Dear David, on the Dec 3 the day the ECB disappointed European investors the Euro Utilities started to decline, but the Dow Jones Utilities Average started to go higher. The overlay gives a clear picture. I am tempted to go long the European Utilities looking at the chart but it would be very much appreciated if you could explain the reason for the huge difference between both Utilities indices. Why didn't commonality work until now? best regards

David Fuller's view

Thanks for your interesting question. 

In times of firmer global GDP growth and similar policies, commonality can be a wonderful tool.  A lead market shows a sector coming into form ahead of similar shares in a quieter market, which eventually undergoes a catch-up move as investors anticipate and help to create commonality by establishing positions.

Could it happen now with European Utilities staging a catch-up move with US Utilities?  Yes, theoretically, although we see no evidence of this, to date.  Therefore I would want to see some clear technical evidence that European Utilities are improving. 

Here is the most likely problem.  The EU is widely regarded by economic realists as the most ineptly managed developed country alliance.  However, admirers who do not live in Europe say the EU has noble goals and is a responsible alliance.

The latter would be fine if the EU also had noble results.  Unfortunately, in terms of economic management affecting utilities, the EU wants to be green and the price of this goal is someone else’s problem.  I have previously written about Germany’s forests of windmills which have to be backed up by polluting coal-fired power stations.  This ‘green’ policy results in increased CO2 emissions.  Solar is better but does not solve the problem of intermittent output which also has to be backed up. 

Consequently, European Utilities charge higher prices, where they can, but have much lower profits, which are reflected by the underperformance of their shares.  In the USA, Utilities are generally much more profitable despite charging lower prices, because they have cheap US natural gas in addition to an extensive range of renewables.