Fear feels different

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“Brexit” polls heavily influence investors’ opinion on European equities. The latest surge in popularity of the “leave” camp accompanied by falling stock prices dampens the mood. Market participants should brace for further falling stock prices as the referendum approaches. Investors’ sentiment has yet to reach negative extreme value.

The latest sentix Sentiment Index for European equities in the Euro Stoxx 50 Index falls with -20% back to -0.14 index points. The weak sentiment reflects surging pessimism among market participants as “Brexit” news continue to dominate. The closer the referendum approaches, the more nervous investors react. Nervous investors in turn exhibit volatile sentiment swings (refer to chart). Since at least last week, investors are aware that the outcome of the referendum balances on a knife’s edge. Therefore, investors are forced into hedging positions causing markets to tumble.

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Since the latest reaction of investors to “Brexit” polls are unlikely driven by panic and the sentix Sentiment for European equities has not reached extreme parameters yet (refer to chart – green zone), hedging demand has not peaked. Investors should expect a final sell-off. The conditions of major European stock indices support this notion as they exhibit bearish chart patterns.

Background

sentix Sentiment, investors’ 1-month expectations for a given market, is polled on a weekly basis since 2001 as part of the sentix Global Investor Survey. It reflects the emotions – between greed and fear – of market participants. Negative sentiment extremes are usually a straight indication for rising prices. High optimism, in contrast, may be a warning signal for an upcoming market consolidation. More important turning points are mostly indicated by a sentiment divergence. In the latest sentix Global Investor Survey was conducted from 09-June-2016 to 11-June-2016. 1084 individual and institutional investors took part in it. 

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