Stocks: Growth concerns send equities skidding again

After a relatively quieter start this morning, European stocks started to roll over again around mid-morning and were near their session lows as went to press. It has been an ugly week for equities and an even a worse one for commodities. Concerns over an imminent rate increase from the Federal Reserve is unnerving investors, while continued soft patch in Chinese data suggests growth in the world’s second largest economy is slowing down more sharply than had been anticipated. In the US, the earnings season is drawing to a close and the results have not been great. There is little further catalyst to support the markets except the on-going expectations that the world’s major central banks will remain extremely accommodative for an extended period of time.

In fact, the ECB is likely to expand its bond purchases programme and cut rates into the negative in December. And judging by the latest growth figures that were released this morning, we would certainly not be surprised if it did. But this should ultimately be good news for stocks, although for now the market’s focus is elsewhere.

The Eurozone Flash third quarter GDP estimate came in at +0.3% versus +0.4% expected and down from +0.4% in Q2. On year-over-year terms, GDP was +1.6%, up from +1.5% previously but below +1.7% expected. Earlier, the German GDP figure came in at +0.3%, which was in line with the expectations, but Italy's GDP (+0.2%) missed the mark. But perhaps the biggest surprise was Portugal’s GDP, which stagnated in the third quarter, missing forecasts of 0.4% growth. Meanwhile the Eurozone trade surplus was €20.1 billion in September, up from €19.8bn in August and higher than expected. In the UK, construction output fell 0.2% in September versus a rise of 1.5% expected and compared to a revised fall of 3.4% in August.

Today’s key data from the US is the retail sales for the month of October and the latest consumer sentiment survey from the University of Michigan. Next week’s key data for the stock markets participants to keep an eye on will include Monday’s preliminary third quarter GDP estimate from Japan, the latest German ZEW survey and US Consumer Price Index, both on Tuesday, minutes from the FOMC’s last meeting on Wednesday and then the Bank of Japan’s monetary policy statement on Thursday.

Technical outlook: Euro Stoxx 50

On the technical front, the Euro Stoxx 50 index is technically still in consolidation as it remains within converging trend lines. After the last stock market rout at the end of August, the index managed to hold its own above the long-term bullish trend line and found strong support around the 3000 level. Long-term investors may look to again use this latest pullback as an opportunity to increase their holdings, so we need to be wary of becoming convinced that another sharp correction is underway. It may well be, but at this stage, the long-term support levels are still in place so one needs to proceed with some caution. In the near-term, some of the key supports to watch include 3325 and 3285, levels that were formerly support and resistance. Below these levels, the 50-day SMA comes in around 3265/70, followed by the 61.8% Fibonacci retracement at 3155.

On the upside, the short-term resistance level to watch is at 3390, a level which was previously support. The 200-day average comes in around 3480/5, followed by additional resistance, a 61.8% Fibonacci level and a bearish trend line all around 3500.