I didn’t think this was something I was going to say soon, but the technicals are indicating that it is just about time to go long European equity indices. To be fair, this swing trade isn’t about Europe overcoming all its problems. This seems to be an overall global stock market play. Global indices are showing signs of reversal.
Are we now going from a risk off ( fear environment so money runs into the safety of bonds and the US Dollar) environment to a risk on ( fear dissipates and investors put their money in more riskier assets such as stocks and cryptos) environment? It does seem so.
The US Dollar is dropping after approaching resistance around 110. A positive sign indicating that people are not running into the safety of cash. For now.
There is no way I can declare a full reversal yet. The Dollar could just be pulling back in a relief rally only to resume the uptrend. I really would like to see how the US Dollar reacts at 105.50 as this was the previous resistance which saw a breakout on July 5th 2022. Buyers are waiting there, but if the sellers can push the Dollar back below this level, then the probability of a reversal increases.
Bonds are red for the day… and that’s pretty much all I can say. Technically we are within a range on TLT. To say bonds are selling off we need to see a close below 112. Money tends to leave bonds for stocks once we are in a risk on environment. This is because of the asset allocation model which many money managers follow and is all about rebalancing the allocation of funds in stocks and bonds when the time is right. In recent years, most funds have been heavy into stocks rather than bonds because bonds yielded nothing. With interest rates rising, some funds may find it appealing to hold bonds again. The issue? When you factor in inflation bonds are still yielding negative in REAL terms. Equities still remain the best place to make returns which can beat inflation.
Europe has been in the news a lot. Mainly for geopolitical reasons which I will soon cover. For us traders, Europe has hit the headlines regularly because of the Euro. The Euro is the weakest it has been against the Dollar for the first time in 20 years. We did cross parity (1.00). Recently, we have recovered above parity and are approaching the major resistance at 1.0350. That is going to be the REAL test for the Euro. There will be sellers, including me, waiting to see how price reacts.
But what could get us above this resistance? Well the European Central Bank is up on July 21st. The ECB is expected to raise interest rates by 25 basis points, taking rates from -0.50% to -0.25%. This last time the Eurozone raised interest rates was back in 2011. It has been a long time coming. Depending on how hawkish the ECB comes out, the Euro could recover. The market wants to see if the ECB will actually follow through with more rate hikes in order to tame inflation.
On the geopolitical side we have new drama with Russia and Europe. The Russians were doing scheduled maintenance on Nord Stream 1 with maintenance to end on July 22nd. Gas flows have been completely halted through this pipeline. The Europeans are worried the Russians could extend the work period as a weapon. This would foil plans by the Europeans to fill gas storage for winter and heighten the energy crisis. Not to mention keep inflation elevated with high energy bills.
The drama continues as yesterday it came out that Gazprom is not in a position to comply with gas contracts in Europe due to unforeseeable circumstances. Gazprom has claimed a ‘force majeure’ on its supplies. What the heck does that mean? Known as an ‘act of God’ clause, force majeure is standard in business contracts and spells out extreme circumstances that excuse a party from their legal obligations.
The Germans aren’t happy:
“It is true that we have received a letter from Gazprom Export in which the company claims force majeure retroactively for past and current shortfalls in gas deliveries. We consider this as unjustified and have formally rejected the force majeure claim,” Lucas Wintgens, spokesperson for Uniper, told CNBC’s Annette Weisbach.
So much for Europe trying to end dependency on Russian gas. This is a costly process and won’t happen overnight. With rising costs, Russia still provides the cheapest energy for Europe. Europe can get gas from the US and Azerbaijan but the transportation costs means the gas is pricier. Definitely the case for LNG from the US which also needs to be ferried across the Atlantic.
So keep these events in your mind as we discuss the possible European market set ups. As of now, they seem to be pricing in the European Central Bank rather than geopolitical fear. The geopolitical side of things will definitely get more interesting for Europe as we head into the colder months in Fall. Be prepared to read about energy and food issues in Europe.
Before we begin to look at these charts, I want to say that the US equity indices look similar in terms of chart structure. This means that US equities might also be ready to reverse.
Starting with Germany and we have a breakout confirmed! The German Dax failed to close below this year’s lows printed in March. Instead, we based at 12,400. The Dax continued to range until we broke out above 13,000 and triggered a breakout move. This has been confirmed with European markets closing. Now it is all about the follow through tomorrow and post ECB. We could potentially pullback to retest 13,000 but would want to see buyers step in and keep prices above. As long as we remain above 13,000 the reversal trade remains intact.
France also confirmed a breakout! The French CAC 40 confirmed a close above 6100. After a month of range, the buyers have come out on top. A very strong close which means the reversal has triggered. Typical breakout analysis in play. It is now all about sustaining this momentum. This becomes even more important with the high risk ECB rate decision coming up.
If you want a chart that embodies Europe as a whole, then take a look at the Euro Stoxx 50 index. This index is comprised of 50 stocks from 11 Eurozone countries. We have also confirmed a breakout taking out 3550.
Things are looking positive for European stocks. The technicals are saying to go long as breakouts have triggered. However, be aware of the high risk event that is the ECB meeting on July 21st. What comes out from that meeting has the potential to continue the breakout momentum, or stop it flat in its track. Russia and energy remains a concern with worrying headlines coming in the colder months in Fall. Be wary of this as well as it does not seem like the Europeans will all of a sudden bow down to Russian pressure.