Dax Index and Fed Fears: A Rocky Road Ahead for Dax Stocks

Highlights

• China’s economic data set a bearish tone on Tuesday: Industrial production and retail sales missed forecasts.
• US retail data fueled the soft-landing theory but stoked fears of a September Fed rate hike.
• Today, the Eurozone economy will be in focus while investors consider the FOMC meeting minutes as rate hike speculation mounts.

Overview

It was a bearish Tuesday for the DAX. Reversing a 0.46% gain from Monday, the DAX fell by 0.86% to end the day at 15,767.

Economic indicators from China set the mood. Industrial production increased 3.7% year-over-year in July versus 4.4% in June, with retail sales up 2.5% versus 3.1% in June. Economists forecast increases of 4.5% and 4.8%, respectively.

Other indicators were also bearish. The unemployment rate increased from 5.2% to 5.3%, with fixed asset investments rising by 3.4% versus 3.8% in June. Economists forecast fixed asset investments to be up 3.8%.

The PBoC responded to the stats by cutting key policy rates unexpectedly to boost growth. However, the move was not enough to prevent a DAX reversal. Investors expect more aggressive support from Beijing to deliver a reversal of economic fortunes.

Late in the European session, US retail sales figures supported the soft-landing theory but also reignited fears of a September Fed rate hike.

The S&P 500 fell by 1.16% on Tuesday. It was also a bearish session for the Dow and the NASDAQ Composite, which saw losses of 1.02% and 1.14%, respectively.  Fed rate hike jitters left the indexes in negative territory.

ZEW Economic Sentiment Delivers Ray of Hope

ZEW Economic Sentiment numbers for Germany and the Eurozone raised hopes of an improving macroeconomic environment.

The German ZEW Economic Sentiment Index rose from -14.7 to -12.3, with the Eurozone Index up from -12.2 to -5.5. Economists forecast Sentiment Index values of -14.7 and -12.0, respectively.

Later in the session, US retail sales figures signaled a hot US economy. In July, US retail sales increased by 0.7% versus +0.3% in June, with core retail sales up 1.0% in July versus +0.2% in June. Economists forecast retail sales to climb by 0.4% and core retail sales to fall by 0.3%.

The Market Movers

It was a bearish session for the auto sector. Mercedes-Benz Group and Volkswagen fell by 1.03% and 0.99%, respectively, with BMW declining by 0.89%. Continental AG and Porsche ended the day with losses of 0.54% and 0.16%, respectively. Demand concerns weighed on the auto sector.

It was also a bearish session for the banks. Commerzbank and Deutsche Bank saw losses of 0.59% and 0.56%, respectively. Fitch warnings of a suite of US bank rating downgrades, including JPMorgan (JPM), weighed on banking stocks.

The Day Ahead for the DAX

It is a busy Wednesday session, with the Eurozone economy in the spotlight this morning.

Eurozone employment change, second estimate GDP, and industrial production numbers will draw interest. While the ZEW Economic Sentiment Index showed an improving outlook, the jury is out on whether the Eurozone can avoid a further deterioration in the macroeconomic environment.

Economists forecast the Eurozone economy to expand by 0.3% quarter-on-quarter after stalling in the first quarter. Revisions to the first estimate figures will move the dial. However, industrial production figures will also need consideration, with the weak demand environment suggesting a more marked decline than forecasts. Economists forecast a 0.1% decline in July.

In the US session, US Housing sector data and industrial production figures for July will be in focus. While the housing sector is a litmus test for the US economy, industrial production numbers will garner interest.

Investors are looking for signs of a deviation from the soft-landing theory.

However, it is worth noting that the industrial production numbers are unlikely to influence the Fed. The manufacturing sector accounts for less than 30% of the US economy and is unlikely to dictate sentiment toward Fed monetary policy. In contrast, a marked deterioration in US housing sector conditions would raise eyebrows.

Later in the session, the FOMC meeting minutes will impact the EUR/USD. While the Fed raised rates by 25 basis points in July, Fed Chair Powell left the door ajar to further rate hikes. With recent economic indicators supporting further tightening, the minutes will reveal whether the Hawks or the Doves are in the driving seat.

Hawkish minutes will send the EUR/USD further south as economic indicators signal a hotter US economy.

DAX Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bearish signals. The DAX sat below the 50-day and 200-day EMAs, sending bearish near and longer-term price signals. Significantly, the 50-day EMA closed in on the 200-day EMA. A bearish cross would give the bears a run at the 15,600 – 15,525 support band.

The 14-4H RSI sits at 40.62, reflecting bearish sentiment, with selling pressure overweighing buying pressure. Significantly, the RSI aligns with the EMAs, supporting a return to 15,700 to target the 15,600 – 15,525 support band.

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