DAX and FTSE outperform amid US inflation concerns, European manufacturing rebounds
German and UK stock markets end the week strong, defying US inflation worries with Germany's booming factory orders and an optimistic European manufacturing outlook signaling economic recovery.
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While US equity markets limped into the weekend on concerns over hotter-than-expected inflation data, the German and UK stock markets ended the week on a solid note.
Despite a lack of AI names, the DAX has followed US equity markets to new highs in 2024, due to several important factors. The energy shock from the Russian invasion of Ukraine has now subsided. Sentiment towards the Chinese economy, which Europe and particularly Germany is leveraged to, appears to be turning high, albeit from a low base. Finally, global manufacturing appears to have turned higher and falling inflation will likely allow the ECB to cut rates in the coming months.
While Germany has been late to join the manufacturing upswing, data released last week showed factory orders in Germany surged by 8.9% in December, compared with a market forecast of a flat reading. It was the strongest rise since June 2020, boosted by large orders across several industries. Further signs of optimism are expected to be viewed in the Euro Area flash PMIs set to be released this week.
What is expected from the Euro Area HCOB PMIs (Thursday, 22 February at 8.00pm)
The Euro-Area Manufacturing PMI surged to 46.6 in January, the highest in ten months, with services stable around 48 for a third month.
This month, the manufacturing PMI is projected to rise to 47.0 from 46.6, and the services PMI is anticipated to edge higher to 48.7, up from 48.4. The composite PMI is expected to increase to 48.8 from 47.9 in January.
HCOB composite flash PMI chart
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FTSE technical analysis
Following a strong rally at the end of last week, the FTSE starts the new week eying resistance at 7750/65ish, which has held for the past nine months. If the FTSE can see a sustained break above 7750/65ish, it would open up a test of the April 7936 high, with scope to the 8047 high.
However, should the FTSE again reject resistance at 7750/60ish, the FTSE would likely rotate back towards the support at 7550/00, coming from the 200-day moving average and last week's 7492 low.
FTSE daily chart
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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 the 17,123 high to the mid-Jan 16,464 low, it was likely a corrective sequence, and that the DAX would push to new highs.
The Dax has since made a fresh record high at 17255. However, given the continued evidence of bearish RSI divergence and based on our wave count, which suggests the up move is mature, we remain of the view that a 5-10% pullback is not too far away.
DAX daily chart
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- Source: TradingView. The figures stated are as of 20 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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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