European indices update: European equities poised for comeback amidst US market highs

Post last week's softer-than-expected US CPI data, the benchmark US equity index, the S&P 500, has made fresh cycle highs, shaping the question of whether the DAX and the FTSE will follow suit.

Early 2023: A spotlight on European market outperformance

During the first five months of 2023, European equities outperformed relative to US stock markets. The main drivers of this outperformance were a rebound in European growth as the energy crisis abated. The debt ceiling debacle overshadowed US equity performance, and AI mania was still in its infancy.

Since May, however, European data has since rolled over. Q1 GDP data released in early June confirmed that the Euro Zone entered a technical recession in Q1 of 2023. Europe's exposure to a slowing China economy is more pronounced, and despite growth slowing, inflation remains sticky. The rates market is priced for another two 25bp rate hikes by year-end, which would take the ECB's official deposit rate to 4%.

In the UK, a similar muddled story. GDP released last week showed no growth in the three months to May. Despite a rise in the unemployment rate in May to 4% from 3.8%, the whole economy pay surprisingly rose to 7.3% from 7.1% expected.

Attention in the UK turns to tomorrow night's June inflation data release. The market is looking for headline inflation to ease to 8.2% YoY from 8.7% prior due to strong base effects, particularly in energy. Core inflation is expected to remain stable at 7.1%.

Heading into the inflation data, the rates market is fully priced for another 100bp of rate hikes from the BoE over the next eight months, taking the BoE's official cash rate to 6.00%.

DAX technical analysis

In last week's update, we noted that if the DAX remained below resistance at 16,000, we would remain with a bearish bias and that on a move "above 16,000, a more neutral bias is warranted."

The DAX has since rebounded back above 16,000 and as the decline from the mid-June 16,572 high unfolded in three waves, we view the recent decline as a correction rather than the early stages of a reversal lower.

Looking forward, providing the DAX holds above trend channel support at 15,660 and the recent swing low at 15,559, a positive bias is in place, looking for a retest and break of the mid-June 16,572 high.

DAX daily chart

FTSE technical analysis

Furthermore to last week's update, we noted that the FTSE had reached our downside target and that the decline from the February 8047 high had unfolded in three waves which we viewed as a corrective or countertrend move. We also suggested moving to a neutral bias watching for signs of basing.

At this point, we still don't have the confirmation that a base is in place at last week's 7229 low. However, should the FTSE reclaim trend line support at 7450 and the 200-day moving average at approximately 7560 on a sustained basis, we would move to a more positive bias looking for the rally to extend, initially towards 7800.

FTSE daily chart

• _{TradingView: the figures stated are as of July 18, 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.}