Why European markets are more at risk than the US

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European markets

On the flipside, European markets are looking at risk, with the FTSE 100, DAX and CAC three such examples.

FTSE 100

The FTSE 100 has been losing ground of late, dented by a strengthening pound, as markets react to the improving hopes of a Brexit deal. Despite traders expecting FTSE strength in the case that there is a deal, it is worthwhile casting our minds back to the EU referendum itself where the sharp decline in sterling actually drove the FTSE higher, much to the dismay of many. Thus any deal with the EU is likely to prove a drag for the FTSE 100 via a jump in the pound.

The chart below highlights the wedge breakout that has occurred this month, with trendline support failing to hold. This bearish breakdown could have substantial implications for the coming months, yet it makes sense to await a break below the first major swing high of 6841 to signify a possible wider sell-off. Such a move would bring about a potential move into the 6416 and even 6065 Fibonacci support levels.

DAX

German concerns, and eurozone concerns in general, will be more geared towards the rising risks to the single currency bloc given the current Italian fiscal crisis. There is unlikely to be a positive resolution in the very near future, so it makes sense to expect further downside. The downside seen today has taken us into the slanted neckline of a head and shoulders formation, yet further downside could spark a substantial period of weakness.

CAC

Finally, the French stock market is looking similarly at risk, with the breakout through trendline resistance coming into question given the decline towards the critical 4897 support level. We are still some way from it, yet a break below that level would point towards a retracement of the rally from 3891.

Overall, there are significant risks to European markets at the moment, with Brexit and Italian debt on the rise. Further downside is needed to confirm a wider bearish outlook, but with the US yet to show anything like the kind of weakness we have seen in Europe, there is a substantial chance we will see today’s downside further represented in Europe rather than the US markets.

2018-10-11 08:25:00

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