Friday, 15 April 2016

Why Europe will remain in a Secular Bear market

Europe may sometimes be regarded as a place of significantly less risk compared to other countries around the globe but they certainly aren't immune from policy mismatch that's failed to produced handsome returns in their equity market and sent the trade bloc into a spiralling downfall that could decouple the aspirations of past leaders.

The chart below highlights that exactly a year ago the Euro Stoxx 600 set the stage for an anticipated escape from a long and drawn out sideways range that had been building in the index since the late 90's and had been the frustration of European fund managers staking their bets on seeing the benefits of a united Europe translate into real economic growth.

However situations where strong support or resistance is approached on longer term charts, market participants suddenly become all too aware of the dangers of raising their hopes too high when speculating the distance that might surpass if a break were to occur. Perhaps its stage fright or a case of being so technically minded in their analysis that the onlook of uncharted territory gets the better of their speculative nature and makes them withdraw from the market, leaving a vacuum of emptiness to support any potential move upwards.

As fate would have it, scandals begun to float merrily into the scene and brought an abrupt halt to a lengthy rally that had been in existence from the lows of the Financial Crisis. The perfect concoction of bad news stirred in with uncertain future pathways regarding economic rhetoric being fed to voters and citizens alike in a bid to save political positions. Markets never lie and they were sure to let these political contortionists know of their true feelings in delaying the process.

Then who could forget the Volkswagen emission scandal that rocked the automotive industry to the core. A flagship company that represented the culture or norm to be expected from European products, that hailed from the one country in the Eurozone where investors found some comfort in knowing that their presence in finding a long lasting solution in the debt crisis debate was being led with a good dose of continuity in mind. But even they managed to slip up.      
The mess Europe finds itself in is not by chance, in fact its as a result of an attempt to find common ground in a community that shares different beliefs and ideologies, making it difficult to navigate through the impasses that frequently appear. The tension that hangs in the air between European leaders can no longer be hidden from the public eye as many of these leaders use the public platform to send out their negotiating terms.

Some would argue that European equities may have fallen foul of the extreme negative sentiment that's been building up since the onset of jitters over the suddenly up and down movements in Chinese equities that subsequently spread volatility throughout the entire global financial system. In fairness you could say that it's certainly drove down the optimism that was once found in global markets however we should not distract our view that the current stance being taken by European politicians of kicking the proverbial can down the road is sustainable to any degree.

Recent transcript leaks from a conversation between IMF officials provides all the proof necessary that the talks with Greece concerning the decision to release the next tranche of bailout funds is bound to be fraught with disagreement and heated arguments.

This comes at a time when the British public is set to go to the polls to vote whether to remain in the EU with public sentiment siding favourably with the "No" vote. Europe cannot afford to lose Britain's membership as it plays a vital role within the trade bloc with grave economic consequences if voters decided to leave.

If Europe can't get over dealing with the debt dilemma it finds itself in then the seemingly never ending saga will push the European Union closer to the brink of collapse. The latest news that the IMF is wanting more participation by European governments in providing the debt relief necessary to Greece is the start of another eerie moment in EU history which could possibly change the course of the trade bloc forever.

EU governments refusal to submit further to IMF demands would be seen in a negative light when it comes to the voters in the UK and could prove to be the tipping point that unhinges the long standing partnerships created over the years amongst nations. Now is the time for Europe to act decisively or else the chance to do so may never occur again.

In saying this, there's no doubt in many people's mind that the stagnative state that the EU sits in only serves to draw more pessimism over the confidence of European leaders ability to reach a conclusive agreement that would see the EU remain an economic super power.  
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