European shares set to wilt further on indecision

China stimulus drive leaves markets undecided.

European indices and U.S. futures are seeing inconclusive trading after unexpected twists in Beijing. Officials there cushioned a broadly expected growth target reduction with fresh stimulus, including aggressive tax cuts and a ramp in cash earmarked for local government spending. The moves imply a reversal of state deleveraging. The reaction: a choppy Shanghai/Shenzhen 300 index. And with Chinese stocks leading global markets this year, wavery sentiment travels.

But the less sure-footed mood also reflects broader trade-related developments. These include China accusing a second detained Canadian of spying, whilst denying a link to Huawei, whose CFO remains on bail in Canada. Huawei itself seeks legal action against Washington restrictions. Elsewhere, Washington is ending preferential treatment of India’s exports. Overall, news is rekindling doubts that U.S. trade relations are entering a conciliatory phase.

As such, Europe’s cars and car parts sector—a conduit for tariff fears for over a year—is Tuesday’s biggest faller as giant carmakers continue to anchor continental markets. Investor wariness of the industry is a key reason for the underperformance and low valuation of large European markets relative to U.S. and Asian counterparts. Given this week’s ECB and NFP event risk, it’s a fair call that appetite will remain shaky. Another robust payroll print would encourage buyers off the fence into a resumed accommodative environment. But a softer than forecast outcome would underpin markets’ return to a cautious approach.

Technically, the main story for Germany’s DAX is a failed approach to former solid 11718 support that has, since Q4 2018, become tough resistance. Whilst there are signs of shorter-term support at February failure highs around 11555, The market’s drive to correct an impulsive 11524-11583 gap opened last month could prevail, particularly as the hourly RSI oscillator in the chart below suggests momentum is currently controlled by sellers. Absent a rethink around the 11524-gap open, it might be left to last week’s kickback low of about 11415 to call time on selling. Either way, the main thing the DAX has going for it right now is a rising line from December’s 10300 lows that could be bisected soon. If that goes, obviously, the rising trend would be called into question.

Source: Refinitiv/City Index

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