EQUITIES staged a strong rally towards the end of last week. The move took a number of stock indices back up through significant resistance levels. The FTSE 100 broke above its 100-day moving average, around the 5,500 mark, while the major US indices behaved with even greater bullish conviction. A few pieces of better-than-expected economic data have convinced some investors that fears of another recessionary slump have been overplayed. After a summer of downgrades to growth estimates, sentiment appears to be turning more positive. On top of this, the third quarter US earnings season is being viewed as supportive for equities. Despite some high profile disappointments from the likes of Apple, IBM and Wells Fargo, the majority of companies continue to beat on both earnings and revenues. The season moves up a gear this week with just under 40 per cent of S&P 500 companies due to report.
But for now all eyes are on Europe as policymakers squabble ahead of the delayed and extended summit this Wednesday. There are three key issues which have to be addressed: an increase to the 21 per cent haircut on Greek debt under the Private Sector Involvement programme, agreement over the amount required for bank recapitalisation and leveraging the EFSF/ESM. There is plenty of scope for markets to be disappointed by the outcome. There is also the danger that EU leaders bottle it again and lob the problem back to the G20 to deal with in its November meeting. But ultimately the only thing that will truly stop the rot is a commitment towards a Eurozone fiscal union.
The German Dax is the benchmark stock index at Europe’s core. Unlike the FTSE and the major US indices, the Dax is trading a long way short of its 100-day moving average at 6,290. After forming a double bottom at 4,963 one month ago, the German index has had a decent 20 per cent rally. But it now has to clear 6,070, which marks the 38.2 per cent Fibonacci retracement of the rally from early 2009 to the high of 7,600 reached earlier this year. The area around 6,070 is acting as resistance just as it did back in August. With the European debt crisis remaining the focus of attention, it’s the performance of the Dax which holds the key for equity traders.