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The Real Market Fright Might Come After Halloween

Michael Msika
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The Real Market Fright Might Come After Halloween

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If European equities can keep their current gain of 18%, then 2019 will be the best year in a decade for the benchmark. The sector rotation that started in late August has extended into October and the shift in market leadership may bode well for Europe. But November is usually a shaky month for stocks and the U.K. general election, trade talks and doubt about Fed policy direction could bring back some volatility.

Altaira Wealth technical and market analyst Ralph Acampora sees the change in market leadership, and recent index breakouts in the U.S. and Europe, as positive, and is happy to stay invested. He notes that France’s CAC and Germany’s DAX broke out of their recent trading range in October, but not the FTSE, and remains moderately bullish into the first quarter of 2020 for stocks generally.

One key feature of the surge is the sustained outperformance of more value and cyclical sectors, which translated into ETF flows, while defensive and growth plays sustained outflows, according to Barclays strategists. Autos led gains in October, along with construction, industrials and basic resources, while former darlings food & beverages underperformed meaningfully.

Still, for Goldman Sachs strategists, a sustained rotation requires brighter economic data, particularly from manufacturers. Without this, the recent sharp rotation might not last. They also point out that the decision on U.S. tariffs on autos is due in November, and the market is pricing fewer concerns over that risk, given the recent rally.

Goldman says European equity indexes have seen strong gains and diverged from weak fundamentals. The strategists prefer upside exposure through call options on the DAX or HSCEI, where volatility remains cheap and has “reset materially lower” in recent weeks. Overall investors remain very cautious as the Sentix index of market sentiment deteriorated in October despite the market rally.

Aside from potential external shocks, November could bring back some volatility. Seasonality is calling for “post-Halloween caution,” according to Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet. November is one of the worst months of the year for FTSE 100 and Euro Stoxx performance historically, they say, especially since the September-October bounce also played out along typical patterns (see chart below). November has been a negative month 55% of the time for the Euro Stoxx since 2006 and about 80% for the FTSE 100.

Bear in mind that so far this year, the Stoxx Europe 600 had only two negative months -- something of a rarity as it happened only twice in the past 20 years: in 2006 and 2013.

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