Further Restrictions but Traders Remain Hopeful


Key Talking Points:

  • US equities push higher, setting a positive tone to start the week
  • German economy continues to struggle under tighter restrictions
  • IBEX 35 leads the way in Europe as banking sector surges

Friday Close Recap

US equities rallied on Friday as markets put greater weighting on the hopes of a coronavirus vaccine by years end, despite new cases and deaths rising significantly across the country. European equities were more cautious, with Germany’s DAX gaining a marginal 0.18% after an overoptimistic start to the week. But risk sentiment seems to have gathered momentum again as Europe kicks off the first trading session of the week with gains across the board, led on mostly by a positive session in Asia after a free trade agreement was reached over the weekend by fifteen major Asia-Pacific economies.

Germany sees tighter restrictions

Fundamentally, European economies continue to show a lot of weakness, but given markets are forward-looking we expect continued encouraging vaccine headlines to keep buying momentum high. Germany, which has been one of the hardest hit countries in the second wave, is now considering tougher restrictions across some states, which would further limit social gatherings. This is in addition to the current month-long lockdown enforced at the beginning of November, which limits restaurants to take-away service only and forces bars, cinemas and gyms to close.

This means Germany is likely to face another quarter of contraction in Q4, after a summer push allowed the German economy to grow 8.2% versus the previous quarter in Q3. But, as mentioned previously, markets are forward looking, and this renewed weakness in economic growth is likely to be already discounted as we saw the DAX 30 head lower at the end of October. As for now, the German Index has to break above key resistance at 13362 in order to try and recapture the pre-corona highs around 13790, with special focus to the highest point since March found at 13460.

DAX 30 Daily chart (06 February16 November 2020)

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IBEX 35 leads the gains in Europe

Elsewhere in Europe, the IBEX 35 is the best performer this morning among the main European indices, pushed higher mostly by the banking sector. BBVA (17.83%) is leading the gains this morning as news broke out that the bank has sold its US business for 11.6 billion dollars, which followed through with a positive start for the rest of the industry, followed closely by Sabadell (13.97%) as Citi has raised its price target to 0.35€ from 0.30€. Other top winners this morning include Bankinter (4.95%), Santander (5.46%) and IAG (5.08%).

The airline conglomerate has been one of the biggest movers this past week as vaccine hopes led to a frenzy in cyclical stocks which were most hit by the pandemic outbreak, surging more than 60% in the last month as a return to normality could be happening quicker than initially expected. But the Spanish Index has been one of the worst performing in the aftermath of the coronavirus-led meltdowns seen back in March, with the highest point of the recovery not being able to penetrate the gap seen in most indices at the beginning of March, which also gives it greater upside potential as it tries to catch up.

The 8000 mark has been a solid resistance throughout the summer recovery but despite the IBEX having its best week in 22 years last week, it has still been unable to push above this key level. This means any further attempt to push higher is going to face an increase of selling pressure in this area, with the next objective being the closure of the coronavirus gap, attempting to push above 8270.

IBEX 35 Daily chart (07 February16 November 2020)

DAX 30, IBEX 35 Forecast: Further Restrictions but Traders Remain Hopeful

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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