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State of the European Markets FreePass

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This rare opportunity gives you our comprehensive outlook for European markets -- the DAX, FTSE, CAC,
AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS, CECE Overall Traded Index, the euro and more..
You'll see exactly what Elliott waves say about the major risks ahead – as well as market junctures that could
prove very fruitful. All on the timeframes that matter most.
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Greg Eident
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
Bottom Line
The DAX, the CAC 40 and the Euro Stoxx 50 are rallying in a final fifth wave off of their respective March 2020 lows,
while the FTSE 100 either completed a countertrend bounce, or will do so with one final push above 6903. Bullish
sentiment extremes are everywhere, but so too are the early hints of a historic financial crackup. In early March, a
London-based fintech startup that was worth $7 billion as recently as last year went bankrupt. And just this week, global
investment banks began sorting through the wreckage of the largest hedge fund blowup in more than two decades.
Meanwhile, numerous metrics of sovereign bond issuance broke records over the first three month of 2021, as
companies and investors continue to binge on debt. These conditions are compatible with a long-term top in both
equities and bonds.

Chart Gallery: Overview of European Markets

The Stock Market
By Brian Whitmer, European Financial Forecast (EFF)

In December 2019, when the chief equity strategist at a major European investment bank described a “perfect bullish
cocktail” for stocks in 2020, The European Financial Forecast (EFF) countered that the environment actually resembled
“each and every one of history’s greatest stock market peaks.” That issue of 16 months ago listed a dozen gauges of
sentiment that had shot to optimistic extremes and went on to paint a bleak picture of unfolding economic and cultural
upheaval that would be far different from the flowery portrait imagined by mainstream economists. The initial blow arrived
swiftly and hit the financial markets especially hard. On February 17, 2020, the DAX peaked alongside world markets
and then plunged 40% over the next 20 trading days. As the wave labels on this weekly chart show, the decline was
wave C of (4). Wave (5) up began on March 16, 2020.
On the one-year anniversary of the Great Coronavirus Crash of 2020, wave (5) has traced out four of its requisite five
waves, and its fifth wave is stair-stepping higher. Similarly, many other stock indexes have retraced the crash and look
much the same as they did before the collapse. Two weeks ago, the Euro Stoxx 50 index pushed to an intraday high of
3875, celebrating a complete retracement of its erstwhile decline. France’s CAC 40 also sits within spitting distance of a
100% retracement, while the DAX currently trades about 7% higher than it did before the crash.
Alongside the rally, gauges of optimism have once again become lopsided. On March 10, for example, the DSI indicator
of Euro Stoxx 50 futures traders (trade-futures.com) pushed to a 9-month high of 90%. This rebound was to be expected,
as the weekly chart on the left shows that the end of Minor wave 5 up will also bring an end to a larger-degree five-wave
rally that began in March 2009. Gauges of optimism reflect these extremes, because the stock market is setting itself up
for an even more significant top.

Outside of the financial markets, the cultural landscape already displays the early hints of resentment that will grow into
full-blown hostility when stocks and social mood reverse. Back in June 2020, for instance, EFF identified Covid-19 as a
“hot button issue around which nations can polarize.” Now, tensions are rising about so-called vaccine nationalism, which
occurs when governments “sign agreements with pharmaceutical manufacturers to supply their own populations with
vaccines ahead of them becoming available for other countries.” (Al Jazeera, 2/7/21) On March 25, EU leaders “clashed
during a marathon videoconference” that the Financial Times described as “tense and sometimes ill-tempered.” (FT,
3/25/21) When poorer eastern European nations demanded a larger share of vaccine doses, the discussions broke down
completely. Last week, Italian police found 29 million doses of the AstraZeneca vaccine when they raided a
pharmaceutical plant in the city of Anagni southeast of Rome. According to EU sources, the doses were initially bound
for the United Kingdom but were blocked by Italian officials under new rules regarding vaccine exports. Other politicians
have attempted to boost their political standing by attacking the distribution process. The Chancellor of Austria, for
example, accused the European Commission of distributing vaccines unfairly.

