Draghi Wavering on QE Taper

The big news today is sources saying that Draghi will not send a new policy message at Jackson Hole next week.  Many were expecting Draghi to send hints of a QE taper like he did a couple of months ago but he's obviously not in the tightening mood these days.  With the stronger euro, Europe doesn't look so hot anymore.  It was the weak euro after all that boosted European stocks, not improving fundamentals.  In other words, Europe is the new Japan.

Europe is stuck now with permanent low rates.  They have fallen into the low rate vortex in which monetary policy has to rely on QE to have any effect on the economy.  It is something the US barely escaped and it is something Europe will not be able to escape this time around.  The baseline fundamentals are just too weak in Europe.  All the growth sectors (basically just technology) are based in the US, and the underlying demographics and labor inefficiency make European equities a poor long term investment at these valuations.  And of course European fixed income with the negative to super low yields.

The US stock market is benefiting from the weaker dollar this year, as the S&P outperforms the Russell 2000, but relying on a weakening currency for stock market gains is unsustainable.  Eventually other countries get sick of having to take the pain from a strengthening currency and they start loosening monetary policy to combat it.

Europe is stuck between a rock and a hard place.  They are going to have a tough time dealing with a strengthening euro, and you are seeing the first signs of Draghi feeling the heat.  This should be an ongoing story over the next year as Europe struggles to normalize as the euro strengthens.

We are right in the middle of the old range, now just waiting for it to hit the top of the range to put on some shorts.  With these unvolatile markets, 5 SPX points is a big deal.