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Friday’s strong rally was driven by comments from ECB member Benoit Coeure, who detailed that he expected growth to be positive in Q3 and Q4, while the central bank will start buying covered bonds this week. This sort of soothing, upbeat and definitive commentary comes at a time when other central banks, such as the BoE, PBoC, BoJ and Federal Reserve, are also trying to smooth out volatility.
The market is keen to get a clearer sense of the health of the European banking sector. With the results of the Asset Quality Review (AQR) out this coming weekend, we will find out which of the 130 banks will need to source additional capital. This could provide added confidence in the region. However, it also holds potential EUR negatives as well.
Later in the week, we also get manufacturing and service data from Germany, as well as the European composite figure. This could highlight further weakness in manufacturing, with the German data expected to contract.
Naturally, external influences will impact sentiment and traders will be keen to see how the S&P 500 reacts around the 200-day moving average at 1907, while the August pivot low 1904 (I have looked specifically at the in-hours level) will also be in focus. US corporate earnings could play a strong role here, but as things stand corporate America is looking strong with 77% of companies so far having beaten expectations.
Looking at the technicals, the daily chart is testing the March and August double bottom of 2971/73 in the EU Stocks50 cash, while the stochastic indicator is turning back above 20. Given the aggression in the selling up until Wednesday, I think it’s good to take a step back and look at the weekly chart, where things are looking more bearish.
Last week’s candle showed clear indecision, not to mention massive range expansion, leaving the index testing the former uptrend drawn from the 2012 low. The ABC equality target has been reached and this seems to be playing out well, with traders fading moves around the ABC target.
The stochastic oscillator is falling, while the MACD is below the zero level, suggesting rallies will be contained.
I see no obvious trade here, although I would have a bias to be short. I would look to see how the index behaves around the double bottom and former 2012 uptrend, as the target on the double bottom is around the 2650 area.