Global Macro: Central Banks Still Fighting

TheStreet.com

NEW YORK (TheStreet) -- The Reserve Bank of Australia cut its cash rate on Tuesday, an indication of risks to growth in China and a lack of fear about inflation around the world. The European Central Bank similarly cut its cash rate last week, citing economic contraction throughout the eurozone. Central banks have been forced to stay ahead of the markets, keeping a floor on prices of risk assets.

Chart Courtesy of Stockcharts.com

The first pair above is of MSCI Germany Index Fund over Total World Stock Index ETF . Germany released stronger-than-expected industrial production numbers Tuesday, but remains in a strong relative downtrend. German equities are outperforming on an absolute basis, but look to be a less attractive investment than American or Japanese equity markets.


As Germany continues to underperform -- a trend that began earlier this year -- the euro has followed suit. The descending FXE, seen under the pair, shows that economic contraction from the region has weighed down currency and equity-market strength. The ECB stepped in to take action to limit investor fear, but growth and stability in the eurozone are the only things that will bring back relative strength in both currency and equity markets.

Chart Courtesy of Stockcharts.com

The next pair is of United States Oil Fund over an equal weight DB Commodity Index Tracking Fund. Oil has been whipped around lately due to volatile economic data, with weaker inflation expectations around the world one minute and strong labor data from the U.S. the next. The pair above has trended sideways for much of the year, but is approaching overhead resistance.

Central bank liquidity around the world and geopolitical tension in the Middle East have kept oil prices on the rise, but another round of good economic data is needed before oil can break through.

Chart Courtesy of Stockcharts.com

Chart Courtesy of Stockcharts.com

The last pair is of CurrencyShares Australian Dollar Trust over CurrencyShares Japanese Yen Trust. This pair is interesting because it is the optimal expression of risk versus risk off sentiment. Japan has been aggressively easing monetary policy, but the yen continues to show strength when fear rattles financial markets.


The Aussie Dollar is tightly linked to China, which is a gauge for world demand and commodity market strength. The recent weakness out of China and waning inflation fear allowed the RBA to cut its cash rate. The Aussie/Yen is still in a strong uptrend. The rate cut didn't derail that trend, but further moves look to be tied to upcoming Chinese data.

At the time of publication the author held no positions in any of the stocks 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.

Rates

View Comments (0)