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European equity indices update: renewed pressure for the FTSE and DAX

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European equity indices have enjoyed a healthy rebound over the past 36 hours but given the Fed's recent rate rise, the markets are feeling the pressure.


bg_janet_yellen_321567602.jpgSource: Bloomberg

 Tony Sycamore | Market Analyst, Australia | Publication date: Thursday 23 March 2023 

Following the violent intraday sell-off that followed the UBS-CSFB takeover on Monday, European equity indices have enjoyed a healthy rebound over the past 36 hours.

Helping the recovery, substantial gains in European Banking stocks after US Treasury Secretary Yellen stated "similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion."

The upbeat tone will likely evaporate when European markets re-open, taking their lead from a softer session on Wall Street following this morning's FOMC meeting.

While the Fed raised rates by 25bps to 4.75%-5.00% and left the median dot unchanged at 5.125% - a dovish development relative to expectations a few weeks ago, the tone of the press conference had hawkish elements. Fed Chair Powell noted he doesn't "see rate cuts this year" and that the Fed is "committed to restoring price stability."

Risk sentiment further soured after Treasury Secretary Janet Yellen said that the government is not considering "blanket" deposit insurance across the banking system, contradicting earlier reports—an explosive mix of communique to drop on markets with wounds still fresh after recent banking stress.

Given the central bank's stubborn focus on inflation, the fallout of a red-hot UK. inflation print last night (10.4% vs 9.9% expected), which guarantees a 25bp rate hike when the BoE meets tonight, will also be felt.

Of particular concern to the BoE, paying close attention to domestic inflation, an increased contribution to CPI from services by 3.1pp from 2.8pp in January.

DAX technical analysis

The view remains that the Dax completed a five-wave advance (Elliott Wave) from the October 11,829 low to the recent 15705 high and is currently tracing out a corrective pullback.

This week's bounce from the 14617 low is viewed as Wave B or the second wave of the correction, missing another leg lower into the 14,400/14,200 support band.

DAX daily chart


FDAX1_2023-03-23_11-37-03.pngSource: TradingView

FTSE technical analysis

The recent break below the band of horizontal support 7700/7650 area confirms that a medium-term high is in place at the February 8047 high and that it is currently tracing out a corrective pullback.

This week's bounce from the 7206 low is viewed as Wave B or the second wave of a three-wave correction that has room to extend back to resistance at 7700 before a deeper decline towards 7100/7000 in the weeks ahead.

FTSE daily chart



UKX_2023-03-23_11-38-36.pngSource: TradingView

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