European market update: FTSE and DAX continue to outperform their US counterparts

While US stock markets have fallen this week on angst over higher interest rates, the shockwaves of Fed Chairs Powell’s hawkish Testimony to Congress failed to extend as far as European Equity indices.

This shouldn’t be too much of a surprise as European equity indices have outperformed US equities since early October. This is best illustrated by the German stock market, the DAX, which is trading 32.5% above its October low, and the UK index, the FTSE, which is trading 18.5% above its October low.

Over in the US, the difference is evident as the S&P 500 is trading 14.5% above its October low.

The reasons are that European equity valuations are lower than the US, positioning is less crowded, and there are upside risks to European growth as the energy shock wave wanes. Evidence of this was viewed overnight as German Industrial Production rebounded in January, +3.5% vs -2.4% in December.

Furthermore, European stock indices are predominantly old economy value stocks and consist of less of the new economy tech stocks prevalent in the US, which are vulnerable to higher interest rates.

The faster pick-up in German growth numbers will likely see the ECB staff forecasts (a crucial input into next week’s ECB meeting) for both growth and core inflation revised higher.

DAX technical analysis

In last week’s update here, we thought the more aggressive repricing in European interest rate markets following the stickier-than-expected inflation numbers in Europe would see the DAX break the uptrend support and head towards the next level of support at 15,000/14800.

However, after a brief look below the trendline support, the DAX rebounded and traded to a fresh cycle high at 15,720.

From here, providing the DAX holds above last week’s swing low at 15,160, the expectation is for it to continue higher towards the next level of upside resistance at 16,000 before a possible look at its all-time 16,295 high. Aware that should the DAX see a sustained break below support at 15,160, it would likely see a deeper decline towards 14,000.

DAX daily chart

FTSE technical analysis

The FTSE has spent the past three weeks correcting in time (not so much in price) from a strong rally in October of a 6707 low to the February 8047 high.

At this point, the correction does not look complete, and the preference is for a deeper pullback towards 7800/7650 before the uptrend resumes.

Aware that if the FTSE were to see a sustained break of support 7700/7650, it would warn that a medium-term high is in place at 8047 and that a deeper decline is underway.

FTSE daily chart

TradingView: The figures stated are as of March 9th, 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.