Market analysts and economists enjoy laying out their wares at the start of the calendar year. A ‘Goldilocks’ theme was dominant, many expecting Europe’s 2017 outperformance to continue, and North America to slow a little due to Fed monetary tightening. By the summer at least one US bank was suggesting that Goldilocks had got a fright, and that while the macro picture was still positive it wasn’t firing on all cylinders. Across the pond many were surprised at how well the US economy had done in the first half.
This August the Nasdaq, Russel and S&P 500 indices all edged up to new record highs, even against a background of a stronger US dollar. From a high in February the euro dropped from 1.2555 to 1.1300, yet this has done little to help EU stock markets. We’ll now review the prospects for the four biggest.
Germany’s Dax index of 30 shares is not representative of the German economy which is dominated by small and medium (unlisted) companies. From January’s record high at 13,596 50 and 200-day moving averages crossed to bearish and it’s off 3 percent – and another 10 per cent on the exchange rate. This week we’re back at levels we first got to in May 2017, as we form the potential right shoulder of a head-and-shoulders top, a break below the neckline targeting 10,550.
France’s CAC 40 index has fared a bit better, up 3 per cent this year and close to this year’s high at 5,657, moving averages (50 and 200 day) switched back to bullish this May. We’re still shy of 2007’s peak at 6,168, let alone the 2000 record high at 6,944. The chart pattern is a bit of a mess really, but demonstrates the repeated struggle at the 5,500 area over the last 18 months.
Spain’s IBEX index of top 35 shares has traded down in a neat channel since May last year, moving averages decidedly bearish since October. Down 4 per cent this year, we are currently re-testing this year’s low around 9,400, which is the 50 per cent retracement level from 2016’s interim low. Were this support to give way, prices should continue to trend lower aiming at the psychological 9,000, the Fibonacci 61 per cent support area.
Italy’s MIB 40 index has been a tricky little thing these last 12 months, thrashing around like a fish caught on an angler’s hook; this simile is most often used by Japanese traders to describe the yield curve. The series of three higher highs, and three slightly lower lows, is a potential broadening top pattern – and we are currently sitting on trend line support taken from 2016’s low. July saw a death cross in the moving averages, the 50-day one dropping below a descending 200-day one. We’ve dipped below the Fibonacci 38 per cent retracement support level and momentum is clearly bearish. Although Italian government threats to withhold EU fund contributions next year if other countries in the block don’t take their quota of migrants have been rejected by the European Commission, the problem doesn’t look as if it will go away soon. Seeing as this index has tried and failed at the psychological 25,000 level three times since 2009, fourth time lucky appears to have been ruled out this year. Watch for a break below 20,000.
