STOX50’s upside likely still capped at 4400

The Eurozone’s leading blue-chip index is pushing higher at the time of writing, boasting of a 15% advance so far in 2023.

That year-to-date tally is even higher than the S&P 500’s 14% climb so far this year (before US markets open on Thursday, June 29^th).

However, note that the STOX50’s ascent since October 2022 has stalled in Q2 2023.

 

Weakening Eurozone economy

Germany’s just-released CPI data earlier today (Thursday, June 29^th) shows a resurgence in inflationary pressures, at a time when the European economy appears to be losing steam:

• The Eurozone entered a technical recession in Q1 2023
• The business outlook in Germany, the Eurozone’s largest economy, has this month fallen to its lowest level so far in 2023
• The Eurozone’s manufacturing sector is still seeing contracting conditions, as evidenced by its sub-50 PMI released last Friday (June 23^rd).

Such economic readings suggest that future earnings could be impacted with downside risks ahead for corporate profitability in Europe.

And with the European Central Bank leaning towards even more rate hikes so as to deliver a death knell to stubborn inflation (see Germany), that could mean more economic damage being incurred.

Recent hawkish rhetoric from ECB speakers and President Lagarde has failed to move the needle that much on market pricing for more 25bp rate hikes in July and September.

But investors do have one eye on the deteriorating growth picture in the eurozone as stock markets look towards the end of the tightening cycle.

 

STOX50 set to underperform S&P 500

The strong rally in growth and tech stocks we have seen in this first half of the year in the US especially, has seen outperformance in their stock markets.

Tech stocks only account for about 15% of the STOX50, which is about half of what it accounts for on the S&P 500.

Despite European equity valuations being relatively low with the price to earnings ratio somewhat below that of the US market, it still seems tough for Europe to keep up with markets Stateside when growth stocks are doing well.

However, the flip side is worth thinking about if we do see selling in the AI-fuelled rally.

 

What else to look out for rest of this week?

It’s a big week of inflation releases around the globe, with the Eurozone’s headline inflation data to be released on Friday (June 30^th).

Headline HICP is seen easing further to 5.6% y-o-y in June from 6.1% in May given energy base effects, while core inflation is forecast to revert to 5.5%, nearer to the 5.7% peak in March.

Higher-than-expected CPI prints that keep the ECB’s foot on the rate-hike pedal may dishearten European equities, in fear of more demand-destroying rate hikes incoming.

From a technical perspective …

We are back in the middle of the range that the index has been trading in since late March.

Prices have been supported by the 100-day simple moving average on a few occasions over recent months, and this now sits at 4,288.

Stronger support can also be seen at the lower rising trendline that has supported this benchmark stock index since December 2022.

Still, there is an obvious resistance barrier at the three recent tops around 4,400.

A fundamentally rosier economic outlook for the Eurozone is likely what’s required before the STOX50 can breach this psychologically-important mark.