european banks continue to face further downside pressure ahead of u k referendum 1816292016

European banks (inclusive of non-Eurozone) have continued its dismal performance in light of the upcoming U.K referendum om 23 June 2016 where the risk of Brexit increases as the “Leave” camp is leading marginally in recent opinion polls.

Given that London is a major finanical centre, a Brexit scneario will cause short-term knee jerk reactions on capital flows which can have a negative impact on the profits of local U.K. banks as well as other European banks operating in London.

In absense of Brexit, the profitability of European banks have already come under fire since 2011 on the onset of the European sovereign debt crisis due to weak internal demand. In additon, Europen Central Bank (ECB)’ quantative easing policies and negative policy interest rates (where it cut its deposite rate to a record low of -0.4% in March 2016) have caused interest rate margins on European banks to narrow, thus putting further downside pressure on profitability.

Since January 2011, European banks as represented by the STOXX Europe 600 Banks Index have underperformed significantly against the broader multi-industry STOXX Europe 600 Index.

Let’s us take a deep dive into the STOXX Europe 600 Banks Index from a technical analysis perspective

STOXX Europe 600 Banks Index versus STOXX Europe 600 Index

STOXX Europe 600 Banks Index

(Click to enlarge charts)

Key elements

• Since hitting a high of 243.13 in October 2009 after the recovery seen from 2008 Great Financial Crisis, the STOXX Europe 600 Banks Index has failed to make any progress and traded in a sideways configuration below a major siwng high of 227.47 printed in July 2015.
• Since the high July 2015 high of 227.47, the Index has tumbled by 42% to print a low of 130.03 in February 2016  and it has started to evolve in a medium-term bearish ascending channel (depicted in pink) with the upper boundary (resistance) now at 146.80 and lower boundary (support) at 97.50 (see daily chart).
• On the shorter-term, current price action has staged a bearish breakout on Monday, 13 June 2016  from  a former “triangle” range configuraiton’s support  in place since 11 Feburary  2016 low now turns pull-back resistance at 140.77.
• Based on the Elliot Wave Principal and fractal analysis, the Index is now likely undergoing a major degree (multi-month) bearish impulsive down wave 5/ of (c) to complete a primary wave B of a potential long-term flat (sideways) range configuation in place since the March 2009 low of 87.17.  The potential end target of the wave 5/ of (c) stands at 97.50 which conflences with mutliple Fibonacc clusters and the lower boundary of the descedning channel (see daily chart).
• The intermediate support before 97.50 rests at 118.20 which is the major swing low areas of Sep/Nov 2011 and May 2012.
• Both the daily and weekly RSI oscillators remain bearish and still has not reached their respective extreme oversold levels. These observations suggest that downside momentum of price aciton remains intact.

Key levels (1 to 3 months)

Intermediate resistance: 140.77

Pivot (key resistance): 146.80

Supports: 118.20 & 97.50

Next resistance:  162.20 (long-term)

Conclusion

The STOXX Europe 600 Banks Index is poised for further potential downside. It may first see an intermediate term rebound first towards the intermediate resistance at 146.80 with a maximum limit set at the 140.77 key pivotal resistance before another downleg materialises to target the supports at 118.20 and 97.50.

It is important to take note of the 97.50 key support level which is considered a major potential inflection level where a significant recovery may occur at that juncture (Elliot Wave Principal and fractal analysis).

On the other hand, a clearance above the 146.80 pivotal resistance is likely to damage the bearish expectations for a push back up to retest the long-term resistance at 162.20 (the major swing high of March 2016 and also the pull-back resistance from the primary swing low of March 2009).

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this email, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs. All queries regarding the contents of this material are to be directed to City Index, a trading name of GAIN Capital Singapore Pte Ltd.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.