Bearish consolidation. Where's your reward to carry this risk?
Generally speaking it is a very bad risk/reward to be long at these levels in European stocks.
Dax has shown some relative strength compared to US markets, but that can be simply due to the fact EURUSD got smacked to quite a low level,which may have resulted in some relative value trades and flows out from USA into Europe. Simply put, in USD terms European stocks seem cheap vs US stocks.
But here is the catch:
- Inflation hit EU as well, EUR yields are just about to blow much higher, as the ECB has no other choice now but to turn hawkish and somehow at least pretend to fight inflation. Even if they stay extremely behind the curve, they must act and raise rates and withraw liquidity.
- Since the real rates will remain negative even if ECB does some tightenning, and inflation will stuck at relatively high levels, it will take further toll on consumer spending, and ultimately will hit European earnings.
- Europe enterred into an energy crisis.
- The ongoing war in Ukraine and sanctions against Russia will cause a recession in Europe. It is very possible Europe will enter stagflation first.
Even if markets do some more effort to trade higher in next few weeks I think both SPX and DAX will ultimately trade much lower from their current levels in 6-12 months time. Probably SPX pricing had got to such an insane level that it will drop a lot more, but DAX won't be able to hold up here either.
Make it simple: it is an initial phase of a bear market. There is nothing bullish here. What's more, technically it looks like a bearish pennant, which if breaks would target 10.000.
Dax has shown some relative strength compared to US markets, but that can be simply due to the fact EURUSD got smacked to quite a low level,which may have resulted in some relative value trades and flows out from USA into Europe. Simply put, in USD terms European stocks seem cheap vs US stocks.
But here is the catch:
- Inflation hit EU as well, EUR yields are just about to blow much higher, as the ECB has no other choice now but to turn hawkish and somehow at least pretend to fight inflation. Even if they stay extremely behind the curve, they must act and raise rates and withraw liquidity.
- Since the real rates will remain negative even if ECB does some tightenning, and inflation will stuck at relatively high levels, it will take further toll on consumer spending, and ultimately will hit European earnings.
- Europe enterred into an energy crisis.
- The ongoing war in Ukraine and sanctions against Russia will cause a recession in Europe. It is very possible Europe will enter stagflation first.
Even if markets do some more effort to trade higher in next few weeks I think both SPX and DAX will ultimately trade much lower from their current levels in 6-12 months time. Probably SPX pricing had got to such an insane level that it will drop a lot more, but DAX won't be able to hold up here either.
Make it simple: it is an initial phase of a bear market. There is nothing bullish here. What's more, technically it looks like a bearish pennant, which if breaks would target 10.000.