7th February - European Stocks diverge
12 February 2013
TECHNICALS:
WEEKLY CHART
The market has repenetrated and looks set to close beneath the critical support in the weekly continuation chart formed from the two Prior Highs at 2607.
Note too the proximity of the diagonal support line at 2570 or so this week.
A break of both would be poor.
DAILY CHART
Note the test on the downside – of 2607 clearly, and then in the day chart a band of support from recent highs that is 2578-2594.
NB that the critical diagonal in the day chart has already been broken.
Hence our judgment that the critical level on the downside is 2578.
FUNDAMENTALS:
Since mid-November global equity markets have enjoyed a rally fuelled by a growing optimism about the prospects for global economic recovery. In the US the economic data has been steadily improving and although the recently released Q4 GDP report was surprisingly weaker than expected, that is attributed to the impasse over the US fiscal cliff negotiations in the final weeks of 2012 and the uncertainty that caused.
More recently, data is again improving, especially the labour market, with jobless claims clearly trending lower.
In China the economy is showing improvement and even in Japan the Nikkei has enjoyed a solid rally fuelled by optimism generated by an incoming government that sees returning the economy to a strong growth path and defeating a two decades old deflation as their main priority.
Even the FTSE has performed well despite the back drop of flat growth and a degree of political uncertainty about the UK’s commitment to the EU after the Prime minister recently announced his intention to renegotiate the terms of the UK’s membership and then put the new deal to a vote in 2017.
But the DJEUROSTOXX 50 has over recent weeks underperformed. True, stocks are correcting globally , but the EUROSTOXX50 has been stalling for sometime.
Although the ECB president recently forecast the Euro zone economy should begin to emerge from recession later this year, the data has yet to reflect this.
Some recent Euro zone reports have begun to show improvement, but not many, and worryingly the French economy now seems to be heading into a recession she has for long managed to avoid.
But there is more than one reasons for the EUROSTOXX market underperforming , not least the renewed strength of the Euro, which the French President only this week said could prove damaging as the Euro zone tries to haul itself out of recession.
In addition there is the political scandal engulfing Spain’s Prime minister which saw Spanish bond yields soar this week to levels not seen for quite some time.
So although the global equity rally is based largely on expectation of better times ahead and although the ECB has forecast better economic times for the Euro zone other factors are at play in the Euro zone which hold the market back.
A contrarian view would be to argue that the Nikkei, FTSE and S&P have over extended themselves. The US has yet to fix her budget problem, the UK may yet experience a triple dip recession and Japan’s hopes may yet again prove miss-placed.
We don’t think so. We judge global equity markets are at the early stages of a new bullish phase, fuelled by expectations of economic recovery that will probably materialise as the year wears on. In the Euro zone the current Spanish scandal is unlikely to retard the market for long if, as the ECB predicts, the economy begins to show signs of recovery.
Even the Euro may find its current strength is more medium than long term. True the Dollar isn’t benefitting now from stronger data, but that is due to traders moving out of safe haven assets into riskier assets, but once that shift is complete a reassessment of the Dollar might occur if the US economy achieves a self sustaining recovery.
So yes, the DJEUROSTOXX50 lags for now, but in the long term don’t write it off.
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