European Stock-Market Rally Has Room to Run

(Bloomberg) --

Trade and Brexit, the two main overhangs for European equities, saw positive developments last week, helping the market revive its stalled rally and break above a recent ceiling. And more good news this morning: data showed China’s industrial output and private consumption were both much stronger than expected. It looks like European stocks’ best rally in a decade is not done yet.

The Stoxx 600 tested its all-time closing high during Friday’s session and also flirted with the intraday high. Looking at Euro Stoxx 50 futures this morning, chances are the Stoxx 600 might hit a record high today.

Most major equity indexes are now above their November highs, levels that have been strong resistance lines in recent weeks. However, the momentum faded a little bit on Friday afternoon, making the picture less bullish. Charts show the Euro Stoxx 50 left a “bearish Shooting Star” as it failed to hold onto the initial rally, suggesting a possible re-test of the uptrend, LCM technical analyst Andy Dodd wrote in a note to clients Friday after the close.

The next levels to watch are the historical highs. It would be a major development if the Stoxx 600 pierces above its long-term ceiling. Other benchmarks like Germany’s DAX and the France’s CAC have further to go before hitting new record highs.

While momentum indicators like the RSI aren’t yet overbought, the technical gap opened on Friday is a warning that the move could face a set-back if bulls fail to push markets higher.

“While Friday’s price action was impressive, markets do not have much more space to the upside anymore and many positive aspects are priced in,” says Comdirect Bank strategist Andreas Lipkow. “The economic optimism must now be underpinned by facts.”

Esty Dwek, head of global markets strategy for Natixis Investment Managers says the initial positive reaction on the stock markets from the U.K. elections “should not be overstated,” as the conclusion of a trade agreement between the U.K. and the EU remains of central importance for further developments. “Negotiations are not going to be easy and a quick result is not to be expected,” she said.

With December PMI numbers on today’s agenda, investors will get their first reality-check on the economy, while Germany’s Ifo Index will be the next checkpoint on Wednesday. Citigroup analysts expect the synchronized slowdown from 2019 to reverse somewhat next year. But while they emphasize that their view doesn’t contain a U.S. recession, multiple models show that the risk of the latter hasn’t yet fully disappeared.

Bottom line: The margin for error is probably small and should macro data fail to recover, the stretched equity rally might have a difficult time to extend the bull run in the coming year. The week may also end up being volatile, with a big option expiry this Friday, that could see traders and investors hedge their risk.

To contact the reporters on this story: Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

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