Stocks end July lower on geopolitical risks, uncertainty over US monetary policy

July has been a month many equity investors, particularly those in Europe, would like to forget and as we head towards the last day of it, stocks are still falling. Sentiment has been hit by a number of factors, not least the on-going geopolitical risks stemming from the crises in Ukraine and Gaza. On top of this, Argentina has defaulted for the second time since 2011 after last minute talks with bondholders broke down, while troubles in Banco Espirito Santo intensified as the Portuguese lender reported a larger-than-expected loss of €3.6 billion for first half of this year. Another weaker Eurozone CPI reading this morning has revived talks of deflation in the single currency bloc, although here we at least had some good news as French consumer spending rose more than expected, while in Germany retail sales and the level of unemployment both showed positive readings. Meanwhile some longer term investors are probably also leaving the market at these still-elevated levels as the return to normal US monetary policy draws ever closer. The Federal Reserve has already suggested that QE will mostly likely end with a single $15bn transaction in the October meeting. But with the economy growing more strongly than expected and Charles Plosser becoming the first FOMC member to vote against the Fed’s latest actions, interest rates could rise sooner and potentially sharper than the markets currently expect. If the official jobs report comes out much stronger than expected but causes a negative reaction in the stock markets tomorrow then it will more or less confirm this thesis.

The pressure has been progressively increasing as more and more technical support levels have broken down on the major stock indices. Take the DAX as example. The German index today broke decisively below the 9600 handle and has since taken out several other support levels including the 200-day moving average (9495). At the time of this writing, the index was heading towards 9400, a level which was previously support. But there are few signs to suggest it will bounce back there. Another potential support level, or a bearish target for that matter, is around 9355/60 area. This level ties in with the 61.8% Fibonacci retracement level of the upswing from the March low. If the DAX does not find support around these levels then it could head back all the way to 8950/60 support over the coming days. Meanwhile some of the secondary technical indicators are also painting a bearish picture: the RSI for one is below the key 40 level while the MACD is below the “0” mark. Only a sharp rally later today or tomorrow post the NFP report may be required to change the trend back to bullish. Even then, the bulls would want the index to not only hold above the 200-day average but the 9600 resistance level too. Unless that happens, we could well see some significant losses in early August.