European equities recorded a stellar performance in January 2023. DAX 40 saw the strongest start of a new year since January 2015 while in the case of the FTSE 100 we must go back to January 2013 to beat the 4.3% gain recorded in the past month. This positive sentiment was also present in the US stock markets, but interestingly the S&P500 index completed five months of underperformance versus its German equivalent. This is the longest period of DAX 40 outperformance against the S&P500 since the 6-month stint in the second half of 2012.

Looking at the broader Euro STOXX market, which includes the majority of the euro area stocks, the Banks, Retail and Technology sectors recorded the strongest performance in January. Particularly for the Technology sector, the 16.3% monthly increase recorded in January was the strongest move higher since April 2009. On the other hand, the Oil and Gas sector finished the month in negative territory, on the back of the dropping energy prices globally.

Data releases this week have been disappointing at the European powerhouse as fourth-quarter GDP came in negative and the retail sales showed another substantially negative change on a year-on-year basis. Naturally, the focus will now fall on the delayed publication of the January preliminary inflation figures. Barring a massive drop at the year-on-year print, the number will most likely maintain the pressure from workers unions’ for higher wage increases across the public sector. ECB president Lagarde at yesterday’s press conference mentioned numerous times the importance of the wage negotiations and tried to highlight the drop in headline inflation as a valid reason for the lower proposed increases.  In the meantime, the IMF published its winter forecasts, with Germany seen growing by just 0.1% in 2023, the weakest rate among the key euro area countries. Spain is seen leading the pack with 1.1% output increase this year, raising concerns on the overall health of Europe’s leading economy amidst the developments in Ukraine.

In the meantime, the UK continues to be regarded as the problematic child in G7. Economic data continue to depict a country in economic disarray as headline inflation remains in double-digit levels despite the continued rate hikes by the BoE. The political shenanigans continue as the Conservative Party chairman Nadhim Zahawi was fired by PMI Rishi Sunak for a “serious breach” of the Ministerial Code. The breach came about Zahawi’s tax affairs, increasing pressure on the government amidst a rapid rise in the cost of living. This week around 500,000 public sectors workers went on strike demanding higher pay increases and more strikes are scheduled during February. This situation is bound to have a grave economic impact, affecting sterling and the overall economic sentiment on the ground. Naturally, the latest IMF forecasts show the UK being the only advanced key economy contracting in 2023. Even Russia is forecast to grow marginally this year.

The DAX 40 index has recorded an impressive 30% jump since the October 3 print, and it is currently in the 14,814-16,297 range. During the April 2021-February 2022 period, DAX 40 hovered inside this broad area before breaking downwards. Focusing on the latest move, the overall technical picture remains somewhat bullish. However, the failure by the stochastic oscillator to record a higher high should warn the bulls of a possible rally exhaustion. Should a pullback take place, the 14,813-14,914 range set by multiple lows during 2021 could prove crucial for market sentiment. A break below this area could encourage the bears to regain their composure and hence potentially aim the 14,000 area.