EU stocks relinquish gains as May’s Brexit cabinet meeting nears conclusion
Fawad Razaqzada November 14, 2018 4:28 PM
European stock indices, including the UK’s FTS 100, came sharply off their earlier highs ahead of the outcome of UK Prime Theresa May’s key cabinet meeting, likely to be after 17:00 GMT. Doubts have risen whether she will be able to win her colleagues' support for the draft Brexit agreement as some Brexiteers fear it will keep the UK locked into EU rules for many years to come. As well as Brexit, European stocks have also been undermined recently by other major global macro factors – for example, concerns over demand from China, where a lot of German luxury cars are exported to, owing the ongoing trade dispute between the US and China. Sentiment has also been hit by the recent currency crises in emerging markets, hurting demand for luxury goods such as Apple’s iPhones. The German DAX index has been the hardest hit among European indices. Regardless of what happens this evening, where the likes of the FTSE and DAX are headed in the slightly longer-term outlook will depend to a large degree on the outcome of trade talks between the US and China as we head towards the end of this year.
DAX hit by multiple blows but could a strong dollar support EU markets?
If the world’s largest economies sort out their trade dispute then this should help to revive optimism over demand for Eurozone exports in 2019, which should alleviate some of the pressure from German stocks. Within Europe, though, ongoing concerns over Brexit and Italy’s budget, as well as the prospects of the German economy falling into a recession – with preliminary third quarter GDP today showing a 0.2% drop in growth – could limit the upside potential for German stocks. What’s more, the European Central Bank is likely to hike interest rates after the summer of next year, for the first time since 2011. The ECB has already tapered its asset purchases programme which is set to end next month. With monetary conditions set to tighten in the Eurozone, things are not looking too great for German equities heading into next year. That being said, interest rates are unlikely to rise sharply and will remain around historically low levels for the foreseeable future. What’s more, the prospects of any positive developments regarding the Brexit or Italy situations, or in the US-China trade dispute, could lead to at least a short-term rally in risk assets across the board. Another source of support for EU stocks could come from higher levels of demand from the US for European goods and services, owing to an improving economy there and a strong dollar. So, it is not all doom and gloom.
DAX remains entrenched in a bearish trend
For now, though, the DAX remains entrenched in a bearish trend as it continually makes lower highs and lower lows. Unless that structure changes one should expect to see further pain rather than gain. The long-term key support range is around 10690-10825 range as per the chart below. If we get there, that’s where we think we might see a more noticeable bounce from. However, it is possible the index pushes higher from here without that deep a pullback first. As such, it is important to watch the most recent highs closely in case they break. This makes the 11855 level particularly important. IF we go above that level then the short-term bias would flip to the bullish side.
Source: TradingView and FOREX.com. Please note, this product is not available to US clients
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.