European equity markets and the eurozone currency look to be pricing in separate outlooks for the future of the eurozone after an unprecedented rescue package. As the chart below highlights, European equities as tracked by the MSCI European index has rebounded sharply from its pre-bailout low — surely aided by the EBC's recent actions — while the euro has gone on to set a new interim low. Many view the bailout as a temporary fix to a much deeper problem that can only be solved with through harsh continent wide austerity plans — if even then.
If Europe manages to somehow seamlessly enact these cuts, many nations have dug themselves so deep into debt that the slightest hint of a missed number, or even worse, a failed debt auction, has the potential to derail the entire process. While the euro seems to be pricing in this possibility equities do not. This analysis doesn’t even mention the impact austere policies will have on the European growth outlook, which could also weigh on equities.
Disclosure: No positions