European stocks and US index futures have recovered nicely this morning following a big drop on Wall Street the day before, where technology shares were hammered on valuation concerns. There has been no obvious trigger behind the rebound and it remains to be seen whether the recovery will hold once the US session gets underway.
Despite the setback for AstraZeneca, which paused trials of its experimental coronavirus vaccine after an unexplained illness in a participant, and reviving Covid-19 infections in Europe, investors seem happy to buy the dips still. They remain hopeful that an effective vaccine will soon become available and convinced that, in any case, central banks and governments will be ready to provide more stimulus if needed.
All eyes on ECB
Indeed, it could be that European investors are pricing in the prospects of more QE from the European Central Bank as the reason behind today’s rebound. Any hints of more stimulus from the ECB on Thursday would be seen as positive for European indices and potentially negative for the euro.
Speaking of the euro, the single currency has weakened a little, presumably as investors prepare for a more dovish ECB meeting. Elsewhere, the pound remains downbeat after its sharp falls as investors bet the renewed Brexit uncertainty calls for more monetary action from the Bank of England. The uncertainty surrounding the UK-EU trade situation has raised the prospects of the UK ending the transition period without a deal in place. With time running out fast, some investors are becoming increasingly pessimistic that an agreement will be reached in time.
Silver lining for FTSE
But there is a silver lining: the weakness in the GBP/USD should be good news for the FTSE, as it boosts companies’ earnings made in dollars. Indeed, the FTSE held its own rather well despite the sell-off on Wall Street yesterday, and it may have created a
bullish reversal pattern now:
Source: TradingView.com and ThinkMarkets
A potential false break reversal pattern may have been created on the UK benchmark stock index, when it refused to hold below the prior low around 5855/60 after several breakdown attempts were made by the sellers. The refusal to break lower is indicative of bullish strength, which has been lacking for the FTSE for several months. But given this tentative bullish sign, the index could now start a more meaningful recovery. However, there a few key resistance levels that need to be reclaimed by the bulls in order to further reduce the selling pressure. Among them, the 6000 level is one to watch closely, which was being tested at the time of writing. This level was formerly support and resistance and ties in with a short-term bearish trend line. Thus, a clean break above here could easily lead to further technical buying in the coming days, assuming there won’t be any fresh bearish stimulus weighing on sentiment from a macro point of view.