European Champions

07/19/2010 10:52 am EST

Focus: GLOBAL

Eoin Treacy

Global Strategist, Fullermoney.com

Nordic markets, German exporters, and Turkish banks are rallying while the world wrings its hands over the fate of Europe, writes Eoin Treacy of Fullermoney.

There has been a great deal of commentary on the malaise affecting European economies, but this is to ignore massive regional differences across the eurozone. Some of the currency union's biggest problems stem from the divergence in competitiveness that sees low inflation, low relative cost of production, high-efficiency economies led by Germany dominate.

Higher inflation, higher cost of production, and less efficient economies mostly on the periphery are at a comparative disadvantage without the pressure release valve of devaluing their currencies or the discipline inherited from generations of fighting inflation. The differences between the respective economies are mirrored in the stock market, where Northern European indices are outperforming.

A large number of German large-cap companies are benefiting from the weaker euro, renewed demand for their products particularly in Asia, and the low interest rate environment at home.

The best performing [stocks in the DAX-30] are focused in the consumer-led export sectors. Banks, steel, cement, insurance, utilities, and telecoms are underperforming.

A large number of companies remain in relatively consistent up trends. Of these, Siemens (NYSE: SI, Frankfurt: SIE), Man SE (Frankfurt: MAN) and Infineon Technologies (NYSE, Frankfurt: IFX) are in some of the more consistent advances. Fresenius Medical Care (NYSE: FMS, Frankfurt: FME) has been even more impressive on the up side.

BMW (Frankfurt: BMW) continues to post new recovery highs, while Daimler (Frankfurt: DAI) also remains in a consistent medium-term up trend. Adidas (Frankfurt: ADS), BASF (Frankfurt: BAS), Fresenius, Henkel (Frankfurt: HEN), Linde (Frankfurt: LIN), and SAP (NYSE, Frankfurt: SAP) all share a similar pattern of consistently higher reaction lows, which would need to be taken out to question the integrity of their medium-term up trends.

[The Turkish stock market is also performing well.] It has held above the 200-day moving average and continued to post new highs. It is now testing the April high near 60,000, and a sustained move below 50,000 would be required to question the primary consistency of the medium-term up trend.

Negative real interest rates have helped fuel the impressive advance. Banks and financials have benefited from loose monetary conditions and dominate the Istanbul Stock Exchange Index. The ISE National Financials Index appears to be returning to a position of outperformance relative to the wider market.

The Turkish lira has strengthened somewhat against the euro over the last few months, but the euro's eight-year progression of higher reaction lows against the currency remains in place. The lira remains close to the center of the eight-year range against the US dollar.

Turkish five-year local currency bond yields continue to compress. The rate broke below 9.5% in early June and encountered resistance at that level a few weeks later. A sustained move back above 9.5% would now be required to question short-term demand dominance. The country's credit default swap spread remains steady, with a mild downward bias in the region of 170 basis points.

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