The German index fell to kick off the day on Tuesday, but in the end, we still have a lot of economic headwinds and issues to chew through.
DAX
The German index fell on Tuesday, but having said that, it’s worth noting that we recovered quite nicely later in the day and that does suggest that the volatility probably keeps up.
The early session saw a rebound fueled by headlines of potential talks between the Iranians and the Americans, but the index also faces quite a bit of headwind based on a hawkish shift in ECB expectations.
The European Central Bank is starting to sound as if they are going to have to keep an eye on rate hikes as being a very real possibility. This is something that will typically work against the index, but we also need to keep in mind that the main reason is also a bad thing, as stagflation, or at least just simple inflation, could cause the market to act as if there is an anchor holding it down.
ECB Expectations and Economic Headwinds
The markets are now pricing in a 25-basis point rate hike for April and June as there will be an upward revised inflation forecast of 2.6, mainly driven by Middle East energy shocks.
Furthermore, a drop in the Eurozone composite PMI to a 10-month low of 50.5 suggests fading economic momentum, leaving the export heavy German index caught between high borrowing costs and stagnant growth. This is not a good combination for the DAX, and it will continue to suffer from it. However, it is also worth noting that the DAX will be the harbinger of what else happens with indices in the European region.
The most immediate resistance that I see above is in the form of the 23,000-euro level. If we were to clear that area, then I would keep an eye on 23,200 euros, which I think is the real prize. I think there is plenty of support for short-term pullbacks, but if we were to break down below the 22,000-euro level, it could really start to weigh upon the DAX for a longer-term drop.
Potential signal: If the DAX breaks above 23,200 I am buying with a stop of 23,000 and a target of 24,000. I would also prefer to see some optimistic news out of the Middle East as well.