The overseas press finally picked up on the story last week. This banner headline, for instance, ran across the front page
of CNN.com last weekend:

The Pandemic Is Stirring Deep Resentments In Europe

They May Not Be Quick To Heal

According to the article, “post-pandemic anger … could create a toxic dynamic that is unlikely to end in closer integration
and greater unity.” (CNN, 3/27/21) In our view, this depiction is much too sanguine. As Bob Prechter observed two
decades ago in Conquer the Crash, “The main social influence of negative social mood is to cause society to polarize….”
When the bear market arrives in full, it will uncover old disputes that have nothing to do with Covid-19, reinvigorating past
grievances that date back centuries.

Elliott Wave Analysis

The wave structure in Britain is different from wave structures on the Continent. The FTSE 100’s advance from March
16, 2020, remains a double zigzag, labeled (w)-(x)-(y) on this daily chart. As discussed last month, the rally also appears
to be forming the right shoulder of a long-term head-and-shoulders topping pattern that dates back to 2015. Since late
December 2020, prices have traded in a narrow band between 6400 and 6900, which encompasses the price territory of
a previous fourth wave. Nothing says that wave 7 cannot run deeper; but, if it does, the rise would be a triple zigzag,
which is a rare pattern. Either way, the stock market’s profile of contracting volume and waning upside momentum
argues that the rally is mature and will be fully retraced by wave 8 down.
The market’s eerie quiet in March is another factor favoring our interpretation of a countertrend bounce within a broader,
deeper bear market. The VFTSE Implied Volatility Index (a measure of expected stock market volatility) closed at 17.1 on
March 26, its lowest level since February 2020. Back then, wave (ii) of 6 pulled stock prices briefly higher in the early
days of the coronavirus outbreak. As the rally progressed, markets were quiet until the bottom fell out a few days later.
The FTSE 100 eventually crashed 35% in two weeks, as the VFTSE shot up to 70.

Today’s market juncture is similar. Traders anticipate calm waters and smooth sailing, but because shares are entering a
third wave down (which is usually longer than a first wave), the bearish message behind the pattern is actually far
stronger. It would not surprise us if the volatility gauges eventually surpass their March 2020 extremes.

Update on a Submerging Market

Because Elliott waves graphically represent human psychology, Elliotticians often rely on seemingly obscure societal
data points to illuminate important market turning points. In December 2020, for example, EFF discussed the explosion
of free stock trading apps that began with Robinhood in the United States and quickly spread throughout the UK and
Europe. When a copycat application announced its debut in Turkey, EFF had this to say about its significance to investor
psychology:

The Midas app is aiming to be the most-digitalized trading venue among Turkish stock brokers. From our point of view, zero-cost
trades in a peak mood environment will probably do something far more damaging: They will coax ever-more amateur investors
into a wildly overpriced market.
—EFF, 12/4/20

This observation proved to be timely. Within a month, Turkey’s Borsa Istanbul 100 Index (BIST 100, left graph) peaked
near 1600 and fell 10% in five days. Prices vacillated in January and February 2021 before eking out a new all-time high
of 1589 on March 17, 2021. Then, the bottom fell out on Monday, March 22, as the BIST 100 dropped nearly 8% and
registered its biggest single-day decline since 2013. Shares plunged another 9% when the exchange opened on
Tuesday, marking the index’s worst two-day slump since the global financial crisis in 2008. Among the 92 world markets
that Bloomberg tracks, the BIST 100 was the worst-performing stock index in March in dollar terms.

The sudden slump also sent fundamental analysts scrambling to find external causes. This MarketWatch column
suggested a culprit: “Turkey’s currency and stocks collapsed after the abrupt termination of its central bank head, a move
that led investors to take a cautious stance toward risky assets on Monday.” (MarketWatch, 3/22/21) Although it is true
that the reversal coincided with Naci Agbal’s termination, two other facts are also true: Agbal’s departure was the third
such change in three years, and neither of the previous two produced a strong market reaction.

Here’s how we explain the situation: The country’s stock, bond and currency markets were already primed to move in the
negative direction; the 24/7 news cycle merely focused on a convenient reason for them to do so. The middle chart, for
instance, shows Turkey’s 10-year government bond, which had gradually sold off in February before dropping 22% on
March 22, pushing interest rates to their highest level since May 2019. Likewise, the lira (chart on right) fell as much as
15% against the dollar on March 22, yet a countertrend bounce had previously ended near $0.14 back in February.

