DAX outlook: Eurozone woes have been more troublesome for euro than stocks – but for how long?

European indices rallied on Friday with the DAX closing near its weekly highs after recovering from earlier weakness. The UK’s FTSE also closed higher. US indices rebounded sharply after the previous week’s decline, when profit-taking had caused the markets to tumble. That, in turn, had come a week after Trump’s victory had caused a big upsurge in risk assets. In other words, US indices managed to hold onto most of their Trump-related gains by last week’s close, although didn’t manage to hit new highs. Meanwhile, Chinese markets continued to weaken, closing at fresh multi-week lows. Caught in the middle, European markets rallied last week despite fresh concerns about the eurozone economy. While the selling has been contained to the euro so far, should recession worries intensify then we could see the stock market also respond negatively, putting the DAX outlook on a negative watch.

 

 

US markets could be more subdued moving forward

 

The divergence in US markets and the rest of the world – especially China – has been eye-catching. US investors are expecting a business-friendly US President to deliver growth in 2025, while his trade tariffs and protectionist policies are seen as negative influence for Chinese markets, and to a lesser degree, the Eurozone.

Much of the Trump trade is now priced in. Thus, moving forward, we could see the US markets struggle to make significant further gains. However, until such a time there’s a solid technical reversal pattern on the charts, we would hold off acting on our not-so-bullish thoughts.

 

DAX outlook: Weak PMIs signal trouble for the eurozone economy 

 

The Eurozone's economic outlook dimmed further in November as business activity unexpectedly contracted. The composite PMI fell sharply from 50 to 48.1, slipping below the key 50-mark and signaling economic contraction. This drop raises fresh concerns ahead of December's European Central Bank (ECB) meeting. Will policymakers take this as a red flag or prioritize resilient hard data, like GDP figures, in their assessment? 

 

ECB President Christine Lagarde flagged PMIs as a critical indicator back in October, and the latest numbers add to the worries. Both manufacturing and services sectors show signs of strain, with weak export demand weighing heavily. New business is slowing across the board, while business confidence for the year ahead continues to decline. 

 

Despite some growth in third-quarter GDP, the outlook is becoming increasingly precarious. A flatlining fourth quarter now seems likely, painting a bearish picture for the euro as we head into year-end.

 

But will this be a bad thing for European stocks?

 

Well, so far, it doesn’t appear to be the case. Last week’s rally in European stocks came as the EUR/USD plunged below the 1.05 handle. The thinking here is that a weaker euro is good news for eurozone exports. However, the impact of a plunging euro will have limited positive impact. If concerns about a recession rise sharply then stocks could also weaken more meaningfully, especially with Trump’s tariffs to come next year.

 

German Ifo survey and US data in focus 

 

The week ahead offers limited Eurozone data, but all eyes will be on Germany’s Ifo Business Climate survey on Monday. After November's weak PMI figures, expectations for upbeat business sentiment are low. This survey will provide further clues about the eurozone’s economic health, and any signs of worsening conditions could put more pressure on the euro, and this time potentially also the stock markets. Concerns about slowing growth in the Eurozone, China’s economy, and geopolitical risks could all add to worries and weigh on the DAX outlook. Markets will closely watch upcoming data to see if there are any signs of stabilization or improvement. 

 

US data dump ahead of Thanksgiving 

 

Midweek, the focus will shift to the US as Wednesday brings a slew of economic data ahead of the Thanksgiving holiday. Investors will scrutinize the second estimate of Q3 GDP, which initially underwhelmed with a 2.8% reading. The release of core PCE, the Federal Reserve’s preferred inflation gauge, along with jobless claims, durable goods orders, pending home sales, and FOMC meeting minutes, will provide further insight into the US economy's health. 

 

These reports could influence the markets. Stronger-than-expected US data would likely be welcomes by stock investors and could add to the EUR/USD’s downward pressure. If we see weak data, then that could start to bring back into focus concerns about US stock valuations which are looking quite stretched. With investors largely absent on Friday, Wednesday's releases could set the tone for the remainder of the week.

 

Technical DAX outlook: key levels to watch  

 

Source: TradingView.com

 

The technical DAX outlook has not turned bearish yet as dips have been bought amid investors’ insatiable appetite for risk. After two weeks of flat closes, the DAX rallied on Friday to create a hammer weekly candle, potentially signaling a bullish trend resumption. Key short-term support now comes in around 19198-19245 area. If this area holds then we could see some further short-term gains with the October’s all-time high being the main upside bullish objective at 19685. Conversely if this support area gives way then we could see the index drop to that long-term support area between 18930 – 19000 again, and this time potentially break below it.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R