EU stocks not out of woods yet

After the latest events concerning Ukraine, it is now all about what kind of economic sanctions will be imposed on Russia and how Moscow will retaliate. In a way, it all depends on when Western leaders such as US President Biden believe Russia sending "peacekeeping" forces into Donetsk and Luhansk constituted an "invasion." The UK government clearly think it does, but there is no unified view on this yet.

Already, the EU has proposed an initial package of sanctions, with German Chancellor Olaf Scholz saying he would halt certification of the Nord Stream 2 pipeline. In the UK, PM Boris Johnson has sanctioned five Russian banks and three "high net worth" individuals. Johnson and other Western leaders argue Russia is planning the pretext for an invasion after it ordered troops into two breakaway regions of eastern Ukraine – Donetsk and Luhansk – which Russian President Vladimir Putin recognised as independent. Let’s see what Biden makes of it.

Whatever happens next, one thing is clear: energy prices are unlikely to come back down in a hurry. It is a major area of concern for Europe, which could exacerbate now that Germany has halted certification of the Nord Stream 2 pipeline. Consumers’ disposable incomes have already bee stretched by surging inflation, and if oil and other energy prices continue to rise, this could hurt the economic recovery, and raise concerns about a possible recession. Although stock markets have bounced sharply off their lows this morning amid “bargain hunting,” I wouldn’t be surprised to see the selling pressure resume, especially with the major indices such as the German DAX breaking their key support levels (see below for more).

With all the uncertainty out there, it is likely – in my opinion – that equity markets will remain volatile for a while yet. It is worth watching the likes of the DAX index closely. The German index yesterday broke below key support area around 14800 to 15000, which then led to further technical selling below it. But with the index now rebounding sharply to get near this target again, it is likely that the sellers will step in and drive the market lower.



The bulls should therefore proceed with extra care and remain vigilant as dip buying could fail them. For the DAX, until and unless the above shaded area is reclaimed, the bias remains bearish, despite today’s short-covering bounce.