The euro is gaining and stocks are following the single currency higher, but investors should avoid chasing the risk-on trade according to one analyst.
“It is our view that the entire western developed stock market is currently trading purely on the back of the euro/dollar exchange rate,” said Jeremy Batstone-Carr, an analyst at Charles Stanley Research in London in a note to clients on Tuesday.
“Markets are seemingly oblivious to fundamentals preferring instead to focus on key macroeconomic trends and few are as significant as those pertaining to the euro zone’s sovereign debt crisis,” he said.
Following a report in the Wall Street Journal that Germany has decided not to push for some kind of restructuring on Greek debt, Batstone-Carr said Berlin is fast running out of credibility.
“Such a move would be completely contrary to popular demand amongst the German people who, if recent election results are to be believed, will now settle for nothing less than the end of Angela Merkel’s role as Chancellor,” he said.
If reports are proven correct and a deal is hashed out which offers more money to Greece to keep it solvent over the summer months, Batstone-Carr believes it will do nothing more than buy the euro zone some time.
“The periphery’s crisis has not been resolved and the positions of various interested parties, including the peoples of Europe, are becoming more entrenched,” he said. "On balance we believe that the newsflow has worsened, not improved, and would regard the trend in euro/dollar as fleeting were not both currencies under severe pressure.”
“With regard to the stock market, we believe it still too early to be adding risk to portfolios and recommend staying defensive,” said Batstone-Carr.