DE30

If the DAX can hold current support levels before breaking to new cycle highs, it could reaffirm the strength of its bullish channel.

There’s significant political risks facing the Eurozone in the coming months, which may also help to keep a lid on the European stock markets.

A number of European stock indices have broken out above their recent ranges, most notably Germany’s DAX index which was up a good 1.5% at 10950 at the time of this writing. Sentiment towards European stock markets have turned positive in recent times due, in part, to speculation about a state bailout for Italy’s troubled banking sector, while energy-linked stocks have surged after the OPEC-inspired rally in oil prices, though both crude contracts have struggled so far this week.

It may be a quiet day in terms of economic data, but there’s been plenty of political news in mainland Europe which has impacted both the euro and stocks.

European stocks have started Tuesday’s session on the front foot after a lacklustre performance on Monday. Sentiment remains upbeat for global equities mainly because of the actions of central banks, rebounding oil prices and the mostly better-than-expected US corporate earnings results.

<p>The contrast between European and US equities could not be more striking. Whereas the S&P 500 is just shy of its all-time high, in Europe, most major stock indices are still limping following their early 2016 wobble. This is despite the ECB’s on-going bond buying programme is at full throttle, which has helped to push benchmark government bond yields to record lows with the German 10-year being just above zero and UK’s equivalent dropping to a fresh low today.</p>

<p>Stocks found some much-needed support this week on the back of a rising oil price to $50 a barrel and as concerns about the negative impact of a potential June Federal Reserve rate increase diminished. Traders realised that a small rate rise, if seen, would not materially impact the world’s largest economy where monetary policy remains exceptionally accommodative. Other major central banks such as the European Central Bank and the Bank of Japan are providing the monetary stimulus the Fed once used to, anyway. These central banks, unlike the Fed, remain pretty much dovish. In fact, the BOJ is widely expected to expand its QE programme at some stage this summer. The ECB, having announced an extension back in March, is unlikely to make further changes in QE when it meets next week. After all, the ECB will start purchasing corporate bonds next month. So expect to see some “wait and see” inaction from the ECB in the coming months. The ECB’s policy is aimed at driving yield-seeking investors out of fixed income and into higher-yielding assets, like equities. For this reason, we continue to remain bullish on stocks.</p>

<p>European stock indices have enjoyed a short-covering bounce that began late in the day on Thursday when Wall Street shares managed to erase most of their earlier declines. At midday in London, the UK’s FTSE 100 was up 1.2% and Germany’s DAX was 0.7% higher.</p>

<p>European stock indices were trading lower at the time of this writing, in what has been a very bad week for equities.  Understandably traders are awaiting the key monthly US jobs report in approximately half an hour from now to provide some direction. Although a stronger-than-expected set of numbers could bring forward expectations about the next Federal Reserve rate increase to as early as June, which can actually be bad news for stocks in the short-term, it would nonetheless help to reduce some concerns about the health of the world’s largest economy. Conversely, a significantly weaker set of data may put to bed talks of a rate increase in June once and for all. So we may see some wild price action in stocks initially before the markets make a decisive move later in the afternoon.</p>

<p>This week’s inaction from two major central banks, namely the US Federal Reserve and the Bank of Japan, has caused the global equity indices – Japan’s Nikkei, in particular – and the US dollar to weaken as the yen and safe haven precious metals soared.  On top of this, weakness in US data persisted as fresh data showed the world’s largest economy grew only by 0.5% in the first quarter on an annualised format, which was less than expected. Japan’s economy fell back into deflation and household spending there slumped more than 5% in March compared to the same period in 2015. Meanwhile in Europe, the UK economy grew by a meagre 0.4% in the first quarter, although this was in line with the forecasts, while the Eurozone GDP expanded by a better-than-expected 0.6% in the first three months of the year. However, inflation was a weak point in the Eurozone as CPI fell back below zero, printing -0.2% year-over-year for April. Along with precious metals, oil prices repeatedly surged to new 2016 highs on the back of a weaker dollar and signs of a more balanced oil market on dwindling US crude production. So, commodity stocks outperformed globally.</p>

<p>European stock markets are trading lower at the time of this writing. Sentiment has been hurt by the weaker oil and commodity prices which have weighed heavily on miners. In addition, the inaction by the Bank of Japan overnight has encouraged speculators to book some profit on their long positions opened post the ECB’s decision to expand QE last Thursday. It is also likely that some traders are simply sitting on their hands as they await the FOMC policy statement and Janet Yellen’s press conference on Wednesday. The Fed is highly unlikely to cut interest rates at this meeting, but the market is wary of potentially hawkish remarks that would suggest a June rate rise is firmly back on the table. This scenario would probably cause US markets to fall, at least initially anyway. But in the event that the Fed sounds more dovish than expected, stocks are likely to stage a relief rally.</p>

<p>European stocks have stormed back to life this morning, evidently in anticipation that the European Central Bank will ease its policy further as it attempts to boost growth and create inflation in an economy which is lacking on both fronts. Traders need to be wary of the possibility that the ECB may disappoint again, like it did back in December. Then, it merely cut rates into the negative when the market was expecting the central bank to do at least that and also expand its asset purchases programme. This time, analysts are once again calling for an increase in monthly purchases to the tune of €10 billion per month and perhaps extending the duration of the programme by six months. So, QE is expected to rise to €70 billion per month and run until September 2017. But with oil prices coming back strongly and the euro remaining weak, the ECB may once again hold off fire. This potential scenario would likely disappoint the markets and lead to a sharp sell-off.</p>