DAX 40 Index is at fresh highs as the market sentiment is positive. The European markets have opened positive but the close could depend on the data. US markets will open in a few hours. On Monday, the markets were range-bound as US markets were closed due to Labor Day Holiday.

European markets ended August on a strong note, with equities rebounding from earlier losses. As the new week commenced, and with U.S. markets closed for Labor Day, Germany's DAX index approached its record highs, despite political turbulence in the region. The elections in Germany have introduced new uncertainties, while the European Central Bank's upcoming meeting is set to be a focal point for investors, especially as economic indicators continue to signal a downturn.

Political Turbulence: Impact on European Markets

DAX Resilience Amid Political Shake-Up

The DAX managed to recover from early losses, nearing the record high it reached at the end of last week. However, the political landscape in Germany added a layer of uncertainty. The state elections saw significant wins for the far-right Alternative for Germany (AfD) and the leftist populist Sahra Wagenknecht Alliance (BSW), which posed a challenge to Chancellor Olaf Scholz's ruling coalition. This political shift, coupled with ongoing struggles in France to form a government, has heightened concerns among investors.

Bond Market Reaction

Reflecting the political uncertainty, the yield on Germany's 10-year bond surged to a one-month high of 2.349% overnight. This rise occurred despite troubling economic data, underscoring the complexity of the market's response to both political and economic developments.

Economic Downturn Indicators: A Deepening Manufacturing Slump

Germany's Manufacturing Sector Under Pressure

Germany's manufacturing sector continues to show signs of strain. The final reading of the Hamburg Commercial Bank (HCOB) Manufacturing PMI for August fell to 42.4, down from 43.2 in July, indicating a deeper contraction. Expectations are that the release of German factory orders will further highlight the downturn, with a forecasted decline of 1.5% for July, marking the sixth decrease in seven months.

ECB Rate Cut Expectations

As the European Central Bank (ECB) prepares for its upcoming meeting, market participants are pricing in a 25 basis point rate cut, with an additional cut anticipated in December. The rate cuts are seen as a response to the deteriorating economic conditions, particularly in Germany's manufacturing sector.

FTSE Technical Analysis: Navigating a Correction

FTSE Struggles to Break Resistance

The FTSE index, after peaking at a mid-May high of 8474, entered a range-trading phase between 8300 and 8100 before dipping to an early August low of 7915. This dip is viewed as part of a broader correction within an ongoing uptrend. However, a sustained break above the August 1st high of 8405 and last week's high of 8414 is needed to confirm that the correction has ended. Such a move would signal a potential retest of the 8474 record high, with the possibility of a further advance toward 8600.

Sideways Movement Possible

As long as the FTSE remains below the resistance level at 8405/8415, the index may continue to experience sideways price action, reflecting ongoing uncertainty in the broader market.

DAX Technical Analysis: A Mature Market Rally

DAX's Elliott Wave Analysis

In the lead-up to August's sell-off, the DAX had completed an Elliott Wave five-wave advance from the October low of 14,630 to the mid-May high of 18,892. The subsequent correction saw the index dip to an early August low of 17,024. The rebound, which pushed the DAX above resistance at 18,000/18,100 and trend channel resistance around 18,550, confirmed that the correction was complete.

Neutral Stance Amidst Potential Gains

While the DAX could potentially reach further gains toward the 19,200/19,400 levels, the current market rally appears mature. As such, a pullback may be on the horizon, leading to a more neutral market stance. This cautious approach reflects the belief that the rally is nearing its peak, and a consolidation phase could follow.