Expert opinions on the country’s financial prospects are likewise shifting alongside the reversal. After analysts largely
championed Turkey as one of the star performers of emerging markets, they have now begun to reimagine the country in
light of their new bearish mood. Referring to Agbal’s departure, one strategist told Bloomberg that Turkey has lost “one of
its last remaining anchors of institutional credibility.” Another Istanbul-based analyst reported that “foreigners are vacating
their positions regardless of the price.” (Bloomberg, 3/23/21)
As the rout worsened, analysts began to tally up the exposure of global banks and financial institutions. According to the
Bank of International Settlements, Spanish banks have the largest loan exposure to Turkey at $60 billion, with banks in
France and Britain coming in a distant second. German banks currently have about $9 billion invested in Turkey, down
from $21 billion in 2013. The following list identifies four European banks that are potentially at risk if a full-blown financial
crisis develops in Turkey (data via Reuters):

● BBVA (Spain): Commercial, corporate and investment banking activities; small and medium-sized enterprise banking,
insurance activities; 14.3% of bank profits come from operations in Turkey

● ING (Netherlands): Wholesale and retail banking in Turkey through a wholly owned subsidiary; Turkey generated €420
million in income in 2020, the bank’s third-largest market

● UniCredit (Italy): Owns a 20% stake in Istanbul-listed commercial bank Yapi Kredi, which contributes about 5% to
UniCredit’s group earnings

● BNP Paribus (France): Retail banking, leasing and insurance businesses through subsidiaries; owns 50% of Turkish
TEB Holdings through a joint venture

The sell-off may have ended, but the immediate arrival of bargain hunters and dip buyers probably signals that another
leg down lies in wait.

Bargain Hunters Save Turkish Stocks from Worst Drop in 20 Years

—Bloomberg, 3/23/21

According to a report by HSBC Securities, valuations in Turkey are low enough to “make one look for things that could go
right, rather than things that could go wrong.” This statement is actually a great description of the psychology that
portends a large-degree market top. When stocks are peaking, optimism prevails and investors pile into shares, because
they expect things to go right. When stocks are bottoming, optimism evaporates and investors refuse to touch shares,
because they expect things to go wrong. Assessing this psychological sine wave is a key facet of wave modeling, and all
the evidence we observe says that the optimistic condition overwhelmingly persists today.

Market Psychology
In September 2019, EFF discussed how wide price swings and market instability often arise at the end of long market
advances. As we explained, it’s as if investors become increasingly aware of the mounting financial danger yet cannot
bring themselves to disengage from the market entirely. Instead, they seem to jump en masse from one hot stock or
stock-market sector to another, generating huge price run-ups and subsequent sell-offs that grow more dramatic by the
month. At the time, we highlighted a runaway advance in the price of the stock exchange itself:

The London Stock Exchange Group has been riding along an upward parabolic curve that has generated a 20-fold increase in
the stock price since the late 2000s. Parabolic advances are inherently unsustainable, and this one is even more precarious
given that we can count five waves up since the LSE’s public debut. Once the rally breaks, an initial decline should pull prices
back to a previous fourth wave … implying a near 50% sell-off from today’s levels.
—EFF, September 2019

These two updated graphs show exactly how this forecast played out. The cited advance was the end of Intermediate
wave (3), which topped at 7922 on September 11, 2019. Prices plummeted 39% in wave C of (4) and bottomed above
the previous-fourth wave price target.
The near-term chart on the right illustrates Intermediate wave (5), which began at the March 2020 low. After rising within
two converging trendlines, LSE Group peaked on February 16, 2021, in the likely completion of wave (5). In March, the
stock price tumbled 39% again, tracing out five waves to the downside and confirming that the one-larger degree trend is
now down. Ideally, a second wave will partially retrace the decline before the next wave down commences.

Late Autumn for Publicly Traded Stock Exchanges

Here, too, the news has belatedly caught up with the LSE’s sliding stock price. After CFO Anna Munz held an
underwhelming conference call on March 8, analysts began to question everything from the exchange’s dubious financial
reporting to its sky-high investment spending and its astronomical costs for integration and infrastructure. This kind of re-
examination is normal during bull-to-bear market transitions, because (1) the financial imperatives that keep companies
afloat during a bear market differ dramatically from those that kept them profitable during the preceding bull; and (2)
investors begin to scrutinize every past corporate decision in the new light of their negatively waxing mood.

