Reuters Insider - Market Pulse: Bag European stocks, shun U.S. – Credit Suisse

IBEX Technologies

14/04/2014 18:46

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 Source:             Thomson Reuters                                   
                                                                       
 Description:        European stock indices are likely to outperform   
                     those of the U.S. during the course of 2014,      
                     according to technical analysis says David Sneddon 
                     of Credit Suisse.                                 
 
 
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Transcript (May be auto-generated)

 Already bruised stock markets take another hit as fears rise of a military 
conflict in Ukraine. That heightened risk aversion feeding into benchmark 
sovereigns, but what do the technicals suggest what'll happen next? Joining me 
in the studio, David Sneddon, Technical Analyst at Credit Suisse. Very good to 
see you again, David. I know we've got a few to go through. Let's start with the
S&P 500. You think we've reached the peak. Where are we going now though? Is it 
really signs of a significant correction in this one? I think this is clearly 
what we're trying to sort of determine at the moment in terms of the market. I 
mean for us, we're looking at the S&P 500, 1,900 was our medium-term bull target
and so we've certainly turned down from a major target resistance. And I think 
the other concern, if you are looking for signs of a more- longer term top is if
you look at the average time of all the bull markets of the last 60, 70 years, 
you're doing it in that type of – now this is the five-year bull market, 
you're in with that average as well. We're seeing exhaustion signals into that 
peak, we're seeing various momentum of volume downturn. So there's clearly that 
backdrop that we might be in a much more sort of important turn. At the moment, 
we've put in the near-term top but we haven't broken any what I would say levels
that indicated a medium term downturn as yet. But I think the risk of that, if 
we were pricing it sort of two months ago compared to now, it clearly increased 
quite sharply. So what levels are you looking at now? From- where do we go from 
here? For us, as we can see in this weekly chart, we fared at the top end of 
this long-term trend channel. We've taken out what has been, never mind some 
moving average support, the lows that we've had for the last two months. And you
can see there, the recent price action of these weekly bars. We've basically 
held 1,834 six, seven, eight weeks in a row. Last week, we took that out, we 
took that moving average out. So that came through on higher volume as well and 
indeed, that new move to a new high was not confirmed by volume. So our view is 
that we go down to 1,800 initially which we're not a million miles away from, 
and then down to the lower end of the trend which essentially, we can look at a 
combination of trend lines and moving averages and we have that starting around 
1,785 and moving down to 1,770. So our view is that we hit 1,800 first of all, 
bounce from there and then go down to 1,785. Alright. 

We've pulled in the Nikkei- there you go, the Nikkei's up there, and let's talk 
about the Topix as well. You believe they've both completed tops as well, don't 
you? I do believe they both completed tops. It's been very interesting in the 
Nikkei if we sort of concentrate on this chart here. But if you actually overlay
a sort of- on the very long where again we got the channel on there, we've 
actually failed at the top end of that channel. If you go back even further, all
the way back to the beginning of the bear market back in the late 1980s, that 
rally that we saw last year pretty much went exactly at the top end of its 
secular bear trend and failed exactly. We've now taken up 14,000 in the Nikkei, 
we've taken out 1,138 from the Topix which is essentially the lows that we've 
put in place earlier on this year. So our view, there is a top in the Nikkei, 
there is a top in the Topix, that should take the market lower. 

I think what's interesting is we haven't seen Dollar/Yen move lower yet. And 
given that this correlation has been very close together, that I think is 
probably the wrinkle in the near term. Either it's a decoupling between the 
equity markets and the currency or is the equity we've lowered false. I don't 
think either those are true. I think Dollar/Yen's going to play catch up but I 
think that will be the thing to watch out for in the next day or two whether 
that does indeed come through. Okay. On to Europe, it's a slightly different 
story in Europe, right? It is. I mean our theme we've been sort of talking to 
clients about it and our published notes for this year has been S&P for 1,900 
but then look to significantly underweight the US but actually stay overweight 
Europe and more so the periphery. And actually, the other call which I'm not 
talking about here is some of the emerging markets actually look this huge 
underperformance we've seen there, looks like we're going to see some more 
outperformance by EM. So it looks at the moment, it's a sort of very much US 
underperformance theme. So even though we think Europe will downturn here, I 
don't think it can stay immune if we're going to see Japan and the US correct 
lower. But I think Europe as a whole will probably outperform. But more 
importantly, the periphery, which has been the star since last summer, will 
actually I think remain that case. So your call is stay long, especially the 
periphery? Especially the periphery. I think the DAX will probably be pretty 
much in line with the S&P whereas I think if we correct for another 5% in the 
S&P down from here, I think the MIB, the IBEX will correct lower as well. But 
our view is that's still a buying opportunity for the MIB, a buying opportunity 
for the IBEX and we've still got further significant gains to come on the 
topside. I think we will just continue this outperformance that we've seen at 
the periphery. I don't think we're done on that yet. Okay. And then I want to 
look at the yields as well especially the US 10-year yield and we could talk 
about what that means as well in Europe and the periphery as well. As you and I 
discussed before this show, selling the bond market has been the pain trade. 
Yes. Where's the yield going? Where's the 10-year yield going? I think- and 
you've summed it pretty neatly. I think it's the pain trade and we know what 
pain trades do, they continue until the pain is all exhausted. It has been a 
consensus trade I think through this year. And if you look at the positioning 
data, if you look at various different measures, people have been continuing 
selling the bond market, playing for the better US growth numbers and yields 
will be higher. And clearly, that's not worked and I think the problem at the 
moment is we're now seeing the equity downturn come through just as yields in 
Europe, UK and the US are on major levels. Last week saw 10-year UK yields move 
the low end of the range. Right. The last two, three runs. German yields are 
trying to push through today. The US yield is still clinging on by the skin of 
its teeth at the moment. And I think probably, you need to see 10Y US below 2.60
suggest that the sideways range that we've been in for the last two months is 
over. But I think the pressure is there and the more the equity market weakens, 
the more that will continue. Sure. But when – and final question, when that 
10-year yield starts to rise, do we assume that the periphery will go up with 
it? I don't think we do. I think the periphery has stayed very much independent 
of actually the core yield move. I don't think the periphery has been tied to 
credit spreads and so the tightening of the credit spreads has been very much - 
if you look at 10Y US/Germany or 10Y US/Spain, Germany, that's a very similar 
chart to looking at so credit spread tightening in either in Europe or in the 
US. So I think what periphery tightening or widening will come through on credit
spread widening. And I think actually for all the markets now, this is the 
critical thing to watch, is the credit spreads. Because even though we've seen 
equities weaken, we've seen tech stocks get hammered, we haven't seen a 
significant widening of credit spreads come through yet and they are still 
holding their support levels. If they were to break over the next week or two, 
then I think that would be the first real clue that this could be a more 
significant turn for the market. As long as they hold in, I think we can take 
the view this as a correction in the equity market in the bigger scheme of 
things. We haven't had a major correction for quite a while. I think how credit 
plays out here will be critical. 

Very good. David, many thanks for that. David Sneddon of Credit Suisse. Let's 
quickly catch up with some of latest corporate news making headlines. Shares in 
miner Glencore Xstrata outperforming European stocks after it sells its stake in
a copper mine in Peru to a Chinese consortium for just under EUR6 billion. It's 
one of China's biggest investments in a foreign mine. And Peugeot Citroen sets a
new profits goal for its ailing car-making business. New Chief Executive Tavares
says he's aiming for a 2% operating margin and deliver EUR2 billion of cash flow
over the next three years. That's it for Market Pulse. Join us at noon each 
weekday for this show. I'm Axel Threlfall, this is Reuters