Europe in danger follow the DAX

There is a constant barrage of news from Europe which is very uninspiring. Brexit unresolved and running into time constrains. Italian government continuously threatening the EU. Again italian government which intends, mostly, to turn its back on austerity and undertake extremely populist measures to hopefully stimulate the economy. Trump and the various threats of tariffs. Turkey economic and currency crises. Just to mention the issues closer to European heartland.

Any positive economic news has been disregarded. Negative economic numbers are watched and discussed very close as indicator that might strengthen the feeling of fear and the inevitable things to come.

The following charts demonstrate the current state of affairs in Europe very well. DAX appears to be building a head and shoulder reversal formation. It is not ready yet as the index did not break lower from here to finally confirm that the structure is in place.

DAX weekly chart

DAx 2018-09-07

Source: Bloomberg

All investor hope that Europe and particularly Germany is not following into the emerging markets path.

September tend to be a very weak period for the equity markets and it appears that this year again it repeats a very long standing pattern. There is still hope that the economic trends will not turn negative and drag the markets lower. The yield curve is not inverted which happens often ahead of major market correction.

We are watching all those indicators which are still constructive. The fear of the unfamiliar political turmoil in Europe and abroad could still become self-fulfilling prophecy and the market in Europe deepens the current correction.

If, on the other hand, investors follow some fundamental indication and valuations, we may be able to escape the worst. DAX is close to the cliff but did not jump yet and there are good reasons, why it can still pull away from the edge.