In fact, because it tracks optimism and pessimism toward the entire business of trading stocks, the stock prices of
publicly traded stock exchanges offer unique insights into investor psychology. The New York Stock Exchange, for
example, announced plans to go public in August 1999, five months before a historic top in the DJIA. Executives
cancelled those plans, but the rally that began in 2002 proved powerful enough to allow the NYSE to sell shares to the
public in 2006. At the time, the Elliott Wave Financial Forecast called it “one of the most bearish imaginable signals,” and
the description proved to be spot on. NYSE corporation shares promptly peaked in November 2006 and crashed 87% to
March 2009.

The London Stock Exchange has been similarly buffeted by social mood. A small group of brokers established the
exchange in 1773, and the LSE grew to become the world’s largest financial marketplace by the onset of World War I. As
Guardian columnist Sean Farrell notes in his August 2019 article, “London Stock Exchange: More Than 300 Years and
Counting,” the LSE closed for five months during the first world war, and, by 1918, almost 1000 members had deserted
the exchange due to subsequent trading restrictions.
The chart below picks up after the exchange closed for six days during World War II’s Siege of Britain in 1940, a social
mood low point that marked the end of Grand Supercycle wave ( in the FTSE All-Share Index. The most important peak
expressions began after the business booms in the 1950s and 1960s, which propelled the LSE to open its 260-floor
Stock Exchange Tower in 1972. That was the same year that stocks peaked in Supercycle wave (I). After another
economic boom in the1980s, Margaret Thatcher’s government initiated the “biggest shake-up in the LSE’s history”
(Guardian, 8/19), removing distinctions between dealers (who buys and sell securities) and brokers (who buy and sell
securities on behalf of clients). “Critics of the measures have argued that retail banks buying up stockbrokers helped lead
to the financial crisis,” according to the Guardian.
The arrows along the top of the chart illustrate the exchange’s largest deals since Supercycle wave (III) peaked in 1999.
The LSE’s IPO in July 2001 bisected the 1999-2002 bear market in terms of time; however, the All-Share index crashed
42% following the IPO for a peak-to-trough decline of 52%. The LSE purchased Borsa Italiana near the stock market
peak in 2007 and took full control of FTSE International in 2011.

The most important deal as it relates to today came in April 2018, when the LSE appointed former Goldman Sachs
banker David Schwimmer to the CEO position. Schwimmer quickly pushed the company to purchase Refinitiv, the data
and analytics giant that analysts previously heralded as a rival to Bloomberg’s data empire. Predictably, the optimism
about the Refinitiv purchase lasted as long as the LSE’s stock price kept rising. Today, as the LSE’s shares have
dropped off a cliff, investors and the financial press have recast the deal in the negative light of the re-emerging bear.

LSE Plunges on Concern Around Costly Refinitiv Integration

—Bloomberg, 3/8/21

Investors’ doubts rise over LSE takeover of Refinitiv

—FT, 3/21/21

The thing is, LSE Group only just completed the $27 billion deal three months ago. The company will still need to spend
more than £1 billion this year to integrate operations and fully £700 million just to cover “legacy costs and expenditure
across LSEG and Refinitiv.” (The Trade, 3/8/21) Last week, Citigroup slashed its price target for LSE Group from 10,200
to 8500 and immediately cut its former buy recommendation to neutral, citing incomplete cost breakdowns and massive
spending on investments. At the same time, Schwimmer’s total pay package rose from £2.46 million in 2019 to £6.88
million last year, as his base pay jumped another 25% last week. “He is now running a bigger organization,” said the
company to substantiate the increase.

The smart move would be to place this extra money directly into a rainy-day fund. In the years ahead, bear-market
imperatives will see the LSE organization shrink to a fraction of its current size.

