Here’s why the CAC 40 and DAX Index will rebound as EU considers “nuclear option”

The CAC 40 and DAX Index futures plunged by over 1% in the futures market as a conflict between the United States and Europe escalated during the weekend. 

The German DAX, which tracks the biggest companies in the country, retreated to €25,122 from its all-time high of €25,470. Similarly, the CAC 40 Index futures dropped to €8,150, down from the year-to-date high of €8,393.

Europe considers the “nuclear option”

The European Union is considering executing its “nuclear option” as tensions with Washington escalate. These tensions rose after Donald Trump announced that he would impose tariffs on a few countries, including Germany, France, and Denmark.

Trump said that he will levy a 10% tariff on goods from these countries on February 1. These tariffs will then jump to 25% in June if a deal to acquire Greenland is not reached.

The announcement came as the European Parliament was considering voting for a trade deal he negotiated last year. As a result, some European leaders, including Emmanuel Macron, have urged the bloc to consider the Anti-Coersion Instrument (ACI) that was passed in 2023 to protect member states from being coerced by other countries.

The ACI response mechanisms include measures like tariffs, limiting access to the EU single market, suspending cooperation agreements, and other trade defense measures. According to the FT, the bloc is considering measures worth over €93 billion in retaliation to Trump’s policies.

An escalation of trade relations would be negative for companies in the German DAX and French CAC 40 because of the trade volume between the two regions.

However, on the positive side, there is a likelihood that Donald Trump is using the tariff mechanisms as a negotiation tactic. For one, a common phrase that emerged last year was TACO, which stands for Trump Always Chickens Out. 

Additionally, Trump will meet with some EU leaders later this week at the World Economic Forum event in Switzerland. Chances are that he may seek to lower the temperatures during these meetings.

The DAX and CAX 40 Indices will also likely rebound later this week because we have been here before. As you recall, the two indices plunged to a record low after Trump’s “Liberation Day”, when he announced tariffs against all countries. They then rebounded and hit their all-time highs by the end of the year.

Most importantly, the Supreme Court will deliver its decision on the legality of Trump’s tariffs on Tuesday. Data on Polymarket shows that there are odds that the court will rule against these tariffs.

Trump will have other options to implement tariffs but analysts expect that these measures will take time as they will need some investigations to be done.

CAC 40 Index technical analysis 

The daily timeframe chart shows that the CAC 40 Index has been in an uptrend in the past few months and is now hovering near its all-time high of €8,396. 

It has remained inside the ascending channel and is slightly above the 50-day Exponential Moving Average (EMA). 

The Relative Strength Index (RSI) has pulled back from the overbought level of 73.92 to the current 56, its lowest level since December 31st.

Therefore, the index will likely retest the lower side of the channel and then resume the upward trend later this year.

DAX Index analysis 

The daily timeframe chart shows that the DAX Index peaked to a record high of €25,450 this month and has now pulled back as tensions with the US escalated.

Technical analysis suggests that the index is aiming to retest the support at €24,665, its highest level in July, August, and October last year. 

This pattern is known as the break-and-retest, which is a common bullish continuation sign. 

Therefore, it will drop and retest that level and then resume the uptrend, potentially above its all-time high.

The post Here’s why the CAC 40 and DAX Index will rebound as EU considers “nuclear option” appeared first on Invezz