European indices: DAX reaches record high ahead of ECB interest rate decision

Mixed start for European equities

It was a mixed start to the week for key European equities as traders assessed the promise of renewed stimulus in China. This comes ahead of a busy calendar that includes interest rate meetings for the European Central Bank (ECB) and the Swiss National Bank (SNB).

Chinese policy changes propel DAX to new heights

The German DAX 40 reached a fresh record high of 20,461 at the opening, driven by China's Politburo announcement. This announcement, made yesterday afternoon, indicated plans to shift from a 'prudent' to a 'moderately loose' monetary policy in 2025.

Germany's economy and stock market are closely tied to China's economic performance. However, the upward movement in the DAX lost momentum following disappointment from the People's Bank of China's (PBOC) dovish shift in September, which did not bring about the anticipated fiscal stimulus.

FTSE gains from commodity strength

In the United Kingdom (UK), the FTSE 100 finished 0.5% higher overnight. This was supported by gains in key commodities, including iron ore and crude oil, and its heavy concentration of mining stocks, which stand to benefit from a loosening of monetary policy in China. Attention now turns to the upcoming ECB meeting.

ECB interest rate decision

Date: Friday, 13 December at 12.15am AEDT

At its last meeting in October, the ECB continued to ease rates with a 25 basis point (bp) cut to its key deposit rate facility, bringing it down to 3.25%. This followed a similar rate cut in September. The move was widely expected due to downside surprises in the September purchasing managers' index (PMI) and inflation figures, and it was viewed as modestly dovish relative to market expectations.

• Expected rate cuts and economic forecasts

Given the ongoing weakness in surveys since October and the continued decline in core inflation, another 25 bp rate cut is expected this week, which would reduce the key deposit rate to 3.00%.

The accompanying statement is anticipated to sound dovish. The current aim of 'keeping policy rates sufficiently restrictive for as long as necessary' could be replaced with an intention to 'gradually remove restrictions,' paving the way for more cuts next year.

The ECB will release a new set of forecasts extending to 2027. Although third quarter (Q3) 2024 gross domestic product (GDP) growth was stronger than expected, revisions to past data and disappointing investment suggest minor downward adjustments for this year and the next.

• Inflation surprises and market pricing

Inflation also surprised to the downside in Q3 and early fourth quarter (Q4), especially in core measures. Consequently, downward revisions to inflation forecasts are likely, with the 2% target expected to be reached sooner than anticipated.

The Euro Area rates market is already fully priced for a 25 bp rate cut at this week's ECB meeting. A cumulative 150 bp of ECB rate cuts are priced between now and December 2025.

ECB interest rate chart

FTSE technical analysis

After a robust rally to the mid-May high of 8474, the FTSE has spent the past six months consolidating mostly above support at 8000 and below a band of resistance at 8400 - 8420.

A sustained break above the trend line resistance at 8370, which originates from the highs of May, August, and October, and then above a band of horizontal resistance at 8400 - 8420, is needed to confirm that the correction in the FTSE is complete and that the uptrend has resumed towards 8600.

While the FTSE remains below resistance at 8400 - 8420, further sideways price action is possible, including a retest of the support from the 200-day moving average of 8145 and the mid-November low of 7995.

FTSE daily chart

DAX technical analysis

The retracement from the October high of 19,674 to the mid-November low of 18,821 was corrective in nature. Upon its completion, the DAX surged higher, falling just short of the 20,500 level highlighted in last week's update.

While we wouldn’t recommend chasing the DAX at these levels due to the overbought nature of the rally, we anticipate that after some consolidation in the upcoming sessions, the DAX can resume its uptrend towards 21,000 by year-end.

A sustained break of support at 19,500 would be the first indication that the DAX has topped and that a deeper pullback is underway.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 10 December 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.}