European Stocks React To ECB Minutes & Pondering The ‘Policy Maker Paradox’

Ok, so it’s worth taking a look at European equities now that we’ve got the ECB minutes and the attendant commentary about the dangers of a possible FX overshoot.

Just for some context, remember what the euro has done since WSJ tipped Draghi’s upcoming speech at Jackson Hole…

WSJDraghiEuro

…and additionally, recall how stretched spec positioning has become…

SpecEUR

Of course the ECB is eyeing what that might mean for inflation but for equity investors, that obviously has all kinds of implications for European stocks (the inflation and equity market conversations aren’t disconnected, but let’s separate them for one second).

Over the course of the euro’s rally, we’ve pointed out that it looked to be weighing on equity markets. There for a while, the Macron win lifted both stocks and the euro, but after a couple of months, it became apparent that equities had seen enough in terms of strength in the common currency.

Well, have a look at the knee-jerk reaction to the ECB minutes in stocks:

Europe

So obviously that’s already being faded a bit, but it’s important to note the reaction and if you want to understand why, look no further than this YTD chart of the DAX versus EURUSD:

DAVEURO

We’ll leave you with this from Bloomberg’s Heather Burke:

After those ECB policy comments the export-heavy DAX — probably the most hurt by the appreciating euro –is up and outperforming. Now everyone will want to see to what extent Draghi will dwell on the euro at his Jackson Hole speech. It’s the classic policy makers’ paradox — the more the euro appreciates on anticipation of policy tightening, the more difficult it gets for the central bank to actually do it.

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