Market analysis: European equities recover but PMIs continue to show weakness
European equities have managed to hold their ground this week, brushing off the bearish sentiment seen last week after French President Macron called for a snap election. The surge in right-wing support in France unearthed concerns about fragmented politics in Europe, which could lead to a rise in Euroskepticism. This sent markets into a frenzy, with bond yields spiking and equities tumbling.
The French CAC 40 took the brunt of it as expected. However, the negative sentiment spilt over to most other major equity indices, including the German DAX 40 and the EURO STOXX 50. Sentiment has stabilised this week allowing the momentum to recover slightly but the pressure remains tilted to the downside.
The latest round of monthly purchasing managers' surveys (PMI) on private sector activity published on Friday morning showed continued contraction in the manufacturing sector in most European countries. Whilst the services sector has performed better, the bulk of the readings came in lower than expected in June. This data puts a damper on the improving sentiment stemming from European data in recent months.
After Thursday’s bullish run, equities have turned bearish again on Friday. The weaker PMI data has likely weighed on sentiment, but we’re also likely seeing some technical correction underway. The DAX 40, for example, has been trailing along its key averages for a while. Before the pullback last week, the 50-day SMA (black line) was acting as a floor but once it was breached the 100-day SMA (red line) became the new key level of support, containing the losses for the past few days. It now seems like the price could be trapped between these two lines for the short term, suggesting the 50-day SMA could become the next level of resistance, currently at 18,345.
DAX 40 daily chart
(Past performance is not a reliable indicator of future results.)
Elsewhere, the CAC 40 has managed to move above the 200-day SMA once again, but the path of least resistance remains slightly challenged. The momentum from the past few days shows a bullish bias in the short term, with higher lows alongside a rising RSI. But there seems to be a lack of commitment in the reversal and the fact that the bullish drive has only managed to recover one day’s worth of pullback in five days shows a weak outlook for the index.
CAC 40 daily chart
(Past performance is not a reliable indicator of future results.)