Oil prices surge to two-week winning streak as Iran supply fears grip markets
Inflation in the European Union is nearing 2%, expected to dip below it in 2026 and 2027, and then settle at its 2% target thereafter. The ECB’s President Lagarde and other ECB members have recently stated that they are comfortable with the central bank’s current interest rate level. The markets are taking the ECB’s public posture as a signal that the 2% in rate cuts over the last two years is likely over.
Why should American investors care? The simple answer is that ECB and Fed policies are often closely aligned because of the interconnectedness of monetary policy, global economic and inflation trends, and financial stability. Interest rate and monetary policy divergences arise when regional growth, fiscal dynamics, and/or financial stress differ between economic regions.
However, while gaps do occur, sustained policy gaps are rare because large interest-rate differentials can destabilize currencies and alter capital flows. Simply put, changes in currency exchange rates due to interest rate differentials bring the economies and interest rates back into balance. Thus, ECB and Fed policy rates are most often aligned.
Therefore, if the ECB is truly done cutting rates, the Fed may not be that far behind. If the Fed were to continue cutting, the dollar could weaken further, which might force the ECB to resume policy easing. As shown in the graph below, there is a good relationship between the European Central Bank’s (ECB) overnight borrowing rate and the Federal Reserve’s Fed Funds rate.
What To Watch Today
Earnings
- No earnings releases today
Economy
Visualizing Rotations
On Tuesdays, we often recap our absolute and relative valuations for sectors and factors. We do this to help our readers understand how various sectors and factors constantly shift from overbought to fair value to oversold. Typically, most sectors and factors follow a jagged path between these three valuation states. Today, we focus on the SimpleVisor graph charting rotations between these states.
The table on the left shows that the Utilities sector has moderately oversold absolute and relative scores. To calculate these scores, we use 13 technical indicators and a weighted scoring system based on their relative importance. The absolute score uses the sector’s price and technical indicators to produce a score ranging from -1.0 to +1.0. The relative indicator uses the same technical indicators and weightings but applies them to the price ratio of the sector to the S&P 500.
The graph on the right side shows how absolute and relative scores shift over time. We use dark blue arrows to better illustrate how utilities have moved between overbought and oversold levels over the past 11 weeks. Initially, Utilities were very overbought on an absolute basis and at fair value on a relative basis. From there, the relative score rose.
After peaking, both scores deteriorated until mid-December. Note that during this period of underperformance, the sector spent a few weeks noodling around at fair value in the middle of the graph. Afterward, it has become very oversold on both bases. Since then, the relative score has improved a little. We suspect it is heading toward fair value, implying it will slightly outperform the market while showing improving technicals.