European equities have started the year on a high note, with major indices like Germany’s DAX and the UK’s FTSE 100 reaching record levels. However, the beginning of Donald Trump’s second term as U.S. President introduces uncertainty, raising concerns about potential volatility that could shake the ongoing rally.

European Markets’ Strong Performance

Last week, European stocks surged, driven by falling global bond yields after weaker-than-expected inflation data from the U.S. and UK. Positive corporate earnings and robust economic signals from China added to the optimism. Additionally, a Gaza ceasefire reduced geopolitical tensions, supporting market sentiment.

Germany’s DAX tested critical resistance levels, while the FTSE mirrored the upward momentum despite Wall Street and Chinese markets underperforming. These gains highlight strong investor confidence, but the rally now faces new risks.

Policy Risks from Trump’s Administration

Trump’s return to the White House brings policy uncertainties that could ripple through global markets:

• Trade Tariffs: Speculation is mounting that Trump may reintroduce tariffs targeting China, potentially disrupting global trade. Export-reliant economies like Germany would be particularly vulnerable to such measures.
• Energy Policies: Any shifts in U.S. energy strategy could impact oil prices, indirectly influencing European industrial and energy sectors.

Traders are closely watching for executive orders that might alter global trade dynamics, which could derail the momentum seen in European markets.

Impact of PMI Data on Sentiment

Global PMI figures due this week will offer a clearer picture of economic activity and could shape investor sentiment:

• Weak PMI Data: Signs of slowing activity could challenge the optimism that has fueled the DAX rally, especially if they hint at weakening export demand.
• Strong PMI Data: Better-than-expected numbers could strengthen the euro, potentially pressuring European equities by dampening the competitive advantage of weaker currencies.

This divergence between softer economic indicators and soaring stock prices raises questions about the sustainability of the current rally.

Technical Analysis: DAX at a Crossroads

The DAX is testing critical resistance levels, with its long-term bullish channel nearing exhaustion. Signs of overbought conditions, as indicated by the RSI surpassing 70, suggest a possible correction. Momentum indicators show divergence, pointing to waning strength in the upward move.

Key levels to watch:

• Support: The December high of 20,500 is a crucial support level. A break below this could signal a correction.
• Resistance: A sustained move above resistance levels could give bulls the momentum to push the index higher.

Outlook: Uncertainty Looms

The DAX remains in a buyer’s market, supported by strong momentum and optimism. However, risks tied to Trump’s policy direction and upcoming economic data could disrupt this narrative. Traders should remain cautious as the week unfolds, with volatility likely if significant policy shifts or economic surprises emerge.