Euro Stoxx 50 awaiting direction from EZ GDP, Ukraine

European stocks have closed sharply lower today with the mainland indices dropping between 1.5 to 2.9 per cent. The UK’s FTSE has performed better, down just a quarter of a per cent, after the Bank of England’s Inflation Report and comments from Governor Mark Carney suggested interest rates will remain low for longer than previously thought. On top of this, UK’s real wages have grown for the first time since September 2009. But all in all it has been a bad day for European equities. Sentiment has been hurt by news that several banks were fined for their failures to prevent manipulation in the FX market and after the NATO commander said Russian troops have entered Ukraine, which has heightened fears over a full-scale war. If the Ukraine situation now comes back to the forefront of investors’ minds then European equities could come under renewed pressure.

Growth fears could return

Meanwhile growth fears could also rekindle this week. The Bank of England Governor Mark Carney was quite vocal about the Eurozone’s struggling economy today which is partly why the BoE revised down the UK GDP estimates slightly for the next two years. On Friday morning, the preliminary third quarter GDP estimates will be published for Germany and France. The economists’ expectations are very low, with the consensus calling for a meagre 0.1 per cent growth a piece. In the second quarter, Germany’s economy had shrunk 0.2%, so there is a real risk that the struggling economic powerhouse would fall into a technical recession. France meanwhile had only avoided negative growth with a flat GDP reading. Thus a downward revision to Q2 GDP and a negative reading for Q3 could also send France into a recession. As a whole, the Eurozone economy is expected to have grown just 0.1% in Q3. Meanwhile ahead of the Eurozone GDP data, we will have some more Chinese macro pointers to digest in the early hours of Thursday. These include industrial production, fixed asset investment and retail sales. Expectations are not high for the Chinese data either, with the census calling for unchanged readings for all these figures.

Depending on the outcome of the abovementioned data, Europe equities could move sharply over the coming days. Most of the indices have now made back more than half of their losses following the last correction, but unlike their US peers they haven’t formed new highs yet. There is thus a possibility that another correction could occur if the indices fail to extend their gains here.  

Technical view

With Friday’s key data now in sight, it may be a good time to look at the Euro Stoxx 50 again. The index broke out of a long-term bullish channel last month, leading to a sharp correction. It has since rallied back quite sharply, managing to climb to a high of 3145 on Thursday following the ECB press conference. However it has struggled to push further higher since. As can be seen on the chart, the index has faced significant resistance from both the 50- and 200-day moving averages, as well as the 61.8% Fibonacci retracement level. It is now only just managing to hold above key support at 3050, which was previously resistance. A potential break below here could pave the way for a move towards the next support levels at 3000/5 followed by 2970/5. Meanwhile the bulls will need to see a daily close above the 50-day average, currently at 3115, before they could perhaps increase their positions. The next potential resistance level is the 78.6% Fibonacci retracement at 3195 followed by the September peak at 3307.

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Source: FOREX.com. Please note this product is not available to US clients.