Article / 03 June 2014 at 8:50 GMT

European Stocks: It's oh, so quiet ahead of ECB meeting

Trader /
United States
•  ECB meeting after-effect crucial for dips
•  German 10-Year Bund rises 5.5 percent
•  Periphery stocks hold up well

With the European Central Bank (ECB) interest rate policy meeting – arguably, the most important economic event of the quarter and potentially the year – just two days away, it is understandable that European equities traded quietly on Monday. In fact, it would be surprising to see any major moves in stocks until Thursday's ECB meeting. Therefore, trading both today and on Wednesday is likely to continue in a subdued manner.

Interestingly enough, while both retail and, to some extent, institutional investors are finding it difficult to avoid "gambling" themselves into a stock trade ahead of any given corporate earnings announcement, most seem to understand that putting on sizeable trades (or any trades for that matter) ahead of a major economic event is a low-probability strategy. Somehow, investors have more respect for economic data prints than for single-stock news risk. If investors showed the same restraint for trading ahead of corporate data prints that they seemingly have for economic data news, both their profit and loss statements – as well as their sanity – would thank them.    
In terms of the bigger picture for European stocks, while the sentiment readings are improving at the margin, as I discussed last Friday, overall consensus is still too negative for stocks to complete the cyclical bull market topping pattern over the coming days. As such, when looking at the German Dax 30 (DAX.I), the breakout from May was significant and healthy in that the initial breakout move then led to a re-test of the breakout area before continuing higher. With the 10,000 area now having been reached, the immediate-term direction is likely to be sideways. Once Thursday's ECB meeting is out of the way we shall either get a chance to buy the dip or we won't. Like any rational trader and money manager, I don't know how equities will react in the short term to the ECB. But with the framework for European stocks still constructive for the time-being, I am still inclined to buy the dips and for the Dax, on the upside, we still have a multi-week/month upside target of at least 10,250.

German Dax 30
Source: Saxo Bank

No discussion of European stocks, ahead of a big interest rate policy meeting, would be complete without having a look at the bond market. While this column is primarily dedicated to equities, we do live in an interconnected world not only within asset classes but also across asset classes. Year-to-date, the price of the German Government 10-Year Bund (BUNDcont) has risen about 5.50 percent, meaning that interest rates went down. In recent weeks, as we have neared this week's big event, bond prices also rose and from a technical perspective are now back to the second quarter 2013 highs. Expectations for Thursday's meeting are thus clearly for a more doveish positioning. Anyone can see that it is crucial to keep this framework in the back of our minds as we navigate the equities landscape. In other words, the central bank winds are still at the backs of equity investors.

German Bund 10 Year
Source: Saxo Bank

The European periphery stocks are also continuing to hold up well. Looking at Italy's FTSE MIB Index (SPMIB.I), the up-gap from the end of May still has the index pushing higher and against the diagonal resistance line from early April. Upside towards 22,500 - 23,000 remains the likely trajectory for the coming weeks/months but here too we must first get past the ECB meeting on Thursday.   

Source: Saxo Bank

— Edited by Kevin McIndoe

Serge Berger, an active trader since 1998, is a leading specialist in Trend Following. Read more of his regular commentary on our social trading site here.


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