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German DAX continues to struggle

By David Morrison  |  11/09/2018 15:09

US indices continue to hover near all-time highs, but ongoing weakness in the German DAX is indicative of Europe’s problems

The divergence in performance between US and European stock indices has been a feature of the last few months. This can be seen clearly when comparing the relative fortunes of Germany’s DAX 30 with the S&P 500. The latter hit a fresh record high at the end of last month while the German DAX continues to come under selling pressure. In the five months to the end of August the S&P 500 rose over 10%. In contrast the DAX has fallen around 7% over the same period.

Technically, all the major US stock indices remain in bull market territory with the 20, 50 and 100-day moving averages all positively stacked up suggesting that more gains are possible. This is despite a slight pull-back since US Labour Day at the beginning of this month as US/Chinese trade tensions resurfaced as a concern. President Trump looks set to proceed with fresh tariffs on Chinese imports taking the total tariff ‘threat’ to over $500 billion – well above the $505 billion-worth of Chinese goods imported by the US last year. On top of this, Trump is now talking about imposing sanctions on selected Chinese officials and companies as a punishment for China’s detention of ethnic Uighurs and other minority Muslim groups. This is an unusual departure for the Trump administration which previously has shown no antipathy to autocratic leadership.

Meanwhile, European equity markets have suffered over the summer months. This has come on the back of trade concerns, a shifting political climate which has seen populist parties steal power away from the centre-left, Brexit worries and the gradual withdrawal of central bank stimulus. The European Central Bank (ECB) continues to reduce its monthly bond purchase programme and is expected to end its Asset Purchase Programme at the end of this year. While the Federal Reserve is actively tightening monetary policy with no adverse effect on US equities (so far), the fear is that the Euro zone is less robust than the US. Certainly, economic growth remains tepid while inflation is still somewhat below the ECB’s preferred target – approaching, but below 2%. Add in the fact that the new Italian government is prepared to square up to Germany and flout restrictions imposed by the ECB and the European Commission, and it’s understandable that investors are nervous.

Last week the DAX sliced through support around 12,130. If it fails to bounce back soon then a retest of the Jan-Feb lows around 11,700 is possible. In contrast to the US majors, the set-up for the moving averages looks bearish with the 100, 50 and 20-day stacked downwards in that order, suggesting the momentum is to the downside. This could change quickly of course, and we should expect to see sharp counter-trend rallies along the way. But chart-wise we can see several lower highs and lower lows suggesting that traders are looking for a retest of the 2018 lows.
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