​​Where to next for the FTSE 100, Dax 40 and Euro Stoxx 50?

​​​What are the main drivers for Q1 2023?

​Despite warnings by the International Monetary Fund (IMF) about recession for 1/3rd of the global economies, European equity indices began the new year on a strong footing by intraday breaking through technical resistance zones.

​Growth and inflation concerns, which to a large extent drove global equity markets in 2022, are likely to do so again in 2023 with the now added variable of China’s swift move away from last year’s strict zero Covid-19 policy.

​The world’s second largest economy re-opening its borders and allowing its citizens to travel again for China’s lunar new year celebrations in January, for the first time in the past couple of years giving them the opportunity to see their families again, is viewed with concern and at the same time hope by its neighbours and the world at large.

​On the one hand, the possible global spread of Covid-19, new variants and a possible spike in infections world-wide may slow down growth, not just in China but also globally, but on the other hand China’s re-opening may well lead to stronger growth in the world’s second largest economy with 1.4 billion people and thus buoy global demand and hence growth.

​Bullish and bearish facts to consider

​When looking at the near 100-year history of the US S&P 500, consecutive negative years have only occurred on four previous occasions since 1928, however, when they do occur, second-year declines tend to be deeper than the first.

​So where are we at in 2023?

​Bears could rightly argue that we have seen no capitulation in 2022, something which usually occurs at bear market bottoms.

​Equity allocation at the October 2022 low was relatively high at 60% and cash allocation relatively low at 25%. At most of the previous bear market lows equity allocation was closer to 40% and cash allocation shot up to 40%. The exception was the Covid-19 crash with 55% equity allocation.

​Furthermore, historically bear markets tend to happen while or after the US Federal Reserve (Fed) pivots, i.e., when it changes its monetary policy from tightening to easing in this case. This hasn’t happened yet but is expected for 2024.

​Also, with regards to the current inverted yield curve with the US 2-year bond yield currently trading at 4.35% and the US 10-year bond yield at 3.74%, meaning that investors expect a decline in long-term interest rates, the odds of a recession being seen, not just in the US, is high.

​This is because since the 1970s the US yield curve always steepened as recessions began. Steepening of the yield curve means that the spread between long- and short-term interest rates widens, or, put differently, that the yields on long-term bonds are rising faster than yields on short-term bonds, or short-term bond yields are falling as long-term bond yields are rising.

Bulls could argue that equity outflows in December 2022 hit a four-month high and that the relative positioning in stocks versus bonds is now at its lowest since 2009 and that a mean reversion, with money flowing back into equities, may occur this year.

​Added to this several sentiment indicators, which tend to act as a contrary indicator, such as CEO business confidence which hit an extreme low in December, seem to point to at least short-term equity gains.

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Technical view on the FTSE 100, DAX 40 and Euro Stoxx 50

​FTSE 100

​The FTSE 100, which was the best performing major equity index last year and managed to end 2022 on a slightly positive note, also began 2023 on a positive footing by briefly reaching a six-month high before giving back some of its intraday gains.

​The index remains medium-term bullish while it continues to be underpinned by its 7,297 December low, though.

​A rise and daily chart close above the 7,618 November high would engage the February-to-May 2022 highs at 7,649 to 7,688.

​DAX 40

​The fact that the DAX 40 has managed to break through its 14,125 to 14,129 resistance area, which capped it during December, points to further upside perhaps taking the index back to its December peak at 14,677.

​A rise above the December high would engage the June peak at 14,712 and then perhaps the March high at 14,927 later in the year.

​This medium-term bullish technical view will remain intact while the index stays above its December trough at 13,697 since it represents the last significant low point.

​Failure there would point at a failed rally attempt in early January and put the 200-day simple moving average (SMA) at 13,557 on the map.

​Euro Stoxx 50

​For the Euro Stoxx 50 the technical picture is quite similar to that of the DAX 40 in that it made a three-week high at 3,923 before giving back some of its Tuesday intraday gains.

​As long as the index remains above its 3,750 December low, though, the medium-term outlook will remain bullish with the December peak at 4,035 remaining in sight.

​The December peak is part of key resistance which sits between the April 2021 to March 2022 highs at 4,026 to 4,049.

​ While the next higher August 2021 high at 4,251 isn’t exceeded, the risk of another down leg being seen in Q1 2023 remains on the cards. In such a scenario the 200-day simple moving average (SMA) at 3,672 may well be revisited.