European indices soar: DAX reaches new high amid election uncertainty

European equity markets rebound as DAX recovers

European equity markets finished higher last week, ending the month of August in positive territory. This rise rendered the sharp sell-off in early August a distant memory.

At the start of a new week, and with US equity markets closed for the Labor Day public holiday, the German DAX recovered from early losses. It consolidated near the record high it struck at the end of last week.

Political shake-up adds uncertainty to European markets

Despite this recovery, German state elections delivered wins for the far-right Alternative for Germany (AfD) and the leftist populist Sahra Wagenknecht Alliance (BSW) parties, dealing a significant blow to Chancellor Olaf Scholz's ruling coalition.

The German state election results added another layer of uncertainty to European politics at a time when France is still struggling to form a government. Reflecting this uncertainty, the yield on the German 10-year bond hit a one-month high overnight of 2.349%.

Economic downturn indicators and ECB rate cuts

The higher bund yield came despite a survey showing that Germany's manufacturing sector downturn deepened in August. The final reading of the Hamburg Commercial Bank (HCOB) Manufacturing purchasing managers' index (PMI) for August was 42.4, down from 43.2 in July. The release of German factory orders on Thursday night is expected to reinforce this downturn, falling by -1.5% in July, marking the sixth fall in seven months.

Ahead of next week's European Central Bank (ECB) interest rate meeting, the European rates market is pricing in a full 25 basis points (bp) rate cut, with a second 25 bp rate cut expected in December.

FTSE technical analysis

After peaking at the mid-May high of 8474, the Financial Times Stock Exchange (FTSE) spent the better part of two months range-trading between 8300 and 8100 before it dipped to its early August low of 7915.

We believe the dip to 7915 was part of a correction within an uptrend. However, a sustained break above the August 1st high of 8405 and last week's high of 8414 is needed to confirm that the correction is complete. This would signal a retest and break of the 8474 record high, before a move to 8600.

While the FTSE remains below the resistance level at 8405/8415, further sideways price action is possible.

FTSE daily chart

Source: TradingView Source: TradingView

DAX technical analysis

In the lead-up to the August sell-down, we believed the DAX had completed an Elliott Wave five-wave advance from the October low of 14,630 to the mid-May high of 18,892 and had commenced a correction. The dip to the early August low of 17,024 was viewed as part of this correction.

The subsequent rebound, initially above resistance at 18,000/18,100 and then above trend channel resistance around 18,550, confirmed the correction was complete. This opened the way for the DAX to break its all-time high of 18,892.

While we can't rule out further gains towards 19,200/19,400, we believe the current market rally is mature and nearing levels from which a pullback is likely. Therefore, we adopt a more neutral stance.

DAX daily chart