European stocks have wavered in the past few days as investors watch the next actions by the Federal Reserve and the European Central Bank (ECB). In Germany, the DAX index was trading at €18,535, a few points below the all-time high of €18,880.
Rate cut cycle
Global stocks have done modestly well this year, helped by the rising hope that the Federal Reserve and the European Central Bank (ECB) will change their strategies in the coming months.
The ECB has already started cutting interest rates and there are chances that it will deliver at least two more cuts this year. Recent data showed that the bloc’s inflation continued to soften in June and is nearing its 2% target.
In the US, data by the Bureau of Labor Statistics (BLS) revealed that the headline Consumer Price Index (CPI) dropped to 3.0% in June while the core CPI moved to 3.2% during the month.
The CPI dropped by 0.1% on a MoM basis, meaning that prices are moving in the right direction. These numbers came a few days after the US published weak manufacturing, non-manufacturing PMI numbers, and jobs numbers.
The implication of all this is that the Federal Reserve will likely start cutting interest rates as soon as in September this year. A potential hindrance to these cuts will be the US election that will happen in November.
A rate cut in September could lead to accusations that the Federal Reserve is interfering with the election.
The German DAX and other global indices react positively to rate cuts by the Federal Reserve and the European Central Bank. Such cuts will lead to a rotation from the high-yielding money market funds to stocks, as I wrote on the S&P 500 index.
Corporate earnings ahead
The next important catalyst for the DAX index will be the upcoming corporate earnings from American companies. Analysts are optimistic that these earnings will continue booming.
The expectation is that the average earnings grew by 8.8% in the last quarter after growing by 5.5% in the previous month. Higher earnings and forward growth will lead to more gains in the coming months.
The earnings season will officially kick off on Thursday as American giants like JPMorgan, Wells Fargo, and Citigroup publish their results. Other companies like Goldman Sachs, Bank of America, and Blackrock will publish their results next week.
Other German companies like Deutsche Bank, Bayer, Deutsche Post, and Allianz are expected to publish their results later this month.
Top DAX index stocks to watch
Many DAX index companies have done well this year. Surprisingly, the worst-performer in 2023 has become the best-performing company in the DAX index this year. Siemens Energy stock has soared by over 131% this year after boosting its balance sheet.
Commerzbank stock price has soared by over 35% this year, making it the second-best-perforning company in the index. It is followed by SAP, Munich Re, and Heidelbergcement.
On the other hand, some of the worst-performing companies in the index are Sartorius, RWE, Bayer, Deutsche Post, and Continental.
DAX index outlook
The daily chart shows that the DAX 40 index has done well this year as it jumped to a high of €18,880 in May. It then pulled back and moved to a low of €17,970 and is now crawling back.
The index has constantly remained above the 200-day and 50-day Exponential Moving Averages (EMA). Popular oscillators like the Relative Strength Index (RSI) and the MACD indicators have drifted upwards.
Therefore, the index will likely continue rising as buyers target the year-to-date high of €18,880. More upside will be confirmed if it rises above that level since it will invalidate the double-top pattern.
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