Eurozone stocks face bumpy road ahead

The troubles for the Eurozone continue, putting the stock market recovery at risk. We had another very poor ZEW survey reading from Germany this morning, as investors fear that additional energy costs for households and businesses will weaken an already struggling economy in the months ahead.

So far, however, stock market bears have resisted the temptation to come out in force and derail the recovery that started in June. This is partly because of: (1) expectations that the ECB’s hiking will end quicker than previously expected; (2) the ongoing weakness in the euro, which is making Eurozone exports attractive to foreigners; (3) a better-than-expected earnings season. (4) downside risks at least partially priced in, and (5) the big correction in oil prices.

Still, it is progressively becoming difficult for investors to justify maintaining an optimistic view on the stock markets given a challenging macro outlook and not just in the Eurozone. A poor Empire Fed Manufacturing Index print and weak Chinese industrial and retail sales data yesterday remind us that it is not just Eurozone that is struggling for growth.

Today’s ZEW survey shows that investors grew even more pessimistic about the Eurozone’s largest economy in August. The German ZEW survey’s Current Conditions index printed -47.6 which was roughly in line with expectation as it deteriorated from the -45.8 reading in July. But the Economic Sentiment index disappointed expectations with a print of -55.3 compared to -53.8 last month. According to ZEW, surveyed investors and analysts expect a further decline in economic growth as high inflation rates and additional costs from energy prices will decrease profit expectations for the private sector.

Energy prices are soaring in Europe. Reduced Russian energy shipments of around only 20% of capacity through the Nord Stream 1 pipeline have increased the risk of rationing in the coming months. However, Germany’s gas storage facilities have reached a fill level of 75%, some two weeks ahead of schedule. The government’s aim is to raise this to 85% by the start of October and 95% by November. So, rationing might be averted after all.

Against this backdrop, I wouldn’t be surprised if the stock market rally derails. But the bears must see a confirmed bearish reversal signal first before even entertaining the idea of shorting the likes of the DAX. Indeed, the current short-term trend is bullish given the higher highs and higher lows. The DAX is climbing inside a rising wedge, as it enters the previous resistance zone around 13900 to around 14100. If not already long, the bulls need to proceed with extra care here.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.