Macro Wrap – False Breakouts in Europe?

by Enis December 10, 2012 7:52 am • Commentary

European stock markets broke out last week to new highs for 2012, quietly tracing out the Santa Clause rally that many have been expecting in the U.S.  But the news from Italy over the weekend that Prime Minister Monti was stepping down, and that the controversial Silvio Berlusconi was returning to the campaign trail has quickly changed the European picture of calm.

Looking at the charts, I see potential false breakouts on the major European indices.  Here is the 1 year chart of the Euro Stoxx 50, the most watched European stock index:



I’ve circled in red where it made new highs for the year last week, only to fall back below the 2600 index level today.

The German DAX has been even stronger over the last 3 years than the broader Euro Stoxx 50, as German strength has been a safe haven among peripheral angst.  Here is the 1 year chart of the DAX:



The index broke above the important 7500 level last week, only to fall back below today.  The DAX has only spent a few weeks above the 7500 level in the past 5 years.

Finally, the 1 year chart of the French CAC:



Failed in the attempted 3600 breakout from last week.

All 3 charts paint a potential picture of disappointment going forward.  The indices tested these levels several times in the past year, to finally break out to new highs…only to fail in rapid fashion.  My personal view is that European stocks have rallied due to cheap valuations that reflected a lot of the bad news that has emanated from Europe in the past couple years, BUT the recent optimism has gotten ahead of itself for a region still mired in depression and battling with societal and political problems of the highest order.  And the charts now look like a sale.

Markets overnight:

  • Asia was mostly green after better than expected Chinese industrial production and retail sales data, with the Shanghai leading the way, up 1%
  • Europe opened red, and is down 1% now, led by Italy down 3.5%.  The financials sector is down more than 2.5% throughout Europe, and Italian 10 year yields are up 35 bps to 4.85 (Spanish 10 year yield up 17 bps to 5.59)
  • SPX futures reflect a down 0.3% open.  The dollar and Treasuries are slightly higher, but commodities are also broadly higher, led by copper and oil +1%