Quiet in the European markets (20.08.2018)

European markets are expected to open only slightly higher according to IG, with small rises in the DAX, CAC and FTSE. Low volume in August, as well as uncertainty after last week's tense geopolitical events are likely to depress risk appetite. The markets are likely to wait for the low-level talks on trade between the U.S. and China, set to take place right before U.S. levies on Chinese goods go into effect, before they undertake positions.

Regardless of the outcome from the trade talks, the market is likely to look towards November. In November there is a planned summit between Trump and Xi, mid-term elections in the U.S.; also by the end of October the British government must submit its plan for Brexit to the EU Commission.

EUR/USD trades at 1,412 today. USD/TRY is at 6,15.

This week the focus in Europe will likely remain the same. On Friday Moody's and S&P downgraded Turkish debt on expectations of a recession in 2019 and inflation reaching 22%. More important for traders, however, is that Turkey is in a weeklong holiday starting Friday. This means less volume, more volatility: any news or change in fundamentals is likely to have an outsized effect on the exchange rates USD/TRY and EUR/TRY.

The Italian saga also continues. One of the cabinet undersecretaries of the ruling Liga said that he expects the ECB to keep rates low in view of Italy's plan for a wider budget deficit due to infrastructure spending. The undersecretary Giorgietti misses the key point: the reason Italy pays a high interest rate on its debt is because it carries a massive risk premium in comparison with risk-free German debt. At the time of writing Italy's risk premium stands at 2,86%. A widening budget deficit in defiance of the EU will likely cause the risk premium to increase, more than offsetting any potential easing by the ECB (at this point the ECB's easing capabilities are already stretched).

Technical picture: DAX30

DAX30, daily chart

Track the DAX for a confirmation of the diamond top reversal pattern, which will likely reverse the upwards trend. The DeMarker is currently in oversold territory so we do not advise opening short positions due to the high probability of a correction to the upside. The price is trading below the 50-, 100- and 200-day MA. More importantly, since the 15th of August the 50-day is trading below the 100-day MA. At these levels I believe it is too risky to initiate either a long or a short position. Track the market for a confirmation of the diamond top pattern, which will likely cause the beginning of a long-term downwards trend. The red bars mark major levels of support.

Asian markets opened slightly higher. The Hang Seng was up 1%, the Shanghai was up 0,66%. A hope for a reversal is presented by a potential resolution of the trade conflict between the U.S. and China.

At 12:00 Sofia time we expect data for construction output in the EU, followed by speeches by BoC's Carolyn Wilkins and the Fed's Raphael Bostic.

Image: pixabay.com

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