We saw an interesting reversal in US markets yesterday, with Apple making an extra interesting “wash out last bulls” reversal. We expect the volatile US trading range to continue. Don´t be surprised to see violent bounces going into Christmas.
What about Europe?
The Brexit saga continues, Macron is desperate, Sweden has no government and the Italian budget rhetoric continues. There are more possible events to take place in “tired” Europe, one of them a possible escalation of the situation in southern part of the Balkans, where recently NATO/EU seem to have different views to the US with regards to a possible army in Kosovo. We will come back with a piece on the subject later, as the area is strategically important, and risks flaring up and spreading.
What about the markets in Europe?
Eurostoxx 50 touched the huge 3000 level yesterday. Note this is a big level that was last a big support back in 2016. There is no doubt the trend is down, but note this index is trading in the lower part of the big trend channel. It was only a few days ago we traded at 3200, 5% higher.
European credit, iTraxx main, has been one of the main drivers of equities according to us. Credit has simply exploded to the upside, but we are seeing a first “stronger” move lower today. If this space gets a bit “bid”, equities will get support.
The below chart is our “classical” Eurostoxx 50 (orange) versus iTraxx (white inverted) chart. Note how credit has been a relative dog, but the two continue being well correlated. The “euphoria” in European credit post the US mid term elections has gone in total “inversion”. Watch European credit carefully here.
Below is the magnified chart of the Eurostoxx 50 channel since May highs. Last time the index bounced on the lower part of the channel was in late October. The bounce back then was approximately 5%.
Eurostoxx 50 has been bad, but even worse is the DAX performance during this last move lower. Mighty DAX is down 8% in 6 sessions. The trend is awful, but note the index could be making a reversal right at the lower part of the channel that has been in place since this summer.
DAX has been severely hit by the big auto’s exposure. The SXAP index is down 11% in a few days.
Source; charts by Bloomberg
Our logic of the crowd being whipsawed by among other things, constant headline risks, continues. Just when everybody sees a break down, the markets reverse and voila, the bounce takes most by surprise.
The low yesterday occurred right at the time one of the derivatives strategists at one of the bigger investment banks explained on Bloomberg TV;
Puts are cheap on SPX
Looks like those are getting cheaper as of this writing.