When Green Turns Red

It did not take long to chalk up another entry on the list of surging fraud cases that we discussed last month. Over the
course of a single week in early March, Greensill Capital, a London-based financial services company that was worth $7
billion as recently as last year, collapsed into bankruptcy, “risking thousands of jobs at borrowing companies, disrupting
the supply chains of multinationals and even the U.K. healthcare system.” (Bloomberg, 3/3/21) Though the collapse
happened just three weeks ago, the fraud allegations have already piled up. Deutsche Bank and Commerzbank are
reportedly on the hook for billions of euros of losses related to Greensill’s banking arm in Bremen, Germany. Two weeks
ago, Credit Suisse overhauled its asset management unit and suspended the bonuses for senior executives who were
connected to the company. “The Swiss lender had multiple ties … including $10 billion of funds that offered exposure to
the company’s loans and were marketed to the bank’s clients as safe investments.” (FT, 3/18/21) Even former prime
minister David Cameron has come under fire over his involvement with Greensill.

Ripple effects spread across the pond as well. On March 16, Bluestone, a coal-mining company owned by the governor
of the state of West Virginia, filed a lawsuit alleging that Greensill “perpetrated a continuous and profitable fraud … under
the guise of establishing a long-term financing arrangement with Bluestone.” (WSJ, 3/16/21) As regulators investigate,
more waves of litigation will come; however, the collapse already affirms many of the dangers that come from investing
during an environment of peak optimism.

Runaway Financialization
Greensill, essentially a financial technology start-up, carved out a lucrative business in supply-chain financing. It paid the
suppliers of its clients earlier than obligated (at a discount) and then pocketed the difference upon receiving full payment
down the road. The company’s downfall came in part from its indiscriminate use of leverage. Rather than hold those cash
advances on its balance sheet like a traditional bank, Greensill bundled them into bondlike securities and sold them to
investment banks. In turn, the banks “scooped up those notes, providing professional investor clients with what appeared
to be a low-risk way to eke out higher returns….” (WSJ, 3/8/21)

In other words, the company played a small-scale version of the same game that sunk the U.S. housing market more
than a decade ago. Predictably, the story ended just as catastrophically as it did for investors in AIG, Bear Stearns,
Lehman Brothers and Northern Rock. In early March, a group of credit insurers cut Greensill off from a critical form of
insurance that protected the company against a client default. The move triggered a wave of repercussions, beginning
on March 1 when Credit Suisse blocked investors from moving money into or out of its supply-chain investment funds.
The jig was up when Swiss asset manager GAM Holdings followed suit the next day, blocking fund flows in its own $800
million fund. Both banks are in the process of winding down those funds.

Massive Complacency in the Financial Technology Sector

The September 2018 EFF put it bluntly: “Fintech [is] on course for a jaw-dropping setback.” Back then, our focus was on
the soaring valuations and ever-accelerating growth forecast that accompanied a “picture perfect five-wave impulse” in
the Global Fintech Thematic Index. As overzealous bulls called for ever-increasing prices, EFF discussed the overblown
optimism surrounding the sector’s star performer, Wirecard, and stated: “The sell-off could be catastrophic.”
For Wirecard investors, the collapse was a total wipeout; the company went bankrupt within two years. For the fintech
sector itself, our warning arrived three days before Primary wave 3 topped out on September 3, 2018. Wave (A) of 4
immediately pulled prices 29% lower, and the jaw-dropper waited until after wave (B) of 4 peaked at 2618 on February
19, 2020. Over the course of just two weeks from February 19 to March 3, wave (C) pulled shares 42% lower. The
conclusion of Primary Wave 5, which has been underway since March 3, 2020, will usher in a longer, deeper bear
market that erases all of the gains made over the past year.

Investors’ Desperate Search for Yield

Many retrospectives put the blame on Greensill’s use of larger, riskier loans, but that view puts the cart before the horse.
As this Bloomberg headline suggests, the business model was made possible by the collision of three forces:
stratospheric optimism, tremendous complacency toward debt, and the abject desperation among fixed-income investors
to eke out positive returns in an environment of sub-zero interest rates.

