Euro Stoxx 50 and DAX 40 push to all-time highs ahead of February CPI

European stock indices continue to attract attention as the global equity rally continues. The Euro Stoxx 50 soared to a new all-time high on Thursday pushing past the 4,800 mark without an issue. The index has rallied over 10% in the past five weeks even as concerns about the European economy mount. Inflation remains above the 2% target and whilst the disinflation process continues, the deceleration rate has slowed. The latest data also revealed the manufacturing sector continues to contract within the bloc.

Euro Stoxx 50 daily chart

Past performance is not a reliable indicator of future results.

It's the expectation that the European Central Bank (ECB) will start cutting rates soon that is driving European equities higher. In their latest meeting minutes released last week, the Federal Reserve pushed back on the idea of immediate rate cuts, but markets still believe the ECB will move before the Fed. Futures markets are currently pricing in a 25-bps rate cut in May.

The latest earnings season has also highlighted that European stocks remain undervalued compared to American stocks when it comes to the Price-to-Earnings (PE) ratio, which has attracted further investment in Europe. Sentiment is also playing its part as risk appetite remains elevated in global markets.

The DAX 40 has also pushed to a new all-time high above 17,250 after breaking away from its sideways consolidation. The move higher continues to be supported by short-term momentum although the RSI has started to peak into overbought territory which may attract new sellers.

DAX 40 daily chart

Past performance is not a reliable indicator of future results.

There isn’t much on the calendar this week when it comes to macro data, so markets are likely to flow with sentiment and follow the path of least resistance. March is going to be a busy month with most major central banks reporting, as well as a long list of crucial data readings. The month will kick off on Friday with the preliminary Euro Zone February CPI reading. Markets are expecting the rate to drop further from 2.8% in January to 2.5% as predicted by analysts. How the actual data comes in compared to these expectations will be crucial for momentum in equity markets. The belief that the ECB is getting closer to cutting could push equities higher, which is likely if the CPI comes in lower than expected.

This will also set up the momentum for the ECB meeting on Thursday next week. Markets are pricing in a 7% chance of a cut at this meeting, which makes it highly unlikely, especially given the recent messaging from policy members. But traders will be paying close attention to any sign of dovishness from the central bank, especially if the CPI reading this week shows further signs of easing.