A bleak outlook and concerns over global economic growth continued to weigh on investors. The European equity markets, however, saw a mixed week. The pan-European Stoxx 600 index ended the week down 4.4%. But the DAX, Germany’s benchmark index, rose for a third straight session. It is trading close to its two-month highs.
This week’s headlines included the IFO Business Climate report in Germany, which showed a third consecutive month of improvement in business morale. But the residential construction sector outlook remained gloomy. There are fears that the eurozone’s economy is entering an economic slowdown.
Meanwhile, the US Federal Reserve is set to hold its interest rate decision this week. The central bank has offered a more hawkish outlook on monetary policy than markets expected. Traders have taken the news as a sign that the Fed will continue to hike interest rates. They are also betting on a 50-basis-point rate increase.
While the US market retraced much of its gains from last week, the European markets have been relatively steady. The pan-European Stoxx 600 is still down 9% year-to-date. But the DAX, Germany’s flagship index, is up 25 percent from its early October lows. The index hasn’t broken its 200-day moving average. It’s near the psychological level of 14,000, which could provide support.
The European Central Bank (ECB) is scheduled to meet next week. The ECB has a key role in shaping Europe’s interest rates, and its meetings are often a key event for investors. Its President, Christine Lagarde, is scheduled to speak at the upcoming European Banking Congress in Frankfurt. The central bank may reveal hints about its interest rate plans for the Eurozone. The US ISM Non-Manufacturing PMI is also on investors’ radars.
German industrial production dipped more than anticipated. ECB officials are concerned about inflationary pressures. They said the central bank would need to raise interest rates in the coming years. They also noted that consumer price inflation was above the 7.2% target. But they said the economy was not in a recession yet.
A recent decline in the FTSE 100 was attributed to worries over the UK economy. The pound fell further. But the UK economy rebounded at a faster pace than expected in October. In addition, the Bank of England is on a tough course. The country is projected to post GDP growth of 0.4 percent, down from a 1.7 percent forecast in the summer. Traders are concerned that a recession is on the way.
The European equity markets have been doing better than their US counterparts, but there are concerns over their outlook. There is a reluctance to reverse the bullish trend.
The DAX may pull back in the coming weeks. But it could test its psychological level of 14,000 before it moves below the 50-day moving average. It’s possible that prices will fall below the 13,500 level, but an alternative scenario may be more plausible. A break of the descending trend line at 4,060 could open the road to 4,100.
