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IBEX 35 Analysis: Rally Continues Despite Virus Fears, Focus Shifts to Fed

IBEX 35 Analysis: Rally Continues Despite Virus Fears, Focus Shifts to Fed

Brendan Fagan,

IBEX 35, European Central Bank, Federal Reserve - Talking Points

  • IBEX 35 continues to rally despite fears over Delta COVID variant, additional lockdowns
  • European Central Bank to remain accommodative, asset purchases to continue
  • European investors look to Wednesday’s FOMC meeting with caution

The Spanish IBEX 35 benchmark stock index continues to rally following dovish comments from European Central Bank (ECB) President Christine Lagarde. In her remarks last week, Lagarde reassured that interest rates were not going to be raised even if inflation temporarily runs above the bank’s 2% target over the medium term. Lagarde also indicated that the bank would maintain purchases under its asset purchase program (APP). The accommodative stance from the ECB pushed European equity markets higher, with the IBEX 35 index trading back above 8,700. Investors and traders may become more cautious on Wednesday, with Federal Reserve Chair Jerome Powell set to speak following the central bank’s interest rate decision.

The IBEX 35’s rally appears to have been caused by two major catalysts: ECB commentary and technical factors. Investors were likely buoyed by the willingness of the ECB to stimulate the Eurozone economy as worries grow over the potential impacts of a massive wave of new COVID infections. Fears over travel restrictions and potential lockdowns saw the Spanish index decline, tagging its 200-day moving average (MA) before bouncing.

At the time of the test of the 200-day MA, the relative strength index (RSI) for the index had dipped to 25.32, indicating heavily oversold conditions were present. While the index has reclaimed nearly 500 points in just 5 trading sessions, it is far from reaching overbought conditions. The RSI on the daily timeframe sits at 50.73, indicating more upside potential before this rally can be deemed “overcooked.” Should this move higher be sustained, traders may look to the 50-day MA for near-term resistance.

IBEX 35 Daily Chart

IBEX 35 Chart

Chart created by TradingView

The Spanish economy looks set to benefit tremendously from a “reopening” as the fallout from the pandemic begins to disappear in the rearview mirror. In comments made last week, Spanish Prime Minister Pedro Sanchez said the domestic economy is on pace to grow 6% in 2021 and 7% in 2022. Spain, a country heavily reliant on travel and tourism, saw GDP shrink by 10.8% in 2020 as potential visitors remained at home during lockdowns.

As travel restrictions continue to ease and tourists return to the Iberian Peninsula, the Spanish “revival” may continue to gain steam. While many still remain unemployed in Spain, government officials do not believe there are structural issues, with most being resolved as tourism recovers. Increasing vaccination rates and improving labor market metrics highlight ever-improving underlying fundamentals in the Spanish economy. Positive domestic data coupled with ECB dovishness may be the tailwind that pushes the IBEX 35 back above its 50-day MA and towards yearly highs above 9,300. A resurgence in COVID does have the potential to derail bullish momentum. With that in mind, traders ought to remain wary of potential risks.

Key Upcoming Economic Events

IBEX 35 Analysis: Rally Continues Despite Virus Fears, Focus Shifts to Fed

Courtesy of the DailyFX Economic Calendar

--- Written by Brendan Fagan, Intern

To contact Brendan, use the comments section below or @BrendanFaganFX on Twitter

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