It’s a rare occurrence to see stocks and EUR/USD to move in opposite directions but today the S&P 500 gained 0.5% while the USD was the second-best performer (narrowly behind JPY).
Risk off in FX; risk on in stocks.
The decoupling makes sense in light of the growing divergence between the US and EU economies. Retail sales and the Empire manufacturing surveys were strong while Europe swirls toward disarray and the ECB toward more rate cuts.
It’s too early to say after just one day but this trade could be a dominant one for the next 3 weeks.
The bond market is starting to make a better argument for US debt. So far, the trade has been to sell periphery debt and pile into German debt. Previously German 2-years were offering a significant yield advantage over USD (30-40 bps two weeks ago).
Now, German 2s are at 0.306% compared to 0.238% for Treasuries. The small difference and the mounting euro risks might outweigh the narrow yield advantage.
