Outlook for Micro DAX Futures and Micro STOXX 50 Futures

14 Aug 2023

By Danish Lim, Investment Analyst, Phillip Nova

European equities have been trading range bound since the end of 1Q. Much of this was driven by prospects of the European Central Bank (ECB) pausing its rate hike campaign as soon as September. ECB President Christine Lagarde said that officials are open minded and “data-dependent” on their September decision and beyond.

The latest inflation and GDP figures for the euro zone left both options on the table – the economy remains stable, while core inflation remains sticky. The ECB’s data-driven approach will likely require more evidence of inflation easing before it can consider pause. We think this will keep European equities range-bound in the near-term until new economic releases tip the scales in either direction.

Near-term Outlook (End Q3): Range-bound

We believe investors may look to Europe for diversification opportunities at attractive valuations, especially as US shares become more expensive. Soft landing bets will also benefit the cyclical-oriented DAX and STOXX 50. Combined, these factors should limit near-term downside.

Medium-term Outlook (Mid-2024): Bearish

The next leg higher/lower will likely depend on 3 key uncertainties: 1) When will the ECB pause, 2) Impact of China’s recovery woes, and 3) Whether the Eurozone can navigate a soft landing.

Despite comments from some ECB members suggesting that a pause may be possible, we think that sticky core inflation (particularly services inflation) will force the ECB to remain hawkish.

The DAX and STOXX 50’s exposure to China also serves as an element of unpredictability. Geopolitical risks and recovery woes in China should weigh on cyclical European sectors such as autos, luxury, and miners.

The euro-zone economy will likely contract further in the months ahead, especially as the services sector continues losing steam. Recent Eurozone PMI data contracted for the 13^th straight month. The cyclical-oriented DAX and STOXX 50 will be prone to further economic weakness.

However, the STOXX 50 has rallied despite disappointing macroeconomic data from China and Europe as seen below.

Source: Bloomberg, STOXX 50 (white) divergence from negative economic surprises in China (green) & Europe (green)

We think this divergence is a key downside risk. Moving forward, we expect European equities to face downward pressure as markets price in weak macroeconomic data. Q2 earnings results will be critical to this outlook- According to Bloomberg, EPS for the STOXX 50 and DAX are down by -9.96% and -12.81% respectively for this quarter so far.

We forecast the Micro STOXX 50 contract (above) to fall to 38.2% retracement around 4026; and the Micro DAX contract to drop to 14785. A hard landing (recession) could see both contracts plunge to 50.0% retracement around 3876 and 14219 for the Micro STOXX 50 and DAX respectively.

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