We remain bullish on stocks globally. Economic growth has driven the current bull markets, thus if this continues it is logical that equities will continue to rally. However, if inflation pressures wane and economic health begins to decline, then the accommodative reaction from central banks, by way of delayed rate hikes or targeted QE, will support stocks.
If the ECB embarks on a new QE program then this is likely drive equities higher in both the US and Europe as it will stimulate growth and inflation. However, it is likely that European equities will rise more as the effect will be direct and the US stocks will suffer at least some negative pressure from the increased likelihood of a rate hike that would temper US growth. Therefore, given the potential for ECB QE, we currently believe that the European equities offer more favourable risk reward dynamics than those in the US, but will likely trade both throughout the course of the year.
European equity movement has been relatively neutral in recent months as the type and size of ECB QE is priced in. In the near term it is likely that positive pressure from a bullish MACD crossover will cause the index to break the level trend of lower highs, but it is unlikely that the key resistance level of 3290 will be broken ahead of the ECB’s next QE announcement.
Upon this we will look to open a long trade using either ETFs traded on US markets that track European equities, or options on those ETFs.