Eurozone stocks face bumpy road ahead

It is becoming difficult for investors to justify maintaining an optimistic view on the stock markets given a challenging macro outlook - and not just in the Eurozone

The troubles for the Eurozone continue, putting the stock market recovery at risk. We had another very poor ZEW survey reading from Germany this morning, as investors fear that additional energy costs for households and businesses will weaken an already struggling economy in the months ahead.

So far, however, stock market bears have resisted the temptation to come out in force and derail the recovery that started in June. This is partly because of: (1) expectations that the ECB’s hiking will end quicker than previously expected; (2) the ongoing weakness in the euro, which is making Eurozone exports attractive to foreigners; (3) a better-than-expected earnings season. (4) downside risks at least partially priced in, and (5) the big correction in oil prices.

Still, it is progressively becoming difficult for investors to justify maintaining an optimistic view on the stock markets given a challenging macro outlook and not just in the Eurozone. A poor Empire Fed Manufacturing Index print and weak Chinese industrial and retail sales data yesterday remind us that it is not just Eurozone that is struggling for growth.

Today’s ZEW survey shows that investors grew even more pessimistic about the Eurozone’s largest economy in August. The German ZEW survey’s Current Conditions index printed -47.6 which was roughly in line with expectation as it deteriorated from the -45.8 reading in July. But the Economic Sentiment index disappointed expectations with a print of -55.3 compared to -53.8 last month. According to ZEW, surveyed investors and analysts expect a further decline in economic growth as high inflation rates and additional costs from energy prices will decrease profit expectations for the private sector.

Energy prices are soaring in Europe. Reduced Russian energy shipments of around only 20% of capacity through the Nord Stream 1 pipeline have increased the risk of rationing in the coming months. However, Germany’s gas storage facilities have reached a fill level of 75%, some two weeks ahead of schedule.  The government’s aim is to raise this to 85% by the start of October and 95% by November. So, rationing might be averted after all.

Against this backdrop, I wouldn’t be surprised if the stock market rally derails. But the bears must see a confirmed bearish reversal signal first before even entertaining the idea of shorting the likes of the DAX. Indeed, the current short-term trend is bullish given the higher highs and higher lows. The DAX is climbing inside a rising wedge, as it enters the previous resistance zone around 13900 to around 14100. If not already long, the bulls need to proceed with extra care here.

dax

 

 

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account