"Great heroes need great sorrows and burdens, or half their greatness goes unnoticed." - Peter S. Beagle
On April 9th, in the article titled "Revisiting the U.K., QE3, and the Spring Switch" here on Seeking Alpha, I took a look at the relative price performance of British shares relative to the U.S. stock market within the context of Quantitative Easing (QE). At the time, it appeared that neither the U.S. Fed nor the U.K. Bank of England would expand asset purchases. The timing of the article was around when I began making the case for a "mini-correction" to occur in equities, which would be the test for my Spring Switch/Great Re-Allocation thesis of money rotating out of bonds and into stocks.
The world seems to have dramatically changed since then, particularly post early May following European elections in France and Greece, combined with a complete surge of fear over Spain's banking system and the growth slowdown occurring in China. Calls are growing louder and louder for another round of global "shock and awe" round of monetary stimulus from SuperBen and the League of Extraordinary Bankers. And it looks like the Bank of England is the first to blink given recent news that the BoE is considering boosting asset purchases/doing more QE.
This may explain why the pound (FXB) has broken down substantially in recent weeks. The U.K. stock market may be forcing the BoE's hand. Take a look below at the price ratio of the iShares United Kingdom ETF (EWU) relative to the SPDR 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. A falling ratio means the opposite.
(click to enlarge)
Notice how the ratio not only broke the support line of April, but also cratered in May with a deep decline ensuing since then. A weak Pound does explain some of this given that it negatively impacts the ETF's return, but given that the U.K. has entered into a double dip recession, it makes sense that stocks are now hungry for more monetary action domestically.
The question now is if the remaining members of SuperBen and the League of Extraordinary Bankers will follow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
