Stocks retreat on China, but IBEX outperforms after Catalan elections

After starting the new week on the front foot, European stock markets have turned lower by mid-morning. At the time of this writing, the UK’s FTSE 100 was off by 1.2% and the German DAX index was down 1.5%. On a micro level, it is the usual suspects that are weighing heavily on the averages. Volkswagen shares, for example, are down another 6% as the emissions scandal rumbles on, while in London it is the commodity stocks that are leading the declines, most notably Glencore which has surely consolidated its position below £1 a share now after plunging nearly 20% this morning alone. Vodafone is another stock deep in the red, down 4%, after talks over a potential merger of European assets with Liberty Global have ended. Precious metal miners are lower with gold giving up the entire gains made during Thursday' session despite the raised equity market volatility and the break of a bearish trend line. In fact, commodities are falling across the board this morning with silver, copper and crude oil all being lower.

The common denominators behind the commodity and stock market sell-off are the on-going concerns over a sharp slowdown in China and the US dollar, which continues to appreciate on the back of market expectations of an imminent interest rate increase and safe haven buying. The latest data out of China shows that industrial companies’ profits dropped 8.8 per cent year-over-year in August. With more and more mining and energy firms scaling back operations as key commodity prices continue to fall back due to the excessive supply and lower demand prospects, we will most likely hear about further declines in profits over the coming months.

Surprisingly, today’s only bright spot (for the lack of a better word) is Spain where the benchmark stock index, the IBEX, is outperforming with a small loss. Here, investors seem to have shrugged off the success of pro-independence parties in the Catalan elections at the weekend. In truth, it was a slightly stronger result for the separatist alliance than had been anticipated but not significantly out of line with the expectations. Significantly, the two parties failed to win an outright majority after securing just under 48% of the vote, a result which promoted the spokesman for Spanish Prime Minister Mariano Rajoy's PP party to say that the separatists had "failed" and that it “should serve to end the independence debate once and for all." But it probably won’t and they will certainly continue trying to break away from Spain. Indeed, today’s seemingly positive reaction could just be because of relief that the separatists did not win an outright majority. But surely the pro-independence camp will increase the pressure now and this increase uncertainty about the future of Catalonia may undermine risk appetite in Spain with the general elections now less than three months away.

So, the volatility for the IBEX could be higher than usual and potentially more than Europe’s other major indices over the coming months. From a purely technical point of view, what happens next will in part depend on price action around the key 9200-9430 support region which has been tested already last week. As can be seen from the weekly chart, this area has formerly served as both support and resistance, and it is where the 200-week moving average comes into play. But with the long-term bullish trend line now eroded, a decisive break below this 9200-9430 region should not surprise us. If this happens, the index may then drop to the 50 or even the 61.8 per cent retracement levels of the entire upswing since the summer of 2012, at 8888 and 8180 respectively.

However if the bulls manage to maul the bears and defend their ground here, we could be in for a nice rally. For this to happen though the index will first and foremost need to break back above short-term resistance at 9660, which could then pave the way for a rally towards the next key level at 10315.