European equities rally: DAX and FTSE hit record highs

Last week was a scintillating one for European equities, as both the DAX and the FTSE finished at fresh record highs. The DAX gained 4% for the week while the FTSE locked in a third straight week of gains, closing 2.68% higher.

Putting the icing on the cake, last week's Bank of England (BoE) meeting went largely to plan. The BoE kept rates unchanged at 5.25% with a vote split of 7-2, as two members, Ramsden and Dhingra, dissented in favour of cuts. The BoE lowered its inflation forecasts and updated its forward guidance, emphasising that it will focus on whether risks from persistent inflation are receding in future data.

Whether the BoE can cut rates at its next meeting on 20 June will depend on two incoming inflation reports due on 22 May and 19 June. However, before that, we received an update on the UK labour market, previewed below.

• UK

Employment numbers

Date: Tuesday, 14 May at 4.00pm AEST

While inflation is the bank's focus, there will be interest in this week's job data to support the case for an earlier cut. In February, the unemployment rate unexpectedly rose to 4.2% from 4.0%.

The market expects the unemployment rate to edge higher to 4.3% in March. A higher-than-expected unemployment rate would increase the chances that the BoE will be able to cut rates by 25 basis points (bp) in June, an outcome to which the rates market currently assigns a 50% probability.

UK unemployment rate

DAX technical analysis

Last week's sharp rally put an end to the view that the DAX was missing another leg lower to complete a three-wave corrective decline from the 18,567 high. Instead, we now see the mid-April 17,626 low as completing a corrective pullback (Wave IV) and the rally from that low point as part of a Wave V.

This Wave count is supported by the bearish divergence via the RSI indicator, where new price highs fail to be confirmed via the RSI. (Within Elliott Wave theory, a Wave V is usually the final leg of an impulse move before a correction unfolds.) However, before the pullback begins, we may still see the DAX extend its gains into the 19,000/19,200 area.

DAX daily chart

FTSE technical analysis

After maintaining a bullish stance in the FTSE since it broke above downtrend resistance in mid-March, we last week suggested moving to a more neutral bias or tightening stops on longs with a view to buying a possible pullback after last Thursday's BoE meeting.

While a pullback has yet to develop, we highlight the FTSE's overbought readings via the RSI indicator and suspect that our pullback may not be too far away.

FTSE daily chart

• ^{Source: Tradingview. The figures stated are as of 14 May 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}