DAX outlook: European stocks remain bid

European markets remained supported in the first half of Thursday’s session, despite a late sell-off on Wall Street Wednesday following earnings results from Netflix (-6.7%) and Tesla (-3.9%) and soaring Wheat prices on concerns Ukraine will not be able to keep exporting grains via the Black Sea. But for now, investors remain hopeful that interest rates are near a peak and that looser policy could follow as inflation cools. The DAX outlook thus remains positive for the time being.

Netflix and Tesla dim tech shine  

This year, the A.I. trade has lifted the tech-heavy Nasdaq index some 45% higher, much more than other US and global indices. However, while excitement about the potential for artificial intelligence is high, investors must not lose focus of the top and bottom lines for companies, as well as their guidance for future quarters. If companies like Tesla fail to show results or guidance to meet the market’s lofty expectations, then a sharp correction in the sector could be on the way.

Central banks winning fight against inflation?

On a more macro level, the markets are supported on the back of the narrative that central banks are winning the fight against inflation. However, with grain prices soaring again and crude oil on the rise, inflation could rise again and encourage central banks to keep interest rates high for longer than expected.

On that front, the markets will face a big test with the Fed, ECB and BOJ all due to make important policy decisions next week.

The narrative that the Federal Reserve is winning the fight against inflation got a boost last week as both CPI and PPI came in weaker than expected. Investors are now betting that next week’s meeting could mark the end of the tightening cycle. But will the Fed indicate otherwise?

In as far as the ECB is concerned, well everyone is expecting it to hike rates by 25 basis points next week, but there’s now a bit of uncertainty about the September meeting. ECB policymaker Klass Knot said earlier this week that there are no guarantees about what could happen at meetings after July. If Christine Lagarde again signals for more rate increases next week, then this is something that could hurt the DAX outlook.

What does it all mean for the DAX?

The DAX may remain supported if investors rein in September rate hike bets. But if the Ukraine-Russia situation continues to push grain prices higher, then this will make things complicated for European equity investors on fears that inflation could re-accelerate again. Inflation data yesterday showed that core CPI in the eurozone was revised upwards slightly to 5.5% y/y in June compared to 5.3% in May, even if headline inflation was left unrevised after cooling from 6.1% to 5.5% last month.

DAX technical analysis: Trend bullish until proven otherwise

Despite all the economic uncertainty across the Eurozone, the German index has had a great year, reaching a fresh all-time high in mid-June. But since then, it has turned a bit more volatile, initially staging a sharp sell-off and then rebounding strongly, before falling again at the start of this month. Last week, though, it bounced back equally strongly, along with global markets on hopes major central banks are starting to win the fight against inflation.

Key support around the 15500 area held, leading to a breakout from the falling wedge pattern (a bullish continuation formation). The index now finds itself above the 21-day exponential moving average again and just over 1.5% away from breaching the record high of 16431 reached in June.

The 16,000 level must now continue to hold to keep the bulls happy in the short-term outlook. Break that, and we could see yet another drop towards 15500, the support region of the wide range the index has been stuck inside for the past couple of months.

All told, there’s little technical evidence to suggest the long-term bullish trend is over just yet. So, we will look for support levels to hold and resistances to break.

So, the DAX outlook remains bullish as things stand, but do watch out for an unexpected reversal as volumes dry up ahead of the big central bank meetings next week.

Source: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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