Good Tuesday everyone! On today’s canvas is the daily chart of the Euro Stoxx 50. For those who do not know, the Euro Stoxx 50 is a stock index of the 50 biggest blue-chip companies in the euro zone. Like the Dow of the US, the Stoxx 50 can also be used as a leading barometer of the euro zone’s economic health. Unlike the DAX (kindly see my colleague’s earlier post here), the Stoxx 50 is a couple of steps away from breaking down already. Its price action is actually very similar to FTSE, which my partner also posted earlier today (kindly check it here), since it is also showing a head and shoulders formation. But as mentioned, the Stoxx has not breached its neckline yet unlike the FTSE. If and when it breaks below the 2,200 level and the neckline, it could plunged all the way down 1,850. In fact, a couple of indicators suggest that it could indeed do so. First, the RSI has fallen below 50, suggesting that the index’s downward momentum is increasing. Second, the 50-day moving average has also crossed over below the 200-day MA, indicating a likely move downwards. Moreover, the MACD has also recently turned negative. On the upside, if buying interest returns and the neckline holds, the index could once again aim at least for the peak of its right shoulder. With the index now trading below the 50 and 200 MAs, however, it would need a lot of buying support to push itself upwards again.
With all the debt concerns that has been happening around the euro zone, particularly in Greece, it is understandable why a lot of investors have been losing faith in investing in euro stocks and even bonds. Just recently, Spain was also placed under the watch list by the international ratings agency, Moody’s. Several countries including Greece, Portugal, and Spain have their sovereign debt already downgraded. If this contagion spreads among the other member countries, investors will all the more pull out their money from the Europe. And it is not as if the euro zone has been growing on a big scale as well. the euro zone only grew by a meager 0.2% during the first quarter of this year. With a drop in the retail sales in the months following and a continued lose of investor confidence, its growth for the second quarter will likewise be weak as well.
So how will a drop in equity demand affect the euro? Remember that most of the investments in the euro zone, the equities and bonds, are priced in euros. One has to exchange their money into euros first before being able to invest in these instruments. A slide in equities due to a lack of demand, therefore, will also cause a dip in the demand for the currency. In short, if and when the euro stoxx index sinks, the valuation of the euro currency would likely decline as well.