The more we look at US markets the less it looks like Europe is proving to be a big force in one way or another.
As we pointed out this weekend, what’s clearly moving the US market is expectations around GDP growth.
As the data has improved, US stocks have improved in a pretty straightforward manner.
But it’s funny, because you always hear about how the US market is so closely correlated with the euro.
So then we wondered, does the euro actually care about Europe stresses? You’d think so, but it’s not that obvious.
As a crude test, we plotted the euro vs. the spread between Italian and German 10-year bonds, which itself is a pretty fine measure of European stress. The wider it gets, the more people are worried about the whole thing collapsing.
Well, there does seem to be a bit of an inverse relationship between the euro and the spread, but not really.
An R-squared of 0.04 for that regression suggests the spread between Italian and German 10 year bonds explains little of the movement in the value of the Euro.
And especially lately, since late September, there’s no inverse relationship at all…the euro is actually moving up when the spread widens and lower when the spread narrows.
Bottom line: The euro is kind of doing its own thing, moving up and down with the headlines of the day — whether from Europe or elsewhere — while Italian bonds to bunds spreads seem to be based on the long-term escalation of the sovereign debt crisis.
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