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EU Stoxx 50 Index at Risk as COVID-19 Second Wave Fuels Volatility

EU Stoxx 50 Index at Risk as COVID-19 Second Wave Fuels Volatility

Daniel Moss, Analyst


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EU Stoxx 50 Index, Covid-19 ‘Second Wave’, Volatility, VDAX – Talking Points:

  • The haven-associated US Dollar and Japanese Yen extended their recent recovery as Covid-19 ‘second wave’ concerns notably soured investor sentiment.
  • EU Stoxx 50 index at risk of further losses after plunging over 4% in light of tightening coronavirus restrictions in several European nations.

Asia-Pacific Recap

Equity markets continued to slide lower during Asia-Pacific trade as Covid-19 ‘second wave’ concerns and the lack of progress in Congressional stimulus negotiations notably soured investors’ sentiment.

The haven-associated US Dollar and Japanese Yen extended their respective climbs against their major counterparts, while the risk-sensitive Australian Dollar plunged back below the 0.72 level after Reserve Bank of Australia Deputy Governor Guy Debelle flagged the potential provision of additional monetary stimulus.

Gold and silver slid lower alongside US 10-year Treasuries yields, as a resurgent Greenback dragged on commodity prices.

Looking ahead, Federal Reserve Chair Jerome Powell’s semi-annual testimony before the Senate Committee on Banking, Housing, and Urban Affairs headlines the economic docket alongside US existing home sales for July.

DailyFX Economic Calendar

Covid-19 Second Wave Sapping Risk Appetite

The forced reimposition of coronavirus restrictions in several European nations is threatening to upend the Euro-area’s nascent economic recovery and may result in the marked discounting of regional risk assets, if the worrying surge in Covid-19 cases continues to go unchecked.

Despite the number of infections significantly increasing over the last 6 weeks in France, Germany, Spain and Italy, regional governments have desperately attempted to avoid tightening restrictions to nurture their respective economies back to health.

However, with the World Health Organization’s regional director for Europe – Hans Kluge – warning that “we have a serious situation unfolding [and] the September case numbers should serve as a wakeup call for all of us”, it seems almost a foregone conclusion that economically devastating restrictions will have to be enforced.

Source - Worldometer

In fact, local authorities in the Spanish capital of Madrid and the southern French city of Nice have moved to limit gatherings and restrict access to parks and public areas to suppress the highly infectious virus.

This noticeable tightening of restrictions appears to have coincided with the VDAX Index’s – the DAX 30 Volatility Index – surge away from the February breakaway gap on September 16 and is indicative of souring market sentiment.

With that in mind, deteriorating health outcomes could continue to stoke volatility and in turn significantly hamper the performance of regional risk assets in the short-term.

VDAX Index Daily Chart

VDAX index daily chart created using TradingView

EU Stoxx 50 Index Daily Chart – Ascending Triangle Break Ominous for Bulls

The European benchmark EU Stoxx 50 index’s 4.24% plunge through key support at the 61.8% Fibonacci (3243) could be indicative of a shift in overall market sentiment, as price sits precariously atop the psychologically pivotal 3100 level.

With price travelling below the 21-, 50- and 200-day moving averages and the RSI drifting towards oversold conditions, an extension of the fall from the post-crisis high (3445) looks in the offing.

That being said, sellers were unable to drive price below the July low (3139), which suggests a near-term recovery back towards the 61.8% Fibonacci (3243) could be on the cards.

Nevertheless, with the MACD indicator crossing below its neutral midpoint into negative territory and above-average volume confirming the recent downside move, a continued push lower looks the more likely scenario.

To that end, a daily close below yesterday’s low (3137) would probably validate the downside break of Ascending Triangle consolidation, and could see price fall back to support at the April high (3020).

EU Stoxx 50 index daily chart created using TradingView

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.