DAX in the Hands of German Factory Orders and ECB Chatter

It was a bearish start to the week for the DAX. The DAX fell by 0.54% on Monday. Partially reversing a 1.25% gain on Friday, the DAX ended the day at 15,964. Significantly, the DAX revisited the 16,100 handle for the first time since May 23 before hitting reverse.

Euro area economic indicators and US service sector PMI numbers weighed on riskier assets. Wholesale inflation numbers for the euro area signaled weak demand. However, inflation remains too high for the ECB, leaving investors in limbo on whether the ECB will tighten further as cracks emerge in the euro area economy.

Service Sector PMIs Test the Riskier Assets

It was a busy morning on the European economic calendar. German trade data and Services PMI numbers for Italy and Spain and finalized PMIs for France, Germany, and the Eurozone were in focus.

German trade data provided little relief. The German trade surplus widened from €14.9 billion to €18.4 billion. Exports unexpectedly rose 1.2%, while imports fell 1.7% in April.

However, with the euro area manufacturing sector continuing to contract, weaker-than-expected services PMIs from Italy and Spain raised more red flags, particularly with the German economy underperforming.

The Eurozone Services PMI fell from 56.2 to 55.1 in May versus a prelim 55.9. Weaker-than-expected numbers from Italy and Spain and downward revisions to the French and German PMIs were a drag.

As a result of the weaker Services PMIs, the Eurozone Composite PMI fell from 54.1 to 52.8, down from a prelim 53.3.

However, wholesale inflation numbers for the euro area were DAX negative, with the annual wholesale inflation rate weakening from 5.5% to 1.0%. While softer wholesale inflation should ease pressure on the ECB to make a move, the sharp decline suggests intensifying competition for new work amidst a weak demand environment. Economists forecast the wholesale inflation rate to accelerate to 5.9%.

US Economic Indicators Disappoint

Later in the day, US economic indicators also moved the dial. US factory orders, finalized S&P Global Composite and Services PMIs, and the all-important ISM Non-Manufacturing PMI numbers were in focus.

The ISM Non-Manufacturing PMI weighed on riskier assets, falling from 51.9 to 50.3 in May versus a forecasted 51.8. Notably, the ISM Non-Manufacturing Prices Index fell from 59.6 to 56.2, with the ISM Non-Manufacturing Employment Index down from 50.8 to 49.2.

Investors eased bets on a June interest rate hike in response to the ISM numbers. According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike fell from 25.3% to 21.2% on Monday versus 64.2% one week earlier.

The Market Movers

It was a mixed day for the auto sector. Volkswagen and Porsche led the way, rising by 0.82% and 1.92%, respectively. Continental and BMW ended the day with gains of 0.66% and 0.26%, respectively. However, Mercedes-Benz Group bucked the trend, falling by 0.28%.

It was a bearish session for the banks. Commerzbank and Deutsche Bank ended the day with losses of 0.75% and 1.68%, respectively.

The Day Ahead for the DAX

It is a busy day on the European economic calendar. German factory orders will draw plenty of interest going into the European session. In March, German factory orders tumbled by 10.7%. Another fall in orders would raise the prospects of another economic contraction in Q2.

Economists forecast factory orders to fall by 2.2% in April, which would pressure the DAX.

Later in the session, euro area retail sales figures will also move the dial. The current inflationary environment weighed on consumer spending in March. While economists forecast a modest 0.2% increase in April, an unexpected fall in retail sales would add further pressure on the ECB to hit the pause button, we don’t expect a DAX response.

The German economy entered a technical recession in Q1, with Q2 numbers suggesting more pain.

With the economic calendar on the busier side, investors should monitor central bank chatter throughout the Monday session. However, no ECB members are on the calendar to speak today, leaving commentary with the media to influence.

While no ECB members are speaking, the ECB will release the ECB Consumer Expectation Survey results that need consideration.

It is a quiet day on the US economic calendar, with no US economic indicators to move the dial. The lack of economic indicators will leave Fed chatter to influence. After ISM Non-Manufacturing PMI numbers on Monday, the markets remain uncertain about the June policy decision and whether more rate hikes are likely in the proceeding months.

DAX Technical Indicators

Resistance & Support Levels

The DAX has to move through the 16,002 pivot to target the First Major Resistance Level (R1) at 16,077 and the Monday high of 16,115. A return to 16,000 would send a bullish signal. However, the DAX would need economic indicators and central bank chatter to support a breakout.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at 16,189 and resistance at 16,200. The Third Major Resistance Level (R3) sits at 16,376.

Failure to move through the pivot would leave the First Major Support Level (S1) at 15,890 in play. However, barring a risk-off-fueled sell-off, the DAX should avoid the Second Major Support Level (S2) at 15,815. The Third Major Support Level (S3) sits at 15,628.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bullish signals. The DAX sat above the 50-day EMA (15,941). The 50-day EMA pulled away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the 50-day EMA (15,941) would support a breakout from R1 (16,077) to give the bulls a run at R2 (16,189). However, a fall through the 50-day EMA (15,914) would bring S1 (15,890) and the 100-day EMA (15,871) into view. A fall through the 50-day EMA would send a bearish signal.

The DAX Futures Sees Red

Eying the futures markets, DAX and the NASDAQ were down 16 and 0.25 points, respectively. The Dow was up 1 point.

For a look at the economic events, check out our economic calendar.