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EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

Daniel Moss, Analyst

EU Stoxx 50, Coronavirus Vaccine, European Central Bank – Talking Points:

  • It was a mixed day of trade during the APAC session as investors mulled vaccine developments.
  • Scaled-back vaccine production may weight on European equity markets.
  • EU Stoxx 50 at risk of near-term pullback as price challenges key resistance.
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Asia-Pacific Recap

It was a mixed day of trade during the Asia-Pacific session as investors digested vaccine developments and awaited the release of the US non-farm payrolls report.

Australia’s ASX 200 index rose 0.28% after retails sales figures for the month of October rose for the first time in 3 months, while Japan’s Nikkei 225 slipped 0.22% lower.

In FX markets, the risk-sensitive AUD and NZD lost ground against their major counterparts alongside the haven-linked USD and JPY, while the commodity-linked NOK largely outperformed.

Crude oil prices jumped over 1% after OPEC+ decided to slash output by 7.2 million barrels-per-day from the start of the next year.

Looking ahead, US non-farm payrolls for the month of November headline the economic docket alongside Canadian unemployment data.

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

DailyFX Economic Calendar

Vaccine Hiccup May Weigh on European Equities

European equity markets have stormed higher since falling to multi-month lows at the start of November, buoyed by positive vaccine news and the prospect of additional monetary support from the European Central Bank.

However, news that Pfizer has scaled back its coronavirus vaccine production targets for this year may weigh on regional asset prices in the near term. The firm had originally estimated that it could manufacture up to 100 million shots in 2021 but supply-chain difficulties have cut that in half.

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

Source – Financial Times

That being said, Pfizer spokeswoman Amy Rose stated that with doses “being made at a rapid pace, we are confident in our ability to supply 1.3 billion doses by the end of 2021”. Nevertheless, the reduction in supply may concern market participants and calls into question the estimates of other prominent vaccine producers.

After all, it is going to take an unprecedented manufacturing response to supply enough doses to end the pandemic and further delays would only prolong the global economic recovery. This reality could ease global growth bets in the coming days and lead to a discounting of the benchmark EU Stoxx 50.

ECB Monetary Policy Easing to Limit Downside

However, expectations of further monetary easing may limit the potential downside for regional risk assets.

The minutes of the ECB’s November policy meeting stated that “members widely agreed that, given the sharper slowdown in growth momentum and the weakening of underlying inflation dynamics compared with what had previously been expected, it would be warranted to recalibrate the monetary policy instruments in December”.

The central bank is expected to expand its 1.35 trillion Pandemic Emergency Purchase Program (PEPP) and offer new long-term loans to banks through Targeted Longer-Term Refinancing Operations (TLTROs), with President Christine Lagarde stating that these “remain the main tools for adjusting our monetary policy”.

Euro-Area Inflation Rate

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

Yet, the International Monetary Fund has urged the ECB to consider options outside of expanding asset purchases given the notable stagnation in consumer price growth in the European Union. The trading bloc has recorded four straight months of deflation, with headline inflation flatlining at a record low of -0.3%.

These calls may go unanswered by the central bank in the near term at least, with Executive Board member Isabel Schnabel stating that “I think it’s appropriate to focus on preserving these conditions rather than easing much further”. Schnabel added that “what’s clear is that since the beginning of the pandemic, PEPP and TLTROs have proven highly effective and are therefore likely to be the main instruments for our recalibration”.

This suggests that the likelihood of a cut to the deposit rate at the upcoming meeting is relatively unlikely. Nevertheless, the prospect of further easing may underpin European equity prices ahead of the ECB’s monetary policy meeting on December 10.

EU Stoxx 50 Index Futures Daily Chart – RSI Divergence Hints at Exhaustion

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

EU Stoxx 50 futures daily chart created using Tradingview

From a technical perspective, a series of Doji and Hammer candles just shy of key resistance suggests the EU Stoxx 50’s 23% surge from the October low (2887) may be running out of steam.

Bearish RSI divergence, in tandem with a notable drop in trading volume, hints at fading bullish momentum and could encourage would-be sellers if psychological support at 3500 gives way.

Breaking back below confluent support at the 21-day moving average and March high (3467) could generate a pullback towards the June high (3394), with a daily close below bringing the 61.8% Fibonacci (3243) into play.

Alternatively, a daily close above the November high (3536) would probably neutralize near-term selling pressure and bring the January low (3607) into focus.

EU Stoxx 50 Index Futures 4-Hour Chart – Rising Wedge in Play

EU Stoxx 50 Index at Risk on Vaccine Hiccup, ECB Tempering Expectations

EU Stoxx 50 futures 4-hour chart created using Tradingview

Zooming into a four-hour chart bolsters the bearish outlook depicted on the daily timeframe, as prices carve out a bearish Rising Wedge pattern.

With the RSI dipping back below 50 and the MACD falling to its lowest intraday levels since early November, the path of least resistance seems skewed to the downside.

Breaching wedge support and the trend-defining 50-MA (3493) could inspire an extended downside push and clear a path to probe support at the June high (3394).

Clearing that likely opening the door for price to challenge the 61.8% Fibonacci (3243).

Conversely, pushing above 3550 would probably invalidate the bearish reversal pattern and bring the January low (3607) into the crosshairs.

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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