Italian stock market could rebound as trader sentiment reaches extreme pessimism
European stock markets have been struggling to regain momentum since last week. Some indices like the CAC 40 and the AEX should manage to end the week up, but others like the DAX and the MIB should end down.
European stock indices are struggling to regain ground due to the rise in the euro, but also due to growing fears of recession following a series of disappointing economic data on both sides of the Atlantic.
Nevertheless, the MIB and DAX may soon join the CAC, AEX and Wall Street in their rebound, given the extremely pessimistic sentiment among investors. Indeed, all the major investor sentiment surveys report extreme pessimism, such as the AAII’s Bull-Bear spread reaching the 7th lowest level in its history, the Bull/Bear ratio of Investors Intelligence which hit its lowest level since 2009 and Bank of America customer optimism which recently fell to 0%. Although significant pessimism does not guarantee a rebound, it rather invites a contrarian attitude.
The FTSE MIB should also benefit from the lifting of some of the uncertainty regarding Italian debt after the ECB indicated that it would put tools in place to prevent too wide a spread between eurozone rates. Since this announcement, the spread between Italian and German 10-year rates has narrowed by nearly 50 basis points, which shows some renewed investor confidence.