European indices update: August blues remain present amid Chinese economic woes

DAX, FTSE down 5%

With just over a week to go, August is shaping up as a month to forget for European equity indices. The DAX and the FTSE are down over 5% MTD and, while there is time for a rebound into the end of the month, the current backdrop doesn’t appear overly supportive.

In Europe, signs of cooling continue to materialise. Overnight, the German producer price index (PPI) fell in July (-6% year-on-year), the fastest since 2009. More importantly, the Euro Zone and its largest economy, Germany, are leveraged to the growth prospects of the Chinese economy.

Is China heading for deflation?

The Chinese economy is faltering, and deflationary concerns are building. Yesterday, the Chinese central bank, the People’s Bank of China (PBoC), delivered a smaller-than-expected rate cut in China. The short-term one-year loan rate was cut 10bp from 3.55% to 3.45%, and the five-year rate was left untouched at 4.20%. The market had expected a 15bp to both the one-year and five-year rates.

On Wednesday night, ahead of the Jackon Hole Economic symposium, where European Central Bank (ECB) President Lagarde is expected to speak, Euro Zone flash purchasing managers' indexes (PMIs) are scheduled for release at 6pm AEST. How they fall will go some way to shaping future views of growth and ECB policy.

What to expect from the Euro Zone and German Flash PMIs

The Euro Zone Composite PMI is expected to fall marginally in August to 48.5 from 48.6 in July as the contraction in private sector activity deepens from a high of 54.1 in April.

The manufacturing sector has been hardest hit by the slowdown: last month, the manufacturing PMI fell to 42.7, its lowest level in three years. This month it is expected to remain at 42.7, while the services PMI is expected to fall to 50.5 from 50.9 prior.

A sharper fall in the PMIs alongside slowing inflation may be enough to see policy markers decide that a pause in September is the prudent cause of action. Currently, there are about 13bp of a 25bp rate hike for September priced into the rates market.

DAX technical analysis

Last week the decline in the DAX from 16,615 high of the 31 July 2023 probed a band of support coming from recent lows and the 200-day moving average at 15,650/450.

While the DAX holds above this support band, allow for a rebound back towards 16,000 and possibly to range highs, 16,400/16,600 area. However, if the DAX sees a sustained break of support at 15,650/450, there is very little in the way of downside support until the lows from March 2023, 14,700/600, area.

DAX daily chart

FTSE technical analysis

Following its recent rejection from the 200-day moving average at 7625, the FTSE has fallen sharply, setting its sights on both range and year-to-date lows in the 7200 area.

While the FTSE holds above support 7200ish, allow for a rebound back towards the 200-day moving average at 7625, with scope to the highs of July 7722 area.

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

FTSE daily chart

• _{TradingView: the figures stated are as of August 22, 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.}