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European markets are looking increasingly at risk, with today’s global market sell-off starting in the US, yet potentially impacting the FTSE 100, DAX and CAC more in the medium term.
European markets are looking increasingly susceptible to a significant decline, with the US-led losses of late providing yet another leg down for Europe. With rising bond yields at the centre of market attention, it is worthwhile noting that Italian yields are rising due to a lack of confidence in the economy, while the US is seeing yields rise owing to strengthening economic numbers. Another difference is that while the US is moving away from record highs, Europe has already been on the decline for months.
The Nasdaq and S&P 500 below are into their first month of declines coming off the back of record highs. Both have hit trendline support, and there is a strong chance that the trend will continue to hold.
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.
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.
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.
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