DAX to shine in potential EU stock market upsurge
Fawad Razaqzada October 24, 2017 8:38 AM
Key points why we think European stocks may perform better going forward:
- European company earnings about to kick into a higher gear – there may be more positive surprises than expected
- Economic data continuing to improve in the Euro area
- Lack of major bearish catalysts is good news for investor sentiment
- ECB may announce taper plan, but this is priced in; potential for dovish surprise
- Technical outlook remains bullish for DAX and other EU indices
The level of investor bullishness we have witnessed on Wall Street and recently in Japan has not been experienced in Europe. Yet. After a small pullback yesterday, the Dow looks set to open at a new record high again after earnings from Caterpillar came in much stronger-than-expected. In Europe, investors have proceeded more cautiously, which is reflected in the major indices here climbing a lot less robustly than in the US. But that could be about to change.
There are a number of fundamental and technical reasons why European indices such as Germany’s DAX could sharply extend their gains. For one thing, the European Central Bank’s likely QE taper announcement on Thursday may be priced in. If anything, the ECB may actually come across as more dovish than expected if it decides to reduce QE but simultaneously extend the duration of the programme. The last thing it would want to do now is prevent the economic growth from accelerating. Indeed, judging by this morning’s release of mostly stronger PMI readings, and other macro data recently, economic activity in the single currency bloc is continuing to improve, thanks above all to favourable monetary conditions. The improvement levels of consumer confidence in the Eurozone is good news for stocks and company earnings. The third quarter European earnings season is about to go up a gear or two this week – see the snapshot below. If we see mostly stronger-than-expected earnings results – like we already have on Wall Street – then the likes of the DAX, CAC and Euro STOXX could surge higher in the coming days.
Now unlike its peers, the DAX has already broken to a new record high this month before the rally stalled. So, if we are to see anything significant going forward then having made its move first, the German index is the one to watch for continued outperformance amongst its European peers.
Technically, the index’s recent consolidation above the old all-time high can be considered bullish as there was no immediate rejection. Now that there has been acceptance at these levels and with the DAX forming a base, this has allowed it to unwind from severally overbought levels mainly through time, which is bullish. Thus unless key support at 12900 breaks first, the path of least resistance remains to the upside. As the index is trading near unchartered territories, one of our favourite ways to look for bullish objectives would be by using the Fibonacci extension tool. As per the chart, the main bullish objective remains at 13245 area, which corresponds with the 127.2% extension of the previous downswing. There are additional Fibonacci extension levels below this level derived from the most recent shorter-term downward move, at 13145 and 13208. But as mentioned, we will be quick to drop our short-term bullish view in the event the DAX breaks back below 12900. Some of the shorter-term support levels that we would also like to see hold include last week’s closing price at 12991 and the previous all-time high at 12951.
Source: eSignal and FOREX.com. Please note, this product is not available to US clients
Source: Reuters and FOREX.com. Please note, this product is not available to US clients
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.