STOX50 Wobbles As Markets Eye ECB Amid Credit Suisse Drama

European shares traded mixed on Thursday as investors remained guarded towards the chaos revolving around Credit Suisse Group AG ahead of the European Central Bank (ECB) meeting.

Despite Credit Suisse receiving a US $54 billion lifeline from the Swiss National Bank, Switzerland’s central bank, some caution still lingered in the air.  The STOX50 Index which represents the 50 largest companies from 11 Eurozone countries struggled for direction this morning amid the lingering unease. However, the banking sector flashed green with Credit Suisse shares rallying over 20% following the emergency loan. With the ECB meeting just a few hours away and investors digesting the series of events concerning Credit Suisse, markets may switch into standby mode until another fundamental spark is brought into the picture.

Taking a brief look at the technical picture, the STOX50 is under pressure on the daily charts. The recent breakdown and daily close below the 4100 support level may open the door to further downside.

It’s all about the ECB meeting…

The European Central Bank is set to announce its rate decision this afternoon at 13:15 GMT.

According to a survey of economists by Bloomberg, most expect a 50-basis point hike. However, when factoring the negative developments concerning Credit Suisse – expectations may differ from reality.

The red flags appeared last week (March 9th) after Credit Suisse was forced to delay the publishing of its annual report thanks to a last-minute query from the US Securities and Exchange Commission. Yesterday (March 15th) the alarm bells rang after Ammar Al Khudairy, the chairman of Credit Suisse’s largest shareholder, Saudi National Bank, said that he would “absolutely not” make further investments in Credit Suisse. These comments sent shockwaves across financial markets and compounded recent fears following Silicon Valley Bank’s failure.

A battle between ECB hawks and doves

There is no doubt that the Credit Suisse drama will add more flavor to the pending ECB meeting.

Growing fears around the overall health of the financial system following the latest developments could empower ECB doves. This may result in the ECB opting for a smaller-than-expected rate hike to prevent further damaging the financial system. On the other hand, inflation still remains hot with core inflation hitting a record high of 5.6% year-on-year in January. This could serve as a strong enough argument for ECB hawks  – resulting in a 50-bp hike. Whatever the outcome, it will be a challenging meeting for the ECB and will certainly set the tone for the euro this month.

How does this impact the STOX50 Index?

Now, this is where things get interesting.

Given today’s environment, a larger-than-expected rate hike may fuel recession risks for the Eurozone while further damaging confidence about the health of the financial system. This would be bad news for European stock markets as the risk aversion, empowers equity bears – sending the STOX50 lower. It will be interesting to see whether the ECB mentions anything about the Credit Suisse situation.  If the central bank strikes a confident tone and suggests that the Credit Suisse situation is temporary, this could boost investor confidence – ultimately supporting the STOX50.

A deep dive into the technicals…

The STOX50 index on the D1 time frame was in a strong uptrend that made a last higher top at 4325.0 on 6 March. The bears then saw an opportunity and started coming into the market in more numbers.

After the top at 4325.0, the price broke through the 15 and 34 Simple Moving Averages (SMA) and the Momentum Oscillator changed course to the downside, both also confirming the increased bearish momentum in the market. A weekly support level was also breached and this became a new resistance level.

A possible critical support level formed when a lower bottom was recorded at 4070.6 on 13 March. Bulls tried to push the market up without success and the price formed a lower top on 14 March at 4190.4, touching the new weekly resistance level.

The very next day the bears broke through the critical support level at 4070.6 and three possible price targets were projected from there. Attaching the Fibonacci tool to the lower bottom at 4070.6, and dragging it to the lower top at 4190.4, the following targets were calculated. The first target can be estimated at 3996.6 (161.8%) which is located at the next weekly support level. The second price target may be calculated at 3876.8 (261.8%) and the price will have to break through yet another weekly support level to reach the third and final target which might be expected at 3682.9 (423.6%).

If the resistance level at 4190.4 is broken, the above scenario is canceled and must be re-assessed.

As long as the bears stay in control, the outlook for STOX50 on the D1 time frame will remain negative.