DAX Index: A German Recession Looms? The Double Impact of Domestic Woes and Overseas Conflicts

Highlights

• The DAX declined by 0.67% on Monday, partially reversing a 1.06% gain from Friday.
• German industrial production and Sentix numbers aligned with investor bets on a German economic recession.
• Global eyes turn to the IMF/World Bank Meetings and the Middle East; potential to sway DAX and broader markets.

DAX Monday Overview

On Monday, the DAX declined by 0.67%. Partially reversing a 1.06% gain from Friday, the DAX ended the day at 15,128.

Middle East Conflict and German Industrial Production Weigh on the DAX

German industrial production figures disappointed on Monday. Industrial production fell by 0.2% in August versus a 0.6% drop in July. Economists had forecasted a 0.1% fall. Notably, industrial production fell for the fourth consecutive month, raising expectations of a German recession.

The Sentix Index continued to signal a German economic recession. Notably, the current situation index declined from -38.3 to -39.5, the lowest since July 2020.

Market jitters over the impact of a Middle East conflict on the fragile German economy contributed to the session losses. The risk of a wider regional conflict involving other Middle Eastern nations kept the markets on edge.

However, statements from Fed speakers eased fears of another rate hike, providing support to the US equity markets. On Monday, the S&P 500 and the Dow saw gains of 0.63% and 0.59%, respectively. The Nasdaq Composite Index rose by 0.39%.

The Monday Market Movers

Auto stocks were among the worst performers on demand jitters. Daimler Truck Holding tumbled by 3.43%, with Continental falling by 2.23%. BMW (-1.11%), Porsche (-0.72%), and Volkswagen (-0.99%) also struggled.

However, arms and automotive manufacturer Rheinmetall rallied 7.14% as investors sought stocks that benefit from conflict. Adidas gained 4.31% despite the gloomy economic outlook. Deutsche Bank maintained the ‘buy’ rating for Puma, boosting demand for the German sports brand.

The IMF and the Middle East in the Spotlight

News from the Middle East and messages from world leaders need consideration today. An increasing threat of regional conflict involving Saudi Arabia and Iran would weigh heavily on riskier assets. The markets are hoping for the Middle East conflict to remain contained.

Supply chain disruption and the prospect of elevated crude oil prices for a prolonged period would be the key risks to the global economy. Crude oil prices will likely influence market risk sentiment.

With the Middle East conflict as the focal point, commentary from the IMF Annual Meetings will also draw interest. The IMF will release the World Bank Economic Outlook report today, which could spook investors. Fears of a German economic recession amidst a sticky inflation environment have intensified in recent weeks.

ECB President Lagarde will attend the IMF/World Bank Annual Meetings. Guidance on how the ECB will tackle another market shock must be convincing for the DAX to avoid another loss.

Fed Commentary Remains a Focal Point

Later today, FOMC member commentary will continue to garner investor interest. FOMC members Bostic, Christopher Waller, Neel Kashkari, and Mary Daly are on the economic calendar to speak today.

Voting members Christopher Waller and Neel Kashkari will likely have more influence on investor sentiment.

Comments on the US economy, the Middle East Conflict, and the monetary policy outlook would influence market sentiment.

As of this morning, the DAX and NASDAQ mini were up 132 and 30 points.

Short-Term Forecast

The news of a more widespread conflict in the Middle East would likely pressure DAX stocks. A gloomy German economic outlook may also test buyer appetite for DAX stocks. However, the DAX would benefit from easing Fed rate hike fears.

DAX Technical Indicators

Daily Chart

The DAX sat below the 50-day and 200-day EMAs, affirming bearish price signals. A move through the 15,245 resistance level would give the bulls a run at the 200-day EMA and the 15,459 resistance level.

Near-term trends will likely hinge on Fed and ECB forward guidance and events in the Middle East. However, the IMF World Economic Outlook Report also needs consideration.

Escalation of the conflict in the Middle East and hawkish central bank comments would support a break below the 15,058 support level. A drop below 15,000 would likely bring the 14,814 support level into view.

The 14-day RSI reading of 36.80 indicates that the DAX could fall through the 15,058 support level before reaching the oversold territory.

4-Hourly Chart

The DAX sits below the 50-day and 200-day EMAs, reaffirming the bearish price signals. A DAX break below the 15,058 support level would support a fall below 15,000.

However, a DAX return to 15,200 would give the bulls a run at the 15,245 resistance level.

The 43.22 14-4 hour RSI reading supports a DAX drop below the 15,058 support level before entering the oversold territory.

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