Germany’s DAX led European indices lower at midday in Europe, with losses of more than 1% as concerns over economic growth and inflation persisted, before bouncing off its lows shortly before the opening of the United States. Almost all sectors were in the red, except for some banks, insurers and energy stocks. There weren’t many new catalysts behind the previous sell-off, with investors eager to take profits after the recent rally in global equities and ahead of major US economic data. Nevertheless, the weakness should not be ignored, given the behavior of the markets this year. It could be a harbinger of a bumpier road ahead.
Since mid-July, European equities have been pushing higher, as have US benchmarks. The recovery has been fueled by somewhat positive corporate earnings as well as hope that the Federal Reserve will soon proceed less aggressively with its interest rate hikes as inflationary pressures show tentative signs of easing and in the wake of a technical, but questionable, recession in the United States. WE.
But is the bullish momentum fading again?
The first thing I want to point out is the difficulty in Chinese stock markets (see sub-chart). Don’t forget that China has led global stock markets lower this year, so it’s definitely something to watch closely.
As for the DAX itself, well, it turned lower after failing to hold above the 13680 resistance level:
In the process, it has now broken below its short-term uptrend line. This in itself is not too significant, as we have seen similar trends break before the rally resumed in recent weeks. However, it certainly serves as a warning sign for bulls. But in the event that we do see the German index break below the most recent low at 13332, then we will have our first lower low in place since this phase of trend recovery began in mid-July. .
Until that happens and unless it does, bears will also want to proceed with a bit of caution, especially as we have some key data coming Wednesday, namely the US CPI, this which could lead to a drastic change in risk appetite.
Look forward
US CPI (Wednesday)
US CPI will undoubtedly be the most important macro release of the week on Wednesday. Inflation may have already fallen more than expected in July, which could be another reason why dollar bulls/buyers are refusing to keep the currency supply.
Economists believe the CPI rose +0.2% m/m, with an expected annual reading of +8.7%, down from 9.1% in June. Let’s see if annual inflation will come down after hitting its highest level since November 1981.
There are reasons why inflation will slow in the future. We have seen the ISM PMI reports reveal a marked slowdown in the price paid sub-indices. Pressures on the global supply chain have eased. Shipping costs have gone down. Commodity prices have fallen. Consumer purchasing power has been squeezed, which should be disinflationary. Obviously, it will take some time for these changes to trickle down to the economy and show up in the data.
US UoM Consumer Sentiment (Friday)
It will also be important to watch this week for Friday’s release of the widely-watched surveys of consumer sentiment and inflation expectations from the University of Michigan. Thanks to soaring prices for everything from gasoline to food, consumer confidence in the United States has fallen rapidly in recent months, mirroring the situation in Europe and the rest of the world. However, the US economy has weathered the inflationary storm better than other regions, which explains why the dollar has been so strong. But is the dynamic changing? If we see signs of a struggling US consumer, it could further hurt risk appetite.
UK GDP (Friday)
On Friday we will also have a data dump from the UK, including GDP. This has the potential to impact sentiment in the UK, but may also affect the DAX and other European indices. UK GDP barely rose in the first quarter as production rose 0.8% vs. 1.0% expected. With several macro indicators suggesting the economy contracted in the second quarter, the pound fell below the $1.20 handle before recovering as the USD began to decline. However, the Bank of England has estimated that growth will decline for 5 consecutive quarters. Let’s see if they’re right and how serious the potential weakness will be.
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