DAX and FTSE outperform amid US inflation concerns, European manufacturing rebounds

While US equity markets limped into the weekend on concerns over hotter-than-expected inflation data, the German and UK stock markets ended the week on a solid note.

Despite a lack of AI names, the DAX has followed US equity markets to new highs in 2024, due to several important factors. The energy shock from the Russian invasion of Ukraine has now subsided. Sentiment towards the Chinese economy, which Europe and particularly Germany is leveraged to, appears to be turning high, albeit from a low base. Finally, global manufacturing appears to have turned higher and falling inflation will likely allow the ECB to cut rates in the coming months.

While Germany has been late to join the manufacturing upswing, data released last week showed factory orders in Germany surged by 8.9% in December, compared with a market forecast of a flat reading. It was the strongest rise since June 2020, boosted by large orders across several industries. Further signs of optimism are expected to be viewed in the Euro Area flash PMIs set to be released this week.

What is expected from the Euro Area HCOB PMIs (Thursday, 22 February at 8.00pm)

The Euro-Area Manufacturing PMI surged to 46.6 in January, the highest in ten months, with services stable around 48 for a third month.

This month, the manufacturing PMI is projected to rise to 47.0 from 46.6, and the services PMI is anticipated to edge higher to 48.7, up from 48.4. The composite PMI is expected to increase to 48.8 from 47.9 in January.

HCOB composite flash PMI chart

Source: TradingEconomics

FTSE technical analysis

Following a strong rally at the end of last week, the FTSE starts the new week eying resistance at 7750/65ish, which has held for the past nine months. If the FTSE can see a sustained break above 7750/65ish, it would open up a test of the April 7936 high, with scope to the 8047 high.

However, should the FTSE again reject resistance at 7750/60ish, the FTSE would likely rotate back towards the support at 7550/00, coming from the 200-day moving average and last week's 7492 low.

FTSE daily chart

Source: TradingView

DAX technical analysis

In our updates in mid to late January, we noted that due to the nature of the three-wave decline from the early January the 17,123 high to the mid-Jan 16,464 low, it was likely a corrective sequence, and that the DAX would push to new highs.

The Dax has since made a fresh record high at 17255. However, given the continued evidence of bearish RSI divergence and based on our wave count, which suggests the up move is mature, we remain of the view that a 5-10% pullback is not too far away.

DAX daily chart