European Stocks 8217 feeble fist pump pre ECB

For Europe’s stock markets, two broad interpretations of position taking may be discernible from technical charts ahead of Thursday’s ECB news.

On the one hand, the index of Eurozone ‘Supersector’ leaders, AKA the Euro Stoxx 50, has been perky of late, even though it’s still down 20% from July’s cycle peak.

Euro Stoxx had recouped more than 12% at the time of writing.

 

The gains reflect the bull case: more of the ECB’s ‘whatever it takes’—another deposit rate cut (definitely) increased bond buying (probably) and other policy tweaks (maybe) will turbocharge the region’s shares.

 

 

Draghi’s double dilemma

On the other hand, charts also reflect the fact that the central bank has disappointed investors at least as often as it has pleased.

Double-edged scenarios compound the ECB’s dilemma.

Typically, even after (finally) acting, it continues to face long-standing questions about the effectiveness of measures to reignite inflation.

For instance, after much pressure, there are signs the ECB has moved closer to abolishing its rule that forbids buying bonds yielding less than the deposit rate.

But the jury is out—to say the least—on whether buying loss-making assets can benefit inflation.

 

Meanwhile, in broad-based terms, the market’s verdict on QE to date is not particularly ambiguous.

 

 

EURO STOXX 50 / EURO STOXX 600 BANKS

Please click image to enlarge

 

 

‘Reception’ system

The perceived inefficiency of the so-called policy ‘transmission mechanism’ was again illustrated on Wednesday, when banks rallied, with STOXX’s bank sector index up as much as 1.5%.

Negative rates and net interest income don’t tend to mix though.

On Thursday, we expect ECB policy to again butt up against reality, though the exact sequence of events can’t be mapped out easily in advance.

What we do know is that from a technical perspective, major European shares breaking a long-term rising trend earlier this year after the start of QE did not bode well.

 

 

DAILY CHART

Please click image to enlarge

 

 

The trend is your (fair weather) friend

Especially given that the euro currently retains 5% of gains from its own rally which also ensued after QE ground zero.

The chances of Euro Stoxx 50 breaking back above and resuming the former trend look distant for the medium term.

Blue-chip shares may currently be consolidating, judging by the index, but that is taking place beneath visible resistance.

Furthermore, with concerns over the strength of current trends in mind, tools which inform us of that strength are not promising.

The sub chart beneath the plot area in our main chart contains Euro Stoxx ADXR readings.

These values plot the changes in the Directional Movement Indicator’s intensity.

It’s worth emphasising that the ADXR does not indicate trend direction.

Technically, according to ADXR creator J. Welles Wilder, values above 25 denote ‘strong’ trends.

However, it’s just as important to note that trends above 50-75 are regarded as ‘very strong’ and that those giving readings below 25 are ‘weak’.

Euro Stoxx’s ADXR currently = 29.

Also, it has been descending from a peak just under 40 in February.

The indicator suggests the current ‘trend’, such as it is, cannot be relied upon for sustained direction.

The stage might still be set for additional gains from ECB cheer.

But in combination with a definitive fall since last summer, and current overhead impediments, ECB’s chances of kick starting a long rally in European equities don’t look great.