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US stocks have outpaced gains in their European counterparts this week as European stocks moved sideways. Sovereign debt risks, Spanish bond auction results, political risk and earnings season are all clouding the outlook for stock markets at the moment.

The fortunes of stock markets in Europe are currently following European peripheral bond markets. The up-tick in bond yields in Spain and Italy on Thursday suggest that strains remain even though both countries were able to sell debt fairly easily this week. Bond yields in Spain may be off from their recent 6.1% highs, but at the time of writing they are currently trading at 5.9%, which is still within the danger-zone.

This is weighing on banks, who are large holders of European sovereign debt particularly in Italy and Spain. Thus, as long as sovereign concerns remain then we could see further declines for European banks. The financial sector makes up more than 20% of the pan-European Eurostoxx index, so its fortunes are important for the performance of the overall index.

Year-to-date US indices are higher, the SPX 500 is up more than 10% at the time of writing, while the Dow Jones has had more modest gains of 6.6% so far this year. In Europe the picture is more mixed, the Eurostoxx index is down 1%, while Spain's Ibex and the Italian index are down 19% and 5% respectively. Spain's index is now less than 5% from its post Lehman-Brothers' 2009 low and it is also on the cusp of a technical bear-market. Some people may start to wonder if Spanish stocks are oversold, however we believe the sovereign risks in the currency bloc are too high at the moment and that the Spanish stock market could have further to fall until either 1, Europe and the IMF agree a substantial increase to the rescue funds available for Europe or 2, growth in Spain starts to pick-up. We will hear about the size of rescue funds at this weekend's IMF/ G20 meeting, and if an increase in funds is approved this could lead to a broad-based relief rally in global markets. However, growth in Spain has shown no sign of improvement in recent months and it could be in the doldrums for some time yet.

US 30 index


We continue to expect US markets to outperform their European counter-parts, however next week's FOMC meeting could throw cold water on the prospect of more QE from the Federal Reserve as some key members, including the deputy governor Yellen, appear to have shifted their stance from dovish to neutral. The biggest downside risks to the US 30 index next week is a less accommodative stance from the Fed, which may be stock negative in the medium-term, and heightened sovereign risks in the Eurozone.

From a technical perspective, indecision seems to have gripped the US 30. It is currently testing support at 12,987 - the top of the Ichimoku cloud. Below here is the end of the technical uptrend. Support lies at 12,920 - the Tankan line - and then there is not much support until 12,620 - the 100-day moving average - and the lows from early April. If the Fed is more dovish next week than expected then resistance still lies at 13,000.

US 30 daily chart with RSI and Ichimoku cloud. The RSI suggests this index could be treading water right now, but watch out for next week's downside risks.




GER 30 and FRA 40:


The European indices have been under pressure in recent weeks and have underperformed their US counterparts. The German Dax index is the best performer and is up 13% so far this year. However, some technical developments suggest the recent up-trend could be over for this index. It broke below the top of the Ichimoku cloud earlier this month and attempts to break back above it have been rejected so far. Investors are cautious even on Germany, which doesn't have debt problems and has been growing fairly strongly, due to the sovereign problems that are now gripping Spain. We expect this index to trade within a range between 6,820 - the top of the cloud - and 6,460 - the bottom of the cloud. To break out of this range to the upside we would need to see a stabilisation in Spanish bond yields and potentially some more official support from the ECB and EU authorities that could drive global risk markets higher. However, if that is not forthcoming then the Dax is at risk from a broad-based risk sell off.

We continue to think that the Dax is in a better position than the French Cac index, which could suffer as a result of political risk from the upcoming Presidential elections (the first round of voting takes place this Sunday). The Cac is already in a technical downtrend and is below the Ichimoku cloud. A weekly close below 3,200 opens the way to 3,000 - the lows from mid-December. Resistance lies at 3,400.

Dax 30 daily chart with Ichimoku cloud and RSI





FRA 40 index with Ichimoku cloud and RSI




Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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