Global Macro: A Correction Looms in Europe

TheStreet.com

NEW YORK (TheStreet) -- European financial markets have outperformed most of their counterparts for the past month. As global asset markets look ripe for a correction, however, watch for Europe to lead the way down.

The two most pressing events out of Europe for the week were the release of industrial production data and European Central Bank President Mario Draghi's speech on Thursday.

Industrial production underperformed expectations, which is disheartening considering Chinese production was so strong. The lack of continuity calls into question global demand, which is bearish for an already overbought financial market.

In his speech, Draghi cautioned against giving too much weight to survey data versus actual hard data released by European government agencies. His modest tone was slightly bearish for European assets.

In order to put this into perspective. let's look at a chart of iShares S&P Europe 350 Index below. European equities have been a global market leader for much of the year, racing to record highs in September.

The issue is not with the strength of the European economy, but with the technical nature of an overbought market.

As investors await the Federal Reserve's monetary policy decision next week, the uncertainty is sure to lead to a broad selloff for global equities. Look for next week to be a mostly negative week for this exchange-traded fund.

The next chart is of CurrencyShares Euro Trust Price. The euro has been weighed down by the same factors that have weighed on equities, and the strength of the U.S. dollar poses an additional risk to the currency.

Weak data stopped a strong euro uptrend this week, as did falling Treasuries.. Treasuries were bid higher during the Syrian conflict, acting as a safe-haven buy. As the fear subsided over the possibility of a Western intervention and investors focused more on U.S. monetary policy, the fall magnified.

Rising U.S. interest rates mean a stronger U.S. currency. The euro has failed to make new highs and looks to be rolling over at the 1.31 level. That leaves the euro with weak support on both technical and fundamental levels.

Next week could be the catalyst for a euro selloff toward its yearly lows if Fed officials introduce tighter-than-expected monetary policy.

At the time of publication the author had no position in any of the stocks mentioned.

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

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