FOMC minutes and the German DAX

By David Morrison  |  22/02/2018 14:33

This article looks at the fall-out from last night’s FOMC minutes and highlights some significant levels on the German DAX 30.

Wrong-footed again

It wasn’t the first time, and it certainly won’t be the last, that investors were initially wrong-footed by minutes from a Federal Reserve meeting. The major US indices shot higher and the dollar slumped as the headline-reading algorithms picked up on phrases suggesting a more-dovish-than-expected tone from the FOMC. The first takeaway focused on Fed members saying that they would continue to raise rates gradually as growth continued to pick up while there was no evidence that inflation would get out of hand.

Four rate hikes in 2018?

But this knee-jerk reaction reversed sharply as humans discerned a certain subtlety missed by the machines. It became apparent that Committee members were erring on the hawkish side given their expectations that GDP growth should accelerate thanks to additional fiscal stimuli from the Trump administration’s tax cuts and regulatory reform. Overall, it sounded as if the FOMC was preparing the markets for four 25-basis pint rate hikes in 2018, up from the three hikes forecast in the December Summary of Economic Projections. This saw bonds and equities sell off sharply with the yield on the key 10-year Treasury spiking above 2.95% to hit a fresh four-year high.

S&P closes on lows

The move saw the S&P 500 close on the low of the day, just above support (previously resistance) around 2,700. The index fell further after hours although it staged a modest recovery ahead of Thursday’s open. Traders will now have to decide if yesterday’s move was little more than a continuation of the corrective pull-back which has been taking place this week or an indication that global indices are due to undertake another substantive lurch lower.

DAX30

All this is important to consider when looking at other global indices. Considering the German DAX there’s a few significant trading levels which stand out on the daily chart. Firstly, there’s a fairly strong area of resistance which comes in around 12,800. This acted as support on a number of occasions in the last quarter of 2017 and as resistance last summer. On the downside, there’s some mild support around 12,300 but that was sliced through earlier this month and looks unlikely to hold if we see another substantial sell-off emanating from the US. Instead, look at the area between 12,000 and 11,900. The former helped check the DAX’s rally in the spring of 2015 while the latter marks the 50% retracement of the rally from November 2016 (after the US Presidential Election) to January this year. If this fails to hold on a weekly basis then there’s very little further support until the index hits 10,800. 


 

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