DAX: Testing the possibility of a reversal?

The growth outlook continues to deteriorate. While German officials await confirmation that the economy is not just experiencing a short correction that will leave capacity utilisation still at relatively high levels, markets are positioning for a prolonged and serious decline in German and Eurozone growth.

Today’s data strengthen the market’s positions, after weaker than expected German orders data at the start of the session and the German Sentix investor confidence, which came out at the lowest level since 2009, added to signs that global trade tensions and Brexit jitters will push the German economy into deep recession.

The German manufacturing orders declined -0.6% m/m in August, more than anticipated,while the German Sentix investor confidence fell back to -19.4 in the October reading, from -12.8 in September. The dip to the lowest level since 2009 highlights mounting risk of a deep recession, rather than the technical correction that the Bundesbank and the government are still factoring in. The overall Eurozone reading fell back to -16.8, which adds to signs that the weakness that started in the German manufacturing sector is spreading to other sectors and countries.

Following the data and as the trade optimism fades, the European stock markets were lower in the European open, with GER30 down by 0.5% from Friday’s close. Even though it holds above Thursday’s low, the heavy losses seen last week have not been recovered yet, keeping the overall outlook negative. As the data continue to back the recession narrative, the only event that could support GER30 is the ECB’s asset purchases resumption.

Although in terms of bias, the asset holds for a 3rd consecutive day to the upside, holding above the 200- and 50-day SMA, at the same time it remains below the 38.2% reversals from the 12,495 high. While intraday, the asset posted few upsides today, the momentum remains neutral, as MACD and RSI hold close to neutral zone, suggesting consolidation in the near term.

On the flipside, the overall volatility presents signs of an abating of the DAX, as the asset remains close to the lower Bollinger Bands pattern, with BB extending lower, MACD readying to turn below zero and RSI  at 44, both presenting negative bias.  

Having this in mind, the recent recovery looks like a correction to the overextended decline seen last week, outside of the BB range. Only a big move above 12,200 could turn the focus back to the mid-12,000 area.

Against that background, ECB speakers this week will likely continue to reflect a diverging range of opinions, although chief economist Lane in particular will defend the move, while repeating the increasingly urgent call for fiscal support as economic growth slows.

Click here to access the Economic Calendar

Andria Pichidi

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.