Angus Nicholson for Chris Weston, Chief Market Strategist at IG Markets
IG Global Indices Report
Brexit concerns appear to be hitting the weakest links of the European Union hardest, possibly based on speculation that Britain’s exit would hasten the Union’s end. On the converse, Greece, Italy and Portugal are likely to see the strongest rallies in the event Remain wins.
European markets have all seen the most significant drops in the forward price-to-earnings ratio as Brexit concerns continue to hit their price levels. Last week, Greece was the third highest valued market at 19.9, but has now dropped dramatically to 16.9.
In price-to-book terms, Italy, Austria and Chinese H-shares all make up the bottom three. Brexit concerns and disappointment that China did not make up a larger part of the MSCI’s weighting seem to be driving these low valuations.
The ASX and the FTSE continue to top the global rankings for dividend yields on offer, and in the wake of the dovish Fed meeting it looks to be driving funds to Australia while the spectre of Brexit hangs over the FTSE and other high-yielding European markets.
The Relative Strength Index (RSI) is a momentum oscillator that shows whether the sum of recent gains have been higher or lower than the sum of recent losses. The RSI gives readings of 0-100 and in a sideways trading market values above 70 or below 30 are traditionally thought of as reversal signals. Otherwise, it is a useful gauge of momentum.
Moving averages also indicate an index’s momentum. Here we have used the 10-day, 20-day and 50-day moving averages and looked at which indices are trading above all of them or below all of them. And the swathe of red “Yes” indicate how risk-off sentiment is dominating global markets.
The FTSE Athens 25 has lost over 15% in the past week. Brexit concerns appear to be weighing on the weakest links of the European Union on the logic that Brexit could precipitate the formal break up of the union. The Greece 25 is likely to continue to see selling in the lead up to the Brexit vote and it is quite likely to drop through key support at 148. However, should the Remain camp win the Brexit vote, Greece could see a massive outperformance.
The Amsterdam Stock Exchange has smashed through support at 426. Netherlands is also one of the top candidates to follow the UK out of the EU should Brexit win the referendum. The lead up to the UK referendum is likely to see further downside for the AEX, and should Brexit pass a trip to 385 and lower seems highly likely.
The FTSE MIB 40 has similarly been hit by Brexit concerns, losing 7.8% over the past week and seeing a -22.9% year-to-date return – the worst of our indices. There looks to be momentum behind a move down to the 16,000 level in the lead up to Brexit. And were Brexit to pass, the MIB would be set to plummet through the 16,000 support level.
