GER30, Daily and Weekly
Italy’s budget spat with the European Commission, and mounting concerns about the immediate fallout and the impact on capital positions of already stretched Italian banks, continue to put a strain on European markets and add to volatility. The Italian government may have inherited the remaining EUR 15 bln of a special fund previously set up to aid struggling banks, but the conflict threatens to once again undermine confidence in the Eurozone project as a whole, especially as the populist government continues to blame ECB and EU Institutions for its problems.
ECB’s Draghi may be cautiously optimistic that a solution will be found eventually, but for investors the conflict adds to concerns about the stability of the Eurozone as a whole and contagion fears continue to linger especially as the risk of a hard Brexit also remains uncomfortably high. Against that background Italy’s BTP auction on Tuesday will be watched very carefully. Lurking behind the spat between Rome and Brussels are concerns that European populist parties are also fuelling tensions in order to lift their profile and position themselves ahead of the European Parliament elections next year.
At the same time the coalition government in Germany is looking increasingly shaky and Chancellor Merkel’s position far from secured. After the electorate delivered a painful blow to the coalition partners at last week’s Bavarian election there are fears that a similarly disastrous result in Sunday’s poll in the state of Hesse will spell the beginning of the end for the government in Berlin and Merkel’s political career. More potential political uncertainty then at a time when markets are already struggling to find a new equilibrium.
As stock markets continue to struggle after the Asian session, GER30 and UK100 futures are moving higher for the 3rd consecutive day, despite ongoing losses in US futures. The German benchmark (GER30) is up by 0.40% so far today, reaching Tuesday’s highs at 11,411.90. This could provide some Resistance to the Index, and we might see a swing back lower at the 50.0% Fibonacci retracement level set from 2-year low.
The medium term outlook for the pair remains strongly negative as the asset closed on Friday below the 200-week MA, at 11,487.00, which could be another barrier on the recent upside movement. The negative bias is also supported by the confirmation of a head and shoulder formation at the beginning of October, on the break of pattern’s trendline at 11,700.0. Therefore in the medium term, the Index is expected to move lower, towards the 61.8% Fib. level, at 11,577.70
A bullish scenario could be confirmed only once we see a Support at the 50.0% Fib. level, along with a break above the 11,955.70, which is the confluence of FE61.8 since March 25 and the 50-day SMA. Such a break could signal the turn of the outlook from bearish to bullish.
Nevertheless, this week’s round of data, including the first reading of Eurozone GDP growth for Q3, is expected to confirm the picture of still robust but slowing growth momentum. At the same time, it will also highlight signs that underlying inflation is picking up. The ECB’s very dovish stance throughout the crisis is starting to haunt the central bank now as it failed to rein in stimulus early enough and continued to expand the balance sheet through a period when growth was above target, while it is now scaling back support at a time when negative risks are stacking up.
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Andria Pichidi
Market Analyst
HotForex
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