Fears of a double-dip and the stress tests knock European stock indices
WHAT a difference a year can make. This time last year we were all worrying about the resilience of the American banks should the economic outlook worsen further while cheering France and Germany’s ability to bounce out of recession in the second quarter.
Twelve months down the line, the financial markets are worrying about the possibility of a double-dip recession and nervously awaiting the results of the European banking stress tests, which will be made public at the end of this month. Meanwhile, fears of a sovereign debt default still stalk the market. Market jitters and uncertainty about the European banking sector’s exposure to sovereign debt and non-performing loans in the Club Med countries have sent stock markets across the region plummeting since mid-April.
The worst performer, unsurprisingly, is the Greek ASE index, which is down 24.5 per cent since 15 April. The Spanish Ibex 35 and the Borsa Italiana are down 19.72 per cent and 19.52 per cent respectively over the same timeframe. Only the German Dax 30 has survived relatively unscathed – it has shed just 2.79 per cent.
At such depressed levels, European stock markets are looking like tempting bets for contracts for difference (CFDs) traders. But is now really the time to be jumping into what is ostensibly still a risky and uncertain trade?
Picking the bottom of a market is a tough call and one which most traders, however experienced, will probably get wrong, says City Index’s Joshua Raymond. He adds it is also dangerous to assume that just because a market has suffered double-digit percentage falls, it is oversold and due a rebound. CFD traders should place stop-losses close to protect themselves from another bout of volatility.
So what of the stress tests and what impact might they have on the market? There are certainly still a lot of unknowns surrounding the European banking system and the precise details of the tests are yet to be clarified. For example, there are rumours circulating that banks’ sovereign debt exposure will not be fully scrutinised by the stress tests. If this were indeed the case, then this would add to the confusion and undermine the results of the tests, potentially dragging indices even lower.
Manoj Ladwa, senior trader at ETX Capital, reckons that the Spanish Ibex 35 and the French CAC 40 will continue to underperform due to both indices’ high exposure to the financial sector. In contrast, he expects the German Dax 30 to outperform its peers but cautions that the index could still give up some ground.
To ensure you don’t end up on the wrong side of a trade, it is worth investigating the key support levels that are underpinning European indices at the moment. For example, the Dax 30 has been bouncing around the 5,800 level for the past two weeks. City Index’s Raymond says that 5,600 and 5,500 are the next two near-term support levels for the Dax, with 5,435 the strongest support. The index is also trading below its 10 and 20-day moving average, which would suggest the market is trending lower in the short-term.
Both the Spanish Ibex 35 and the Italian MIB are still very much in a downward trend. For the Ibex, a lot of people will be looking at the 8,600 level. A close below here could see some new shorts enter the market, says Raymond. For the MIB, a close below 18,000 would be further confirmation of the sell trend.
Calling the next move in the European stock indices will be a tough one but worthwhile for medium-term CFD traders.
IN FOCUS | EUROPEAN BANK STRESS TESTS
The exact criteria for Europe’s bank stress tests will only be known once the results are published on 23 July. According to the European Commission, the outlines for the stress tests will be agreed by the European Central Bank, to then be undertaken on a bank-by-bank basis across Europe. Finance ministers will meet in Brussels on 13 July to finalise the terms of the tests. The results are expected to include details of the banks’ sovereign debt holdings, their strategy for dealing with any future financial crises, their resilience to a sudden shock situation and a hypothetical situation of just a 3 per cent “haircut” on sovereign debt. However, if Greece is anything to go by, this 3 per cent level wouldn’t even skim the surface of possible figures.
The authorities have boosted the number of banks to be included in the tests. Originally, only 25 of Europe’s leading banks were to be tested. This number has reportedly been raised to over 100.
Verity Pugh