performer over the past year and is currently trading at record highs.

An ETF that closely tracks the price movement of the DAX is iShares MSCI Germany Index .

As U.S. equity indices have corrected lower, and funds have flowed out of emerging markets, strong European equity markets have remained at elevated levels.

Strong economic data have bolstered the argument that European economies have largely reached a bottom with regards to economic contraction. This has improved investor sentiment and been a cause for continued money flow into equities.

Although the DAX has traded within a range for the past month, there are no signs of a major correction. If the index does decline, it should go no lower than the 8000 level.

The last chart is of the yen over the dollar. The yen is perceived as a traditional safe haven currency, and when risk enters the market place, investors push money into the Japanese currency.

An ETF that closely tracks the price movement of the yen is the CurrencyShares Japanese Yen Trust .

Emerging-market equities and currencies have declined as investors have pulled money from their foreign investments for fear of market volatility. Times of global financial market weakness, which is currently being caused by increasing U.S. interest rates, tend to have a greater magnitude effect on emerging-market assets.

The yen has been on a steady rise the past two months as investors have fled riskier investments and sought refuge in the currency. Much like the euro, the yen does not look to have major downside risk just yet.

Look for a steady rise out of the yen to its June highs leading into September, and then for the currency to get its directional cue from the upcoming Fed meeting next month.

At the time of publication, Sachais had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.

View Comments (0)