DAX hits fresh record highs amid Nvidia's earnings surge: Euro area inflation insight awaited

Riding the wave of Nvidia's impressive earnings report, European equities, including the stalwart German stock market, witnessed a surge to unprecedented highs last week.

While the Nasdaq and the Nikkei have hogged the spotlight with their stellar performances this year, the German stock market has quietly carved its path to success. With a solid 13.4% gain in 2023, the DAX has continued its ascent, boasting a 4% increase year-to-date, even amidst the absence of notable AI players.

As highlighted previously, the DAX's upward trajectory can be attributed to various crucial factors, such as a resurgence in manufacturing, a positive shift in sentiment towards China, and the resolution of the energy shock triggered by the Russian invasion of Ukraine.

Equally significant has been the rapid decline in Euro Area inflation over the past sixteen months, positioning the ECB as a frontrunner among central banks expected to implement rate cuts in 2024. Insights into the timing of these potential rate adjustments will be gleaned from this week's Euro Area inflation data, as outlined below.

What's on the horizon for Euro area inflation (Friday, 1 March 9:00pm)

In January, headline inflation in the Euro area dipped to 2.8% YoY from December's 2.9%. Core inflation also saw a decline, settling at 3.3% YoY, marking its lowest level since March 2022. This month, expectations point to a further decrease, with headline inflation projected to drop to 2.7% YoY and core inflation anticipated to decline even further to 2.9% YoY.

The minutes from the January ECB meeting, unveiled last week, underscored a widespread consensus that it was premature to broach the subject of rate cuts, emphasizing the fragile nature of the disinflationary process. This sentiment was reinforced by hawkish remarks from ECB Governing Council members Stournaras and President Lagarde, who echoed, "We are not there yet" regarding inflation.

Nevertheless, the rates market is already factoring in a 25bp ECB rate cut slated for April, with a total of 88bp in cuts projected for 2024.

EA annual headline inflation rate chart

FTSE technical analysis

It's the same old story for the FTSE, as it starts the new week eying resistance at 7750/65ish, which has capped for the past nine months. If the FTSE can see a sustained break above 7750/65ish, it would warrant a positive bias and open a test of the April 7936 high, with scope to the 8047 high.

However, while the FTSE trades below resistance at 7750/60ish, there remains a high likelihood of further sideways rotating back towards the support at 7550/00, coming from the 200-day moving average and the mid-February 7492 low.

FTSE daily chart

DAX technical analysis

In our updates in mid to late January, we noted that due to the nature of the three-wave decline from the early January 17,123 high to the mid-Jan 16,464 low, it was likely a correction, and the DAX would push to new highs.

The Dax has since made a fresh record high at 17502, and while it remains above uptrend support at 17,200 from the October 14,666 low, the path of least resistance is for higher prices to follow.

Aware that should the DAX fall below support at 17,200 and below a cluster of horizontal support at 17,100, it would warn that a deeper pullback towards the 200-day moving average at 16,127 is underway.

DAX daily chart

• ^{Source: Tradingview. The figures stated are as of 27 February 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.}