European equity markets are expected to open a little lower on Wednesday, with the recent drop in oil prices partially responsible but also as indices continue to struggle for momentum as they attempt to break above their recent highs.
The DAX touched its highest levels this year over the last couple of days and the CAC isn’t far behind it, trading at its highest point since April and not far from recording its own 2016 high. And yet, each time we’re hitting those levels, rather than sparking a wave of bullish momentum, the indices appear to be running into a brick wall.
With the FTSE also appearing to struggle at these levels and the S&P and Dow in the US also looking at risk of possible correction, equity markets are possibly looking a little overextended at the moment.
Oil prices have been in decline over the last couple of days which will be part of the problem. With doubts being cast over the OPEC output deal and API on Tuesday reporting inventories rose more than expected last week – a rise which if confirmed by EIA today would all but offset last week’s decline – further declines in oil could lie ahead. From a technical standpoint, a break below $50.50 could trigger a move back towards $49. A similar break below $49 in WTI could prompt a move back towards $47-47.50.
Traders will also have a keen focus on the US dollar and the pound sterling in the currency markets. The US dollar index was trading at its highest level since the start of February on Tuesday, as investors continue to price in a December rate hike.
As the index closes in on 100, we may see it run into some resistance, something we already saw yesterday just above 99. The pound is already trading a little lower today after hitting its lowest level since the flash crash yesterday. This appeared to come in anticipation of Mark Carney’s appearance, with traders possibly anticipating bad news either on the economy or the BoE Governors future.
It’s looking like a rather quiet morning for economic data, with the only notable releases coming from the US this afternoon. The flash services PMI is expected to record a marginal improvement, while new home sales are expected to have eased a little while remained above 600,000 in September.