German 30 (DAX) Nears 18,600; ECB Rate Cut Speculation and Weak German PMI Data
German stocks opened the week on a bearish note, with the DAX index retreating to around 18,579.06.
The decline was primarily driven by the underperformance of previously strong sectors, particularly the DAX Insurance (CXPIX), which fell to 2,272.07, and the DAX Transportation & Logistics (CXPLX), which dropped to 1,258.96.
(Ouch!) #German economy continues to stagnate, particularly in the manufacturing sector. #Germany does not necessarily need an interest rate cut by the @ecb – but it does need structural reforms & confidence @FuestClemens @ifo_Institut live @GuyJohnsonTV interview @BloombergTV pic.twitter.com/YbitkqV5aZ
— ACEMAXX ANALYTICS (@acemaxx) August 26, 2024
Conversely, the DAX Food & Beverage (CXPFX) remained in positive territory at 400.92. Speculation surrounding potential European Central Bank (ECB) rate cuts due to weak Eurozone growth continues to weigh heavily on the DAX.
Lower borrowing costs, while potentially supportive of the economy, could also signal underlying economic troubles, diminishing investor confidence and leading to a bearish outlook for German equities.
On the other hand, a weaker U.S. Dollar, driven by dovish remarks from Federal Reserve Chairman Jerome Powell, may lend support to the DAX by boosting European exports and corporate earnings, thereby lifting investor sentiment.
ECB’s Potential Rate Cut and Its Impact on the DAX Index
ECB Governing Council member Olli Rehn recently voiced concerns about slowing inflation and economic weakness in the Eurozone, reinforcing the case for lowering borrowing costs in September.
This sentiment aligns with a subdued growth outlook, particularly in the manufacturing sector, which could prompt the ECB to cut rates to bolster the economy.
There is no reason to cut interest rates if the CB strictly adheres to monetary #austerity – #ECB's restrictive monetary policy is weighing on demand in the #euro zone, which is already chronically weak, chart @ECB https://t.co/yeKxYEdH92 pic.twitter.com/0CQ36QYJFj
— ACEMAXX ANALYTICS (@acemaxx) August 26, 2024
The latest flash German PMI data highlighted a faster-than-expected contraction in manufacturing activity, which fell to 42.1, while the services sector expanded more slowly than anticipated, reaching 51.4.
These developments suggest that the DAX index could face further pressure if investor confidence continues to wane in light of economic headwinds.
Impact of Fed’s Dovish Stance on DAX Index and Global Markets
The dovish tone from Fed Chairman Jerome Powell at the Jackson Hole Symposium, where he hinted at potential rate cuts, has led to a weaker U.S. Dollar.
Although Powell refrained from specifying the timing or magnitude of the cuts, market participants are pricing in a 25-basis point reduction at the September meeting.
Equities, and nearly every other asset class, rallied on Friday because #FederalReserve Chairman #Powell basically promised rate cuts to arrive soon.
This will put even more emphasis on the ‘will there be a #recession’ debate. As the great chart from @Callum_Thomas shows, a… pic.twitter.com/atUgD86Ywu— jeroen blokland (@jsblokland) August 25, 2024
Philadelphia Fed President Patrick Harker and Chicago Fed President Austan Goolsbee also supported gradual easing, adding to the expectation of forthcoming policy adjustments.
As a result, the weakening U.S. Dollar could favour the DAX index by enhancing the competitiveness of European exports and boosting corporate earnings, potentially providing a cushion against the broader bearish sentiment.
Technical Analysis of the DAX Index
The technical outlook for the DAX index suggests a pivotal moment. After a strong rally, the index appears to be consolidating within a rising channel.
Currently trading near the upper boundary of the channel, the DAX is encountering resistance around the 18,650 level.
The RSI is hovering near the overbought zone at 72.11, indicating that the index may be due for a pullback.
Key support is found at 18,488, followed by a more substantial level at 18,353.27, which aligns with the 50-day EMA at 18,298.24.
If the index fails to break above the resistance, a retracement toward these support levels could be on the horizon, potentially providing a buying opportunity for investors.
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