Will political unrest and credit downgrades derail European indices?

Political instability impacts European markets

European stocks fell overnight, hindered by weak economic data and political instability in France and Germany.

The German parliament accepted Chancellor Olaf Scholz's request for a confidence withdrawal, leading to an early election on 23 February after his government collapsed. Scholz called the vote after dismissing Finance Minister Christian Lindner, leader of the Free Democrats, which cost him his majority.

France's credit rating downgrade

Moody's downgrade of France's credit rating further dampened sentiment, increasing borrowing costs and raising concerns about the country’s financial recovery.

European PMI data eases tariff concerns

In economic news, the purchasing managers' index (PMI) data showed European economic activity contracted less than feared, easing tariff gloom ahead of United States (US) President-elect Donald Trump's inauguration next month.

• The Hamburg Commercial Bank (HCOB) Composite PMI rose to 49.5 from 48.3 in November, beating forecasts of 48.2
• In the United Kingdom (UK), the S&P UK Composite PMI remained at 50.5 in December, unchanged from November, marking the 14th consecutive month of expansion in the UK private sector.

The focus now shifts to the upcoming UK consumer price index (CPI) data and Thursday’s Bank of England (BoE) meeting, previewed below.

BoE interest rate decision

Date: Thursday, 19 December at 11.00pm AEDT

At its last meeting in November, the Bank of England lowered its official Bank interest rate by 0.25% to 4.75%, marking its second rate cut in this easing cycle.

The BoE signalled that a quarterly pace of rate cuts was likely in the future, as services inflation is still high in the UK and fiscal stimulus from recent government budget announcements will boost growth and bring upside risks to inflation.

On Wednesday night in the lead-up to Thursday's BoE meeting, an inflation report for November will be released. In October, annual inflation in the UK was unexpectedly firm at 2.3%, the highest in six months, while annual core inflation increased to 3.3% from 3.2% prior.

Core inflation is expected to tick higher again to 3.4% in November. This will ensure the BoE keeps rates on hold at 4.75% before cutting rates by 25 basis points (bp) in February next year. A cumulative 73 bp of rate cuts are priced into the UK rates market between now and December 2025, taking the BoE’s official Bank rate lower to 4%.

BoE official bank rate chart

FTSE 100 technical analysis

After a robust rally to the mid-May high of 8474, the FTSE 100 has spent the past six months consolidating mostly above support at 8000 and below a band of resistance at 8400-8420.

A sustained break above the trend line resistance at 8370-8390, which comes from the highs of May, August, and October, and then above a band of horizontal resistance at 8400-8420, is needed to confirm that the correction in the FTSE is complete and that the uptrend has resumed towards 8600.

Aware that while the FTSE remains below resistance at 8400-8420, further sideways price action is possible, including a retest of the support coming from the 200-day moving average of 8177 and the mid-November 7995 low.

FTSE 100 daily chart

DAX 40 technical analysis

The retracement from the October 19,674 high to the mid-November 18,821 low was corrective in nature. Upon its completion, the DAX 40's uptrend resumed, and overnight, it reached the 20,500 level we have highlighted in recent updates.

While we wouldn’t be chasing the DAX at these levels, given the rally is now overbought, we suspect that after some consolidation, which involves a pullback towards 20,000, the DAX can resume its uptrend towards 21,000 into year-end.

A sustained break of support at 19,500 would be the first indication that the DAX has topped out and that a deeper pullback is underway.

DAX 40 daily chart

• _{Source: TradingView. The figures stated are as of 17 December 2024. 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.}