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Daily Reports 17

German DAX under pressure

By David Morrison  |  07/02/2019 15:02

Germany’s DAX peaked just over a year ago. Recent data releases highlight recession fears
In contrast to the major US stock indices which, for the most part, peaked at the end of the third quarter in 2018, the German DAX hit its high point just over a year ago. Like the S&P 500, it fell sharply at the end of January last year as fears of a break-out in US inflation helped trigger a surge in volatility. This contributed to a disorderly rout in global equity markets. But whereas US indices went on to make fresh record highs, the DAX was unable to maintain its upward momentum and declined sharply in June. By August three key moving averages confirmed a change in trend when first the 50-day, and then the 100 broke below the 200-day exponential moving average (EMA) giving the bearish set-up that is still in evidence. The index also made a succession of lower highs and lower lows. Even the rally since late December has so far failed to top the previous high in November. Once again, this is another bearish signal. Now we can see the DAX failing to pierce resistance at the 100-day EMA around 11,350 while testing support offered up by the 50-day EMA at 11,100.
Weak data
The German economy has been hit hard by the slowdown in China, as Germany is a big exporter of high-tech manufacturing equipment. Obviously, the ongoing US-Chinese trade dispute isn’t helping. Recent German data releases have been dismal. Over the last few days alone we’ve seen disappointing numbers on Services PMI, Factory Orders and Industrial Production. The fear is that Europe’s economic powerhouse will join Italy in announcing that it is in a technical recession. That would be confirmed next week if fourth quarter GDP contracts again.
US-China trade dispute
The DAX should get a boost if the US and China manage to resolve their differences over trade before the 1st March. US Treasury Secretary Steve Mnuchin is due to lead a delegation to China next week to resume trade talks, while claiming that recent conversations have proved “very productive.” But there’s also a danger that any face-saving agreement will prove insubstantial given President Trump's demands. His insistence that China enforces US intellectual property rights, ends forced technology transfers and brings an end to cyber-hacking and unfair trade practices is probably far too much for Chinese policymakers to agree to at this stage of the country’s development. But anything is possible, and positive news stories could trigger sharp stock market rallies.
Daily DAX chart

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