Analysis and Opinion »

European Stocks Take the Baton, and Lead Market Forward

David Becker
Share on StockTwits
Published on
European Stocks Take the Baton, and Lead Market Forward

European stocks have started to make a move in tandem with US stocks which is giving the rally some additional momentum. Germany is the key driver along with France. Germany has hit a record high, while France is trading at the highest level in seven years. Italy and Spain stocks rallying as well.

Both are still trading below 52-week highs, but their short-term trends have turned up. Greece has been a drag on Europe. The Dow Jones Greece Stock Index starting to bounce off potential chart support along its mid-2013 low. The weekly RSI and MACD lines are oversold and may be getting ready to turn positive. If they do, that would give Europe an added boost.

Using a hedge instrument is the key to a successful trade for US investors. Most US investors do not have access to German or French stocks that are not ETFs or ADRs. ETF that are unhedged return the stock but the movements in the currency offset any gains experienced by the European market.

The HEDJ is a European hedged ETF while the DXGE is a German ETF that hedges their Euro exposer. If you look at the holding of the DXGE you will see that the ETF holds OTC contracts where it has sold the Euro against the dollar for the notional amount of the stock that it holds. If this is compared to the EMU iShares (EZU) which has lost nearly -6%, this year you can see the benefit. Their divergent performance is due to the -17% loss in the Euro.

When you buy a eurozone stock or ETF, you also buy the Euro. Money made on rising stocks are lost on the falling currency. That’s why the HEDJ has become one of the most popular ETFs.

Share on StockTwits

Iron FX 1.11156/1.11128 2.8
XM Markets 1.09948/1.09928 2
FxPro 1.10184/1.10171 1.3
FXCM 1.13943/1.13912 3.1