Squawk Morning Briefing: Sentiment Contagion

The dominant view of analysts for 2012 states that the European continent will have economic difficulties and the common currency shared by many of its countries will also suffer. However, they further suggest that the U.S. will largely be insulated and that its markets will fare well.

The markets themselves beg to differ as seen by overnight action as the two continue to trade in tandem. U.S. equity futures traded up with the Euro and European equities early in the continental session. However, when a Fitch analyst said that the ECB needed to take much stronger action to avoid “cataclysmic collapse” of the Euro. The simultaneous impact to both U. S. equity futures and the Euro is clearly visible on the charts.

And that brings us back to the question of decoupling. Even if the structural ties between the two economies are weak (and we’re not saying they are), what happens “over there” still has a dramatic effect on sentiment “back here.” As we’ve suggested many times, sentiment is a leading indicator and it is expressed through market investment decisions. Sentiment contagion can be just as destructive as structural contagion and both could be the catalyst that drive the Euro and U. S. Equities lower.

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