European equity indices: what does French election uncertainty mean for the DAX and the FTSE?

The DAX and the Financial Times Stock Exchange (FTSE) finished higher last week as the outcome of the UK election went largely according to the script. However, a surprise shift in the second round of the French elections has cast a shadow of uncertainty.

French fiscal impact and political uncertainty

After the first round of the French elections on 30 June, parties from the centre and the left of the French political spectrum worked together to pull weaker candidates. This was done to avoid splitting the vote and to block Marine Le Pen’s far-right National Rally (RN) party from attaining an absolute majority.

The move achieved its goal. However, it also provided an unexpected outcome, as a left-wing coalition called the New Popular Front (NPF) emerged victorious. RN was relegated to third place behind President Emmanuel Macron's centrist alliance.

While the result removed the worst fiscal tail risks of a left or right-leaning government, the most likely outcome in the near term is a hung parliament, as the three parties look for ways to obtain the 289 votes needed to form a government. In the interim, it leaves uncertainty in France, Europe’s third-largest economy, and over European equity markets.

FTSE technical analysis

Following the FTSE's pullback from the May 8474 high to the mid-June 8112 low, we moved from a neutral to a positive bias, leaning against horizontal and uptrend support at 8050/8000.

The rebound since has been tepid at best and given the results of the French election outlined above, we think the risks of another leg lower are increasing.

As such, we move back to a neutral bias. A sustained break below support at 8100/8000 would signal that a deeper decline towards 7800 is underway.

FTSE daily chart

DAX technical analysis

The view remains that the DAX completed a five-wave rally from the October 14,630 low to the mid-May 18,892 high. Within Elliott Wave theory, a Wave V is usually the final leg of an impulse move before a correction unfolds.

We suspect the DAX may have completed or is close to completing the second leg, Wave B, of a three-wave ‘ABC’ correction at last week's 18,650 high.

Once Wave B is complete, we expect the DAX to commence another leg lower at Wave C towards support at 17,700/600 coming from Wave equality and the mid-April 17,626 low. A break of support at 18,300 would indicate that Wave C lower is underway.

Pending signs of basing in the 17,700/600 area, we will be looking to be a buyer in anticipation of the uptrend resuming.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 9 July 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.}