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Capitalise on trade war-inspired selloff

FOLLOWING the most recent European Central Bank (ECB) meeting, further details of tapering of the asset purchase programme and the timeline of the interest rate hike cycle were announced.

Clearly, the ECB is following in the footsteps of the Federal Reserve (Fed) as the ECB confirmed the tapering of the monthly asset purchase programme from the current 30 billion euros to 15 billion euros, from October through December 2018. After which, the net purchases will end, and the ECB would only reinvest principal payments from maturing assets starting from 2019. This was the part where the market was already fully priced in.

However, the disappointing part was the possible timeline for the interest rate hike. Prior to the ECB meeting, the market was expecting a more defined timeline for the start of the interest rate hike with much expectation placed on June to July 2019.

However, the ECB under-delivered and failed to meet expectations as the timeline given was at least through summer 2019 before the interest rate hike begins. In other words, the earliest that the ECB would embark on their interest rate hike cycle is somewhere between June and September 2019 or even later, conditional on economic data and especially inflation numbers.

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Moreover, the eurozone quarterly GDP forecast for 2018 was reduced to 2.1 per cent from 2.4 per cent, suggesting the ECB still sees fit for more monetary policy accommodation.

All in, despite the news of further tapering in the asset purchase programme, which was widely expected, this ECB meeting appeared more dovish. Hence, with a delay in the interest rate hike cycle in Europe, expect the European equity market to benefit from the low interest rate environment. That should act as a tailwind for the market at least in the near-term until a more affirmative tone is sent out to the market regarding the exact date of the interest rate hike cycle.

On the day of the ECB meeting, the German DAX index indeed rallied 1.68 per cent, but the positive move was short-lived. The general equity market was once again plagued by the trade war scare between the US and China after both parties imposed 25 per cent tariffs on US$50 billion of each other's product.

The trade war tension heated up again on June 19 after President Donald Trump pledged to impose a 10 per cent tariff on another US$200 billion of Chinese imports. To make matters worse, China also promised to retaliate if the US was to go ahead with the new threat.

Hence, the European equity market was also affected negatively where the German DAX index fell as much as 4 per cent. The German DAX index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. However, we do not expect this selloff to sustain.

The German DAX index is currently hovering near a strong confluence of support at the 200-day moving average, 12,583 resistance turned support area and 38.2 per cent Fibonacci retracement level. With the backdrop of a more dovish ECB, the European equity market should remain well supported. Despite the current bearish breakout below the 12,583 support area, further bearish follow through needs to be present for the selloff to sustain and accelerate.

If the German DAX index continues to close below the 12,583 support area for a few more consecutive days, the bearish momentum should accelerate.

Some other support areas to look out for a reversal back into the uptrend are the 12,322 support area followed by 12,000. On the other hand, if the German DAX index closes back above the 12,583 support area on the daily timeframe, then the current bearish breakout could turn out to be a false bearish break and further justify a rebound higher off the 12,583 floor.

Watch out for further bullish price action rejection off the 12,583 support area for the confirmation of the resumption of the uptrend. The likely target for the next wave up is the 13,200 resistance area followed by 13,533.

From a longer-term perspective, we still expect the trend of the German DAX index to be up unless the 11,878 critical support area breaks.

In summary, the ongoing trade war scare between US and China should be treated as noise and investors should capitalise on the current trade war-inspired selloff to accumulate more as the tension fades out.

  • The writer is chief technical strategist, Phillip Securities Research.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice