European indices hit in US recession fears crossfire

Heavy losses in European markets and sector-specific declines

European equity indices took a heavy hit overnight, with the DAX and the Financial Times Stock Exchange (FTSE) hitting multi-month lows as mounting fears of a slowdown in the world's largest economy sent ripples through global equities.

In Germany, heavyweight automakers and banks were at the epicentre of the sell-off. In the UK, the energy and big miners did the damage as they followed commodity and gold prices lower. Last week's rate cut by the Bank of England was left a distant memory.

Positive developments in the US services sector

However, amidst the gloom, there was a flicker of relief as news broke of a rebound in the US services sector for July. This encouraging development allowed the FTSE and DAX to pare back some of their earlier losses as trading approached the close. We think it could also prove to be a circuit breaker to the recent sell-off in US stock markets.

FTSE technical analysis

After peaking at a mid-May high of 8474, the FTSE spent the better part of the past two months range-trading between 8300 and 8100 before last night's look below support at 8000.

At this point, the jury is out on whether the fall below 8000 is the start of a deeper decline towards 7850/7800. While we are open to this idea, we are not looking to chase it lower into the support provided by the 200-day moving average at 7850.

To negate the downside risks, the FTSE needs to return to the safety of its 8100-8300 range without first breaking below the 200-day moving average at 7850.

FTSE daily chart

DAX technical analysis

Over the past two months, we have maintained the view that the DAX completed an Elliott Wave five rally from the October 14,630 low to the mid-May 18,892 high before entering a correction.

The overnight break of support at 18,000/17,950 is seen as part of the ongoing correction, provided it holds above the 200-day moving average at 17,412 and the overnight low at 17,000. A rebound above 18,000 would be the first indication that the correction is complete.

A break below 17,000 would warn that a deeper decline back towards 16,000 is underway.

DAX daily chart

• _{Source: TradingView. The figures stated are as of 6 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.}