GER40

We’ve certainly seen calmer tone across the financial landscape ever since Trump delayed the reciprocal tariffs by 90 days and then followed it up by suspending of tariffs on consumer tech items – phones, computers, and the like – between the US and China.

After a brutal three-day selloff—the worst since 2020—global equities showed the first significant signs of recovery on Tuesday. A flicker of optimism emerged following speculation about renewed US trade talks. Trump hinted at a willingness to negotiate with China and said several other countries want to make a deal.

The trade war has escalated and there is going to be a lot of back and forth from now until the April 2 “liberation day.” Against this backdrop, we will maintain a short-term bearish view on the European markets. The DAX outlook could weaken if we see further support levels break in the coming days, which could accelerate the selling pressure.

Sentiment has been boosted because Germany’s incoming Chancellor Friedrich Merz has unveiled plans to inject hundreds of billions of euros into defence and infrastructure, which marks a significant departure from Germany’s traditionally rigid borrowing rules, fuelling optimism for a broader economic uplift across Europe. The focus is now turning to the ECB rate decision and President Lagarde’s press conference tomorrow, which could influence the DAX forecast.

Lingering tensions between the US and Europe could temper risk appetite, particularly after last week’s cautious trading, when concerns over US President Donald Trump’s stance on tariffs, coupled with stretched valuations, unsettled investors. For these reasons, we maintain a cautious DAX forecast despite a positive start to the week.

With the US out for a holiday, the focus remains firmly on European markets today, where stocks have been surging lately thanks to Trump pushing for a swift resolution to the Ukraine war. But have the markets got ahead of themselves with all this optimism? This DAX analysis shows the German index is now at extremely overbought levels, which calls for caution.

With much of the positivity surrounding a potential resolution to the Russia and Ukraine war, Trump’s softer tariffs tone and ECB rate cuts all priced in, you do wonder how much further the index will be able to rise without first staging a correction of some sort. So, our DAX forecast is neutral at these levels, and we would not be surprised if markets now headed lower for a while, even if, ultimately, the bullish trend then continues.

With the US out, it has understandably been a quiet day so far in Europe where major indices were trading mixed but holding onto their recent impressive gains. Some of the major European indices hit new record highs last week, including the high-flying German DAX index.

European stocks traded mixed with Spain’s Ibex rising to a fresh weekly high and Germany’s DAX off its earlier lows at mid-day in London as government bond yields eased off their earlier highs.

DAX analysis: After climbing an impressive 18% last year and 20% the year before, the DAX has made a decent start to the new year, up a good 2.2% year-to-date. But it is early days and with valuations looking a little stretched and the economy not doing so well, we could see correction first before the market resumes higher.

This week’s US inflation data may impact Wall Street but will likely have limited implications for European indices. But one factor that is certainly weight on sentiment on this side of the pond is political uncertainty in Germany. Against this backdrop, our DAX forecast is turning bearish in the short term, especially if the German index now breaks a key support area that it was testing at the time of writing.