Dax 30, CAC 40 and Ibex 35 outlook: will optimism last all week?

European markets wrap:

• Dax 30, CAC 40 and Ibex 35 have been lifted by trade hopes and German GDP
• Technical analysis suggests an upward trend for Frankfurt’s stock exchange
• Later in the week, economic data and a Jerome Powell speech could dislodge European markets

European markets are moving higher today on US-China trade deal optimism and a better-than-expected German GDP in the second quarter after a positive start on Monday. In Germany, Dax 30 is up 0.24% at 13,097.

In France, CAC 40 is gaining 0.26%, moving up to the psychological threshold of 5000. In Spain, Ibex 35 is up 0,11% at 7,116.

As top US and Chinese trade officials reaffirmed last night their commitment to the Phase 1trade deal, risk-appetite of European investors for stocks is heightened, extending the increases registered yesterday on the EU’s indices, and despite the Covid-19 case surge in the area.

This morning, data also revealed that the German GDP in the second quarter performed better than initially thought, with an upward revision at -9.7% from a -10.9% first estimate.

But could this upward move keeps on track ahead of a pretty busy week, with the Jackson Hole Symposium of the Fed and important data on the American economy?

Dax 30 on an ascending channel

On a technical side, German Dax 30 is in a comfortable position to hold its gains, considers Daniel Moss, market analyst at DailyFX. ‘The German index continues to track within the confines of an ascending channel and remains constructively poised about the midpoint of the 2009 uptrend’, he observed.

‘Mobile support at the 21-day moving average (12750) could direct price towards resistance at the yearly open, with a daily close above the July high (13126) needed to carve a path to its record high at 13829’, said Daniel Moss. ‘Conversely, a daily close below the 50-day moving average at 12645 may slide down the indice towards 12170.’

CAC 40 still vulnerable to corrections under 5200 resistance

In Paris, ‘a parabolic move on Monday sent the index above 5000 but resistance around 5200 remains the most formidable opponent’, according to Peter Hanks, market analyst at DailyFX. ‘Consequently, range trading opportunities could remain attractive when considering a position in the CAC 40.’

‘In the event of a risk aversion, the Fibonacci level near 4700 will likely mark an area of potential support’, he added. ‘Until a larger move that can test the barriers above and below the current price range is established, it seems the CAC 40 is vulnerable to further range-bound movement.’

Ibex 35 sustainable rebound not yet reached

Similarly to the French index, Ibex 35 still has some way to go before reaching a level on which it could rely on a more sustainable rebound. Given the Spanish index managed to get back over the 7100 point mark yesterday, for Joan Cabrero, advisor at Ecotrader, Ibex 35 must be able to beat the resistance of 7385, which is 200 points up from its current level.

This will ensure an upward trend and ‘cancel the threat of returning to the April and May lows, above 6420’, said Cabrero to the daily newspaper El Economista.

US economic calendar could dislodge the European stock exchange

On a fundamental side, Dax 30, CAC 40 and Ibex 35, as the rest of the European indices, could tumble on several events planned from today to the end of the week.

Regarding the economic calendar in the USA, the Conference Board Consumer Confidence, the weekly jobless claims and the second GDP forecast will give a more precise picture of the American recovery during the summer. If the data misses the Wall Street consensus, it could mean appetite for stocks decreases and slow down European indices.

Furthermore, the main driver of the markets this week will be the annual Jackson Hole Symposium led by the Fed of Kansas City. Investors’ attention will be paid to Fed Chairman Jerome Powell’s speech, planned at 13:10 GMT on Thursday. Powell is likely to reveal a set of measures aimed at pushing inflation higher to stimulate American growth after the pandemic.

‘The expectations are pretty high to get something meaningful on Thursday’, said to CNCB Tom Graff, head of fixed income at Brown Advisory. ‘This is probably a historic speech.’

But the higher the expectations, the greater the disappointment. Markets could be impacted if Powell doesn’t give a strong signal to boost inflation. Yet analysts are confident that ‘the Fed will seek a moderate inflation overshoot during the recovery phase of this cycle’, wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISIS.

The Pandemic risk remains in place

Finally, evolution of Covid-19 cases in the euro-zone in the coming days could also influence the course of European indices, especially the Dax 30. On Monday, Germany recorded its largest daily increase of Covid-19 cases in over four months (+2034).

Should cases continue to rise at this pace, the country could reintroduce some restrictions very quickly. Chancellor Angela Merkel is to discuss the issue with all of the 16 states on Thursday. If nationwide regulations are passed, investors will consider that the risk a second wave of the pandemic remains on the downside and will favour the purchase of safe-haven securities to the detriment of stocks.

However, for Lazard Asset Management research team, ‘the key is how governments respond to any potential second wave. If lockdown measures become more targeted and regionally focused than the first wave, then the economic impacts will be less than we have witnessed so far.’

In the near future, ‘Markets will [mostly] continue to be highly attuned to medical discoveries, particularly any progress toward a viable vaccine. The sheer volume of capital going into vaccine and treatment research in such a short space of time will hopefully help support quicker discoveries in these areas.’

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