European indices: global rate cut optimism boosts equities as German business climate declines

European markets rally but German economic concerns persist

European equity markets rallied last week, buoyed by global interest rate cut optimism following Federal Reserve Chair Jerome Powell's speech at Jackson Hole, which confirmed market expectations of Fed rate cuts before year-end.

However, the week has started more cautiously with a bank holiday in the UK and as Germany's Ifo Business Climate Indicator fell to 86.6 in August 2024 - the lowest since February - down from 87 in July. The sub-index for current conditions declined to 86.5 from 87.1, while business expectations dropped to 86.8 from an upwardly revised 87. Ifo President Clemens Fuest expressed concern, stating, "The German economy is increasingly entering a crisis."

Looking ahead, this week is set to be data-intensive, featuring earnings reports from AI giant Nvidia and key inflation updates in Europe and the US.

Euro area inflation expectations

Date: Friday, 30 August at 7.00pm AEST

In July, the annual inflation rate in the Euro Area rose to 2.6% year-on-year (YoY) from 2.5% in June, exceeding expectations of a slowdown to 2.4%. The core rate held steady at 2.9% for a third consecutive month, above forecasts of 2.8%.

For August, the market expects headline inflation to ease to 2.2% YoY, the lowest since mid-2021, while core inflation is anticipated to dip slightly to 2.8% YoY. The rates market is fully priced for a 25 basis point (bp) rate cut at the European Central Bank’s (ECB) 12 September meeting, with 65 bp of cumulative rate cuts priced before year-end.

EA core inflation rate chart

FTSE technical analysis

After peaking at the mid-May high of 8474, the Financial Times Stock Exchange (FTSE) spent the better part of two months range-trading between 8300 and 8100 before it dipped to its early August 7915 low.

We remain of the view that the dip to 7915 is part of a correction within an uptrend. However, a sustained break above the 1 August high of 8405 is needed to provide further confirmation that the correction is complete and that a retest and break of the 8474 record high is underway before a move to 8600.

Be aware that while the FTSE 100 remains below 8405, further sideways price action is possible.

FTSE daily chart

DAX technical analysis

Leading up to the August sell-down, the DAX had completed an Elliott Wave five-wave advance from the October low of 14,630 to the mid-May high of 18,892 and had commenced a correction. The dip to the early August low of 17,024 is viewed as part of the correction.

The subsequent rebound, initially above resistance at the 18,000/100 area and then above trend channel resistance around the 18,550 area last week, has increased the probability that the correction is complete and that the uptrend has resumed. This opens the way for the DAX to retest the July high of 18,779 before the 18,892 all-time high.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 27 August 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.}