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European indices: DAX sits on a knife edge


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European indices face uncertain times as central banks take divergent stances, with the DAX showing signs of a potential correction.

 

original-size.webpSource: Bloomberg

 

 Tony Sycamore | Market Analyst, Australia | Publication date: Tuesday 26 September 2023 06:19

BoE's cash rate on top of 'Table Mountain'

Last week saw the Federal Reserve (Fed) and the BoE deliver hawkish holds in contrast to the European Central Bank's (ECB’s) dovish hike the previous week. The BoE was empowered to keep its official cash rate at 5.25% after the release of a cooler-than-expected August consumer price index (CPI), just a day before the Monetary Policy Committee (MPC) meeting.

Unless there is an upside in inflation or wage growth from here, the BoE’s official cash rate is now on top of Table Mountain, to borrow the analogy of the BoE’s Chief economist Huw Pill.

For those unfamiliar with Table Mountain, it looks exactly like the name suggests. Pill’s analogy warns that rates in the UK will need to remain higher for longer. In the current climate, where activity data is already sliding, this increases the chance of a recession in the UK.

For those looking for further evidence of why the ECB delivered a dovish hike the prior week, last night's German ifo business climate index printed at 85.7 in September, the weakest level since October 2022 when fears of a European recession and European energy crisis were at their greatest.

The ifo print likely confirms the ECB’s rate hiking cycle is over and that the German economy will likely lead Europe into recession.

DAX technical analysis

During September, the view has been that the correction in the DAX, which started from the late August 16615 high, was missing a leg lower and had further to go.

The overnight close below the 200-day moving average at 15629 and break of the mid-August low at 15511 warns that the missing and final leg (Wave C) of a three-wave ABC pullback has commenced, which targets a move to wave equality at 15000.

Should the pullback play out as expected and signs of basing emerge in the 15000 area, we expect to see the uptrend resume, which would see the DAX test and break the July 16615 high.

DAX daily chart

 

original-size.webpSource: TradingView

FTSE technical analysis

In early September, contrary to our expectations, the FTSE rebounded from the critically important 7200 level, initially supported by BoE Governor Andrew Bailey's dovish comments in late August and then by the dovish ECB meeting.

The hawkish hold from the BoE and the Fed last week appears to have capped the rally at 7750 and prompted the FTSE to fall back within its range and below the 200-day moving average at 7637. While the FTSE remains below resistance at 7750, there is a good chance of further rotation within the 7750/7200 range.

Aware that if the FTSE were to see a sustained break of support at 7200, there is scope for it to extend its decline towards 7000 before a retest of the 2022 lows 6800/6700 area.

FTSE daily chart

 

original-size.webpSource: TradingView

TradingView: The figures stated are as of 26 September 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

 

 

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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