DAX 30 Fundamental Forecast – September 9, 2016

The DAX 30 tumbled over 62 points after the ECB held rates and policy. The index is trading at 10689.30 as the strong euro weighs on stocks. The European Central Bank says asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond if necessary, and in any case until is sees a sustained adjustment in inflation.

The stock of German government bonds eligible for purchase based on the multiple rules put in place is worth only 40 billion euro’s nominal, i.e. no more than four months of purchases. Removal of the minimum yield rule would make around 95 billion euros in German government bonds available for purchase, making it possible to keep implementing the PSPP at the current pace until June 2017. However, in all likeliness the ECB will want to secure a broader margin of action on the German curve to preserve its credibility. In addition to the yield rule, therefore, some other parameters will also have to be changed. The most effective move to definitively solve the shortage problem would be to abolish the rule by which purchases are made based on the share of the ECB capital held by individual countries, and to start purchasing pro-quota of outstanding debt.

As the DAX has consolidated in recent weeks, the longer term bias remained positive, given that the move to the August high resulted in a breakout above a long term falling trendline dating from the April 2015 high. Although the DAX remains overbought on a weekly basis, a market in the midst of a strong uptrend can remain overbought for extended periods of time, as occurred throughout the first quarter of 2015. Thus, a breakout over the near term would be a sign of internal strength, indicating more gains are likely in the weeks ahead.

Above the late 2015 high, the 61.8% retracement of the April 2015-February 2016 decline near 11,000 is the next potential level of resistance. This round number also has potential psychological value. Third resistance is at the Nov. 2015 peak at 11,430.

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Upcoming Economic Events that you should be monitoring:

 September 9, 2016

Government Bond Auctions

Date Time Country Auction

Sep 08 11:00 Ireland Holds bond auction

Sep 08 17:20 Italy Announces details of bond auction