Is Europe's Bull Run Just Getting Started?

Traders will closely monitor the upcoming flash PMI data amid escalating trade tensions, as it will provide the first major insights into how businesses have been affected by Donald Trump's tariffs.

Guidance Amid Troubled Waters

One month after Trump took office, the rhetoric surrounding tariffs has intensified. The first tariffs took effect in early February, and upcoming PMI data scheduled for release on Friday will capture attention as they offer insights into how businesses are responding to the tariffs. As Europe struggles to gain economic momentum, its largest economy, Germany, has experienced five years of stagnant growth and two consecutive years of contraction.

Still, Germany's DAX 40 and the STOXX 50, which represent Europe's biggest firms, have recently hit new record highs. Better earnings, support from tech giant SAP amid the AI revolution, and hopes for a peace deal in Ukraine have all supported investor sentiment. However, challenges persist, including high energy prices and the rising prospect of a trade war with the US. Recently, Trump announced planned tariffs on pharmaceuticals and cars, which could severely impact Europe and Germany's automotive exports.

To New Heights or Over the Top?

While stock gains could be supported by further interest rate cuts by the ECB, this is not a certainty. Isabel Schnabel, Germany's representative at the ECB, argued on Wednesday that inflation risks remain on the upside and that the central bank should debate whether the policy has exited restrictive territory in March, signalling a potential pause. Although talks of a ceasefire in Ukraine have spurred optimism, it is unlikely that Germany or Europe will return to buying cheap Russian gas. With global supply concerns likely to keep energy prices in Europe high, this could undermine recent stock market gains outside tech.

The extent of concerns surrounding the impact of tariffs could become evident when HCOB releases the first look at its PMI survey on Friday. The French Manufacturing PMI is expected to see a marginal increase to 45.4 from 45 but to still remain below the 50 level that signals expansion. The German Manufacturing PMI is expected to be even less optimistic at 45.1, virtually unchanged from the previous 45 print. Meanwhile, the UK, which initially avoided the economic doldrums last year, is also expected to remain in contraction but in a better position at 48.5, up from 48.3 previously.

DAX40 Forming Pennant or Flag?

The German DAX40 pulled back following its record high to 22950, with the completion of the first leg down suggesting a short-term upside correction and a potential continuation lower into a pennant or flag pattern. Given the length of the first move down, the measured move projection, which equals the first leg, could open the door to the 22K handle as prices trade under the major upward trendline of the bull leg. If this pattern does not play out, it could signal another record high, assuming DAX reclaims flips the trendline and the 22600 and 22710 swings let bulls through. During price discovery, 23250 and 23500 come into focus.

Source: SpreadEx / Germany 40

Key Takeaways

While major stock indices in Europe have reached record highs, the upcoming PMI data could show the extent to which tariffs and escalating trade tensions have impacted businesses. As challenges such as high energy prices and the prospect of further trade wars remain, they could undermine these gains, particularly outside the tech sector. Nonetheless, hopes for a peace deal in Ukraine and continued support from the course of AI and ECB could provide a tailwind for European equities.