European indices in a tailspin: DAX and FTSE grapple for recovery amid dire data

In our note early last week, we highlighted the battle that the DAX and the FTSE faced to maintain altitude just before they peeled away to finish the week approximately 3.5% lower.

They face an uphill battle to regain altitude this week, as key domestic data releases set to remain challenging are due this week.

Caught between a rock and a hard place

As a backdrop, in Europe, Q1 GDP data released in early June confirmed that the Euro Zone entered a technical recession in Q1 of 2023, as GDP fell by -0.1% following a -0.1% fall in Q4 of 2022.

In recent weeks, the data has continued to disappoint across PMIs and the German Ifo, providing further evidence that the ECB's rate hiking cycle is weighing on growth.

This week's key economic event in Europe is the release of the German ZEW Economic Sentiment Index tonight, with the market looking for a third consecutive fall in sentiment to -10.6 from -8.5 in June.

Despite the growth trajectory of Europe hitting the skids, inflation remains sticky, and the rates market expects another two 25bp rate hikes by year-end, which would take the ECB's official deposit rate to 4%.

In the UK, the key events will be the release of employment data (tonight) and GDP (tomorrow) ahead of next week's all-important inflation data. The three-month employment rate is expected to remain unchanged at 3.8%. 3-month YoY, the whole economy pay, is expected to moderate to 7.1% from 7.2%. GDP is expected to contract by -0.3% MoM due to the additional bank holiday, with a similar bounce back expected next month.

The aftershock of last month's horrific inflation data print in the UK has the rates market fully priced for another 125bp of rate hikes from the BoE over the next eight months, taking the BoE's official cash rate to 6.25%.

DAX technical analysis

In last week's update, we highlighted the downside risks coming from a break of uptrend support at approximately 15950 and the late June 15,833 low.

"Aware that should the DAX see a sustained break of around 15,950 and then falls below the recent swing low at 15,833, a deeper decline is expected towards support at 15,300/300 before the 200-day moving average of 14,900."

The bearish road map outlined above remains our central case - providing the DAX remains below the resistance from the broken trend channel coming in at 16,000 on a closing basis. Above 16,000, a more neutral bias is warranted.

DAX daily chart

FTSE technical analysis

In last week's update, we noted that the FTSE was building acceptance under the 200-day moving average, and "Presuming the FTSE remains below the 200-day moving average and then breaks below uptrend support at 7400, a deeper decline is expected towards support at 7200, coming from year-to-date lows."

After reaching the downside target at the end of last week, we note that the decline from the February 8047 high has unfolded in three waves which we see as a corrective or countertrend move. While we can't confirm that the correction is complete, we move to a more neutral bias watching for signs of basing in the coming weeks ahead of 7000.

FTSE daily chart

• _{TradingView: the figures stated are as of July 11, 2023. 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.}