DAX: US PMI Sends Jitters Through the Market
Yesterday’s unexpected decline in the U.S. Manufacturing PMI index sent global stocks lower as concerns over contraction in the world’s largest economy grew.
Risk-off sentiment gave way, leaving hopes for a Fed rate cut behind. The U.S. Manufacturing PMI came in at 46.8, with most analysts expecting a small increase to 48.8 from last month’s 48.5.
The reduction in U.S. manufacturing activity outweighed the increasing possibility of a Fed interest rate cut in September.
The CME FedWatch calculates a 73.5% probability of a 25-basis point rate cut in September, while the probability of a 50bp cut has risen to 26.5% from 11.5% a week ago.
It’s now looking like the Fed is behind the curve in monetary policy, and a soft landing seems less likely. Concerns over growth prospects will take the front seat as the much-awaited monetary easing may come too late.
The DAX lost 2.43% yesterday, its worst one-day drop since December 2022. Eyes are now turning to the Non-Farm Payrolls data later on today. The market is expecting the economy to add another 175k jobs.
A lower number could spark volatility, as this time around the market will probably not welcome softer numbers. In the recent past, the stock market has been happy to see weaker jobs data, which increased the hopes of a Fed rate cut.
This time around, the market is in fear of a central bank that has delayed taking action for too long. Meaning interest rate cuts will have come too late in the game to have a beneficial effect on the economy.
Technical View
The day chart below for the DAX shows a market that has formed a head-and shoulders pattern (yellow line). Yesterday’s candle broke that pattern to the downside, where the close is well below the neckline (grey line).
This breakout is a clear bearish signal, but it also coincides with a breakout of the Ichimoku cloud to the downside, adding more bearish sentiment. The next major support level is at 17,419 (orange line).
However, before that happens we are likely to get a retracement towards the neckline. That correction should not close above the neckline, allowing for a continuation of the bearish setup.
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