Europe’s equity markets have seen a steep decline over the last week. Stoxx 600 The market fell for six straight sessions prior to Tuesday’s stop. Due to the hawkish comments of central banks, dip buyers are few and far between. This lack of enthusiasm is affecting the market. Trading volume is already falling, which may exacerbate the downward trend. And technical indicators indicate that further declines could occur.
Important Points
1. Europe’s stocks have seen a steep decline in a week. The Stoxx 600 fell for six sessions straight. But dip buyers are scarce, showing a lack confidence among investors to purchase the market’s current levels.
2. The lack of momentum and summer’s lull have contributed to the decline in European stocks. Technical indicators indicate that the Stoxx 600 could face further declines. The 200-day moving is the next major level of support.
3. The weakness in the largest European companies such as LVMH Novo Nordisk Nestle and others is alarming and could affect the overall market either way. Momentum indicators also show signs of weakness and add to the bearish sentiment among European stocks.
In the last week, Europe’s stocks have seen a steep decline that has erased a third of annual gains. But buyers who want to profit from the drop are hard to find. The Stoxx 600 dropped for six sessions in a row before breaking its losing streak on the Tuesday. Although this is not a correction, the fact that fewer investors have been willing to take the plunge compared to the previous pullbacks does indicate a lack of interest. Andreas Lipkow of Comdirect Bank says that investors are struggling to resist taking profits and there is not enough interest to buy due to the lack of positive energy and summer lulls in international financial market.
The decline in trading volume before the seasonal summer slowdown could exacerbate the downward moves. Technically, the breadth is declining, but it hasn’t yet reached levels that suggest a rebound. The Stoxx 600’s 200-day support level is approximately 2% lower than its current trading level. Individual stocks could still see a decrease in the percentage of stocks that are below their 10-day average before buyers start to step in.
The European rally has been mainly driven by 15 large companies that account for 39%. The median stock, however, has only gained 4.6%, as opposed to the broad gauge’s 6.6%. Some large-caps are now showing signs of weakness, which is bad news for the Stoxx600.
Carl Dooley, head of EMEA trading at TD Cowen, notes that while the broader European index is not at a technically relevant level, the biggest three stocks in the region—LVMH, Novo Nordisk, and Nestle—are all hovering around their 100-day moving averages. This group’s movement will determine the direction of other markets.
Moving Average Convergence Divergence, or MACD (moving average convergence divergence), measures momentum. Momentum is waning in Europe and most major indexes have turned negative. This is a major change from the all-green readings of last month. Credit spreads are still high and indicate more economic trouble to come. Macro concerns are beginning to show up, but have not yet been reflected in the stock market.
According to BofA’s derivative strategists the equity volatility is not likely to stay at extreme lows due to a still hawkish European Central Bank and to fundamental risks in the economy after a period where tightening has been taking place. Goldman Sachs strategist Peter Oppenheimer predicts that most equity market will remain within the range of a “fat and flat” Range over the next twelve months is due to the poor growth in earnings at the index-level and high valuations.
