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Global Macro: Focus on Europe

NEW YORK (TheStreet) -- Europe has been overshadowed for the past few weeks as investors have focused their attention on U.S., China and Japan headlines.

From the upcoming German elections, to the diminishing squabble out of Portugal, European politics have dominated the news wires. All the while, European economic data have outperformed expectations.

Business sentiment is on the rise in European countries, and the services sector has improved across the board. With such positive data, many economists are predicting a bottom may have already formed under the region's previous recessionary spiral.

The first chart below is of iShares S&P Europe 350 Index over Vanguard Total World Stock Index ETF . This pair measures European large-cap equities versus a basket of world equities.

European equities have shown relative outperformance due to investor's improving sentiment surrounding the region. The improved economic picture, as stated above, has helped, but so has macro influences.

Policy from the Federal Reserve and the Bank of Japan have led world equities higher on a nominal level. European equities have outperformed mostly due to diminishing fears over whether the region will disband its economic union.

If world equities continue to trend higher, this pair will similarly continue on its path, however, topping patterns in other world indices will bring European equities down with it.

The next chart is of CurrencyShares Euro Trust over CurrencyShares Japanese Yen Trust . This pair measures the strength of the Euro/Yen currency cross.

The euro has tracked European equities higher and generally receives a bid when world markets buy riskier assets.

Similarly, yen weakness signals that investors do have an appetite for riskier assets and are choosing not to buy the traditional safe-haven currency to hedge volatility exposure. This has been bullish for the run up so far. However, the cross looks to have hit upon a major resistance level.

Inability to break higher will be bearish for financial markets and could potentially call the current uptrend into question.

Watch this pair to dictate investor sentiment over the following weeks.

The last chart is of iShares JPMorgan USD Emerging Markets Bond over iShares Barclays 7-10 Year Treasury . This pair measures the strength of emerging market bonds versus the risk-free U.S. 10-year.