Dax Turns Down Following Recent Gains
Looking across markets, aside from the volatility we had around the BOJ meeting, it’s been a much quieter week. The calm before the storm perhaps, as we approach the upcoming February FOMC meeting. However, there have still been some noteworthy moves and chatting with traders ahead of the weekend, it seems the move capturing the most attention is the more than 2% reversal in the DAX which, prior to falling in the back half of this week, had been on a solid rally across early 2023, rallying almost 10%. So, let’s take a look at what caused the move and, as ever, if you caught it? Well done! If you missed it? There’s always next week.
What Caused the Move?
Global Recession Fears
We saw some initial weakness on Wednesday as asset markets reacted to news of much-weaker-than forecast US data for December (retail sales & PPI). The data put recession fears back into focus, sending stock prices falling across the board. While losses were more limited in Europe than in the US, the deeper fall was to come on Thursday.
Hawkish ECB Comments
ECB’s Lagarde upset the apple cart on Thursday as she warned that inflation remains ‘way too high’. Lagarde advised that the ECB would ‘stay the course’ on rates and keep going until CPI was comfortably back in the bank’s 2% target zone. With energy prices tanking over recent months and better data out of the eurozone recently, traders were beginning to mull the idea of a slower pace of tightening, in line with what we’ve seen from the Fed. However, Lagarde’s comments were seen effectively pouring cold water on this notion, sending the DAX heavily lower yesterday.
Looking ahead, the outlook for the DAX remains broadly favourable. On the back of the strong gains we’ve seen only the past two weeks, the current pull-back should prove to be a correction. While Lagarde’s comments provide headwinds for now, the idea of a pivot is likely to gain in traction if we see inflation beginning to cool faster-than-expected in coming months. Additionally, as the economic picture in the eurozone improves, this too should continue to support stock sentiment.
The rally in the DAX saw the index trading up to a test of the 15163.41 level. Price has stalled there for now. However, the key area to note is the 14703.98 area, where we also have the rising trend line off last year’s lows. While this level holds the focus is on a further push higher an dan eventual breakout to 15642.76.