How Lex Greensill Risked His Fortune and His Firm

It's disturbing that yield-starved investors are still misjudging the dangers of exotic investment products more than a decade after
the banking crisis.
—Bloomberg, 3/5/21

Disturbing, yes, but also entirely predictable. In fact, EFF has documented the effects of yield-starved investors ever
since the 2008 financial crisis ostensibly ended. In February 2010, for instance, we observed that even as sovereign
default risk grew in countries like Greece, Spain and Italy, the risk was “not stopping yield-starved investors from buying.”
Within months, Europe’s sovereign debt crisis roiled through Greece, Ireland, Italy, Portugal, Spain and, finally, Cyprus,
which defaulted on its sovereign debt in 2012. Once again, runaway optimism has generated an intense complacency
toward debt that has caused investors to ignore a classic financial truism: that higher investment returns almost always
come with higher risk.

The Domino Effect

According to Bloomberg, Greensill is “not big enough to pose broader dangers to the financial system.” (3/5/21) But this
view also misses the point. For one thing, it is still premature to say how far the aftershocks will spread. Already, the
collapse has slammed into venture capital investors, investment funds at global investment banks, and several German
municipalities that deposited money with Greensill. By mid-March, companies who relied on short-term loans from
Greensill found themselves scrambling to fill the void. “Some customers without access to cash will need to find alternate
sources of financing in the coming weeks and months.” (WSJ, 3/8/21) On March 12, U.S. private equity company Apollo
Global Management ended talks with British administrators to purchase Greensill’s operating assets. So, from our
perspective, we simply cannot know whether the situation is contained.

More important, Greensill is merely emblematic of the credit-bloated financial corporations that have risked life and limb
to keep investment returns flowing. Just this week, Archegos Capital Management, a little-known hedge fund with total
positions north of $50 billion, collapsed after it faced margin calls from its Wall Street lenders. On Monday, executives
realized that they “might be facing the biggest hedge fund blowup since Long-Term Capital Management in the 1990s.”
(Bloomberg, 3/29/21) Back then, the U.S. Federal Reserve brought together 16 worldwide financial institutions to rescue
the fund. Today’s financial institutions are far more connected and far more leveraged, which means that any one of
these small-scale sparks could ignite the credit inferno we have been anticipating.

The Credit Markets

By Brian Whitmer, European Financial Forecast (EFF)

Bond investors’ optimism is pushing to multi-year extremes in parallel with the sentiment conditions in stocks. Yet, the
danger that lurks across global debt markets may be even more extreme than that in equities. Last month, for example,
EFF illustrated a multi-year high in the Bloomberg Barclays Global Aggregate Duration Value Index. As we explained, the
index tracks the bond market concept of duration in corporate debt, providing a rough approximation of how destructive
rising interest rates could become.
In sovereign debt, investors also keep piling into the riskiest bonds. In fact, demand is so strong that fixed-income
experts are having difficulty quantifying it:

European bond sale order books grow to ‘ridiculous’ levels

—FT, 3/18/21

According to the article, the size of sovereign order books — a list of buy and sell orders organized by price — gradually
rose beginning in 2017. Order books bloated further in 2020 and have since reached “frankly ridiculous numbers,”
according to one strategist. As such, experts can no longer use the books to gauge demand.

Another popular way to gauge demand for sovereign debt is to look at bid-to-cover ratios, which compare the bids
received in a security auction to the amount of bonds sold. A version of this graph was published in the March 18 edition
of the Financial Times. Average bid-to-cover ratios have risen steadily across the key euro-area bond markets. The
metric spiked 40% in 2020 and the ratios have continued to push higher in 2021.

The runaway demand is confirmed by this year’s string of record-setting bond auctions. In January, Spain attracted
orders of more than €130 billion for a 10-year bond syndication, the country’s second record-setting deal in 12 months. In
February, Italy’s €108 billion debt sale broke a record that was set last summer. Even Greece — a country that was

effectively locked out of the international credit markets at the height of the euro-area debt crisis in 2012 — just held its
first 30-year debt sale since 2008. The bonds attracted more than €26 billion of orders for just €2.5 billion of debt and
allowed officials to cut pricing by 10 basis points.

Runaway trends like these cannot last forever. A trend toward rising interest rates will stifle demand for most forms of
debt, and investors will become risk-averse due to the inevitable defaults that accompany credit deflation. This joint
condition should put a lid on demand for all but the world’s shortest-term, most pristine bonds.
 The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to
optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of
the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the
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