Revisiting The U.K., QE3, And The Spring Switch

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 |  Includes: DIA, EWU
by: Michael A. Gayed, CFA

"Everything is temporary. Everything is bound to end." - Keren Ann

On February 13, I put out a piece here on Seeking Alpha titled "Can Bank of England Turn U.K. Equities Into Leaders Again?" in which I addressed the then announced expansion of Quantitative Easing by the Bank of England and its potential impact on U.K. markets. I noted that the price ratio relative to the U.S. appeared to have bottomed in January around the time anticipation grew regarding the QE announcement. At the end of the article, I wrote that

while entirely possible that the trend resumes on the upside with QE as the excuse, any potential outperformance may be relatively short-lived, particularly if the U.S. Fed initiates its own form of Quantitative Easing 3 in the near future.

Now it appears that the Fed will not initiate QE3, nor will the Bank of England expand its asset purchases. What's been the market's reaction? Take a look below at the price ratio of the iShares United Kingdom ETF (EWU) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/EWU is outperforming (up more/down less) the denominator/DIA.

Click to enlarge

Notice on the far right of the chart the initial burst of optimism following QE from the U.K., and the subsequent weakness recently which completely undid strength experienced during January and February. Without further QE from the Fed or the U.K., it makes sense that the U.S. would continue its strength all else being equal relative to England, given a much better economic outlook in the States.

What does this have to do with the Spring Switch? Broadly speaking, if two countries which previously were thought to expand asset purchases now decide that they are not needed, it may force money out of bonds since the implication is that central banks would no longer be on the side of the bond bulls. Once again, this means that money could be forced to take risk into equities as a result.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.