Worries prevailed in the markets and dragged particularly German stocks lower.

Italian budget worries linger on as the confrontation with EU is approaching

Italian politicians believe they can play with markets, which backfires

German political volatility is unsettling

US interest rates at over 3% rattle the markets

Flatt yield curve seen as harbinger of the next recession

Good read from Federal Reserve Bank of San Francisco (click)

China still unresolved trade conflict

New tensions with Saudi Arabia which could potentially lead to higher oil prices

German ZEW expectation index is falling, indicating investors worry

All this lead finally to the equity markets in Germany falling thorough resistance and finalising a head and shoulder formation

DAX index weekly Price

DAX 2018-10-17

Source: Bloomberg

A rally above last week’s heights could bring some relieve. However the structure of the market is badly damaged which usually take more than just technical rebounds.

Investor sentiment on both sides of the Atlantic is really weak

CNN Greed and Fear indicator is at extremes (click) 

Greed and fear 2018-10-17

Investors’ expectations of economic deterioration as polled by Bank of America Merrill Lynch is at 2008 highs

Good corporate numbers are disregarded by the stock markets

Stable economic numbers not supportive

Just realised that I can add more negative than positive. This is amazing and scary.

At the moment the old saying comes back: markets climb the wall of worries.

However, it is also very difficult to “cry wolf” in the face of the market Action.

Rising US yields

US 10 year government bond generic yield

10y bond yield 2018-10-04

Source: Bloomberg

Steeper yield curve in the US

US 3 months vs. 10 years yield curve

us curve 2018-10-04

Source: Bloomberg

Better economic numbers

ISM Non-Manufacturing Sept 2018

ISM 2018-10-04

Source: Institute for Supply Management, Bloomberg

All this unsettles the equity markets. Too much good. It is easy to argue that the good time will not last and the correction in equity markets will finally happen. All so true.

The time is the hard issue. Timing has always been a challenge especially in bull markets. The time tested indicators may be flashing some yellow warning signs. However, as so often they may be early not by weeks buy quarters. Just entering some of the best period in the market history.

Fourth quarter of a calendar year till the end of the second quarter are generally strong.

This period particularly into the pre-election year shows even stronger performance.

season 2018-10-04

Source: Oppenheimer & Co., Bloomberg

Well behaved Federal Reserve with clearly communicated policy.

Global central banks showing tolerance for higher inflation.

Trade disputes making it all look sour is arguably a long shot.

Markets are afraid of the news to their own peril. Fundamentals last longer than news.


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.