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Global Macro: Economic Contraction Keeps the ECB on Its Toes

NEW YORK (TheStreet) -- The eurozone proved unable to escape the weak global growth trend, as the region contracted for its sixth straight quarter Wednesday.

Germany was the lone bright spot, but even that country failed to provide positive momentum to the region. The pair below is of CurrencyShares Euro Currency Trust (FXE) over DB USD Index Bullish (UUP). This is, in essence, a tale of diverging central banks.

The Federal Reserve has been a major proponent of quantitative easing and loose policy for the past few years, providing liquidity and boosting investor sentiment. As sentiment has risen, the economy has gradually turned up. Now the talk is how the Federal Reserve is going to exit their continuing rounds of liquidity injections.


In Europe, the economic picture remains gloomy. European markets are sensitive to economic releases, and central bankers are willing to cut rates if the picture continues to worsen.

The chart below highlights the weakness of the euro over the past few months. As the European Central Bank approaches more cuts and the Fed devises an exit strategy, the currencies continue to diverge. The euro is hitting yearly lows, and continued economic weakness from the region could mean falling to even lower levels.

The next pair is of MSCI France Index Fund (EWQ) over Total World Stock Index ETF (VT). This pair represents equity weakness seen in the French economy due to a lack of fundamental strength.

France fell into a slight contraction this quarter, alongside record unemployment figures. French bankers have called for less austerity and more lax conditions to improve growth. The strong downtrend since the beginning of the year highlights the struggles France has endured. French equities will continue to underperform the broader market until the ECB begins promoting more growth oriented strategies.

The last pair shows a silver lining among the gloomy European backdrop. The chart is of FTSE Greece 20 ETF (GREK) over VT. Greek equities have outperformed the broader market for the past month, after fear of a breakup had hit its peak with the Cyprus dilemma.


Fitch upgraded Greece's credit rating on Wednesday, which led to a rally in Greek sovereign debt. They cited the reduced risk that Greece will be forced to exit the currency bloc, and although weakness pervades the region, there is a hint of stability that remains. This stability and continued rounds of liquidity should hopefully push sentiment higher, even if economic data take longer to improve.

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

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

Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

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