Europe’s Momentum Crash
Disclaimer: Your capital is at risk. This is not investment advice.
Not only did the Federal Reserve cut interest rates last week, but on Tuesday, the Chinese launched a bazooka of the financial kind. They pledged to cut rates by 0.5% and potentially another 0.25%to 0.5% later in the year. There was also a 0.5% cut on interest rates for existing mortgages and a reduction in the downpayment to 15% for home purchases. There’s also a $113 billion stabilisation fund for the stockmarket, and liquidity facilities for financial firms. (HT Macro Strategy Partners).
Not everyone was convinced, as China has longer-term issues such as malinvestment, an ageing population, and an economy that needs to see higher consumer demand. But as with all financial bazookas, the markets took it well, with asset prices jumping around the world. Renowned hedge fund manager David Tepper took to CNBC saying he was “buying everything”.
Here in Europe, it caused a momentum crash, whereby many of the lagging assets (red) jumped ahead of the prevailing leaders (blue), causing a momentum crash (black winners relative to losers). This isn’t a stockmarket crash but a rotation within. In this case, growth stalled while value surged. The 20-year chart doesn’t show the move particularly well, but the black line is maybe telling us something. The last great momentum crash was in late 2020, as the market started to price in the end of lockdowns.
