European indices update: ECB rate hike expectations recede amid worrisome data

Investors hope for a skip from the Fed

After a bruising first half of August, key European indices rebounded into month-end, supported by a positive lead from Wall Street and hopes that the Federal Reserve Bank (Fed) is at the end of its rate hiking cycle.

While expectations for a skip from the Fed in September are firmly in place, the outlook for the upcoming European Central Bank (ECB) meeting in September is less certain.

Following the latest patch of worrying data in Europe, which includes sticky core inflation and evidence that the services purchasing managers' index (PMI) is now following the manufacturing PMI lower, the rates market expects the ECB to stay on hold in September. Additionally, there is little chance of a rate hike priced until December - undermining recent hawkish rhetoric from ECB speakers.

Hawkish ECB hits European equities

Traditionally, after the ECB has reached the end of its tightening cycle, European equities have not fared as well as other markets. This time around, it is unlikely to be different. Core inflation at 5.3% remains well above target, and the ECB deposit rate of 3.75% runs the risk of inflation staying above target for longer and becoming more entrenched in expectations.

Attention now turns to the release of the final services PMIs for August tonight, followed by the release of retail sales for July and German factory orders tomorrow night.

DAX technical analysis

The manner in which the DAX reached the first upside target of 16,000 suggests that the rebound has been corrective, viewed as the second wave or Wave B of a three-wave corrective sequence. As such, providing the DAX remains below the resistance 16,070/120 area, we expect to see a retest of recent lows and support of 15,500ish.

If the DAX were to see a sustained break of support of 15,500, 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

In late week's update, we stated, "While the FTSE holds above support at 7200ish, allow for a rebound back towards the 200-day moving average at 7625, with scope to the highs of July 7722 area,"

Despite its 2% rally since last week, the FTSE has fallen about 100 points short of the 200-day moving average now at 7630. While we can't rule out a final push higher, given the backdrop from the US and the German equity market, we think a retest of support at 7200 is looming in the weeks ahead.

If the FTSE were to see a sustained break of support at 7200, there is scope 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 September 5, 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.}