Dax Index: ECB Chief Economist Brings Comfort but DAX Market Remains Wary of China

Highlights

• Bearish week for DAX: Index declines by 1.63%, closing at 15,574.
• China’s monetary decisions are expected to keep influencing DAX’s trajectory.
• DAX eyes on German producer prices; forecast -0.2%.

Friday’s Session Overview

It was a bearish end to a bearish week for the DAX falling 0.65%. Following a 0.71% loss on Thursday, the DAX ended the week down 1.63% to 15,574.

Market sentiment toward China’s economy and attempts from Beijing to support the economy left the DAX in negative territory. While the PBoC has made several moves to boost growth, investors remain unconvinced about how effective the policy maneuvers will be.

Uncertainty toward Fed monetary policy intentions added to the bearish mood, while sticky Eurozone inflation was also a red flag.

The Eurozone annual inflation rate softened from 5.5% to 5.3%, while core inflation held at 5.5% in July. Significantly, the ECB has taken a greater interest in core inflation.

ECB Chief Economist Philip Lane provided some market comfort on Friday, saying the Eurozone economy would unlikely experience a deep or sustained recession.

Friday’s Market Movers

It was a bearish session for the auto sector. Porsche ended the day down 1.43%, with BMW falling by 0.86%. Mercedes-Benz Group and Continental AG saw losses of 0.74% and 0.36%, respectively, with Volkswagen declining by 0.21%. Risk aversion stemming from China and Germany’s economic woes continues to weigh on the auto sector.

It was also a bearish session for the banks. Commerzbank and Deutsche Bank ended the day with losses of 1.32% and 0.40%, respectively. Economic headwinds left the banking sector in negative territory.

However, Zalando was among the worst performers, sliding by 3.68% on negative sentiment toward the euro area economy and consumption. Zalando is an online retailer of beauty, fashion, and shoes.

The Day Ahead for the DAX

China is in the spotlight again this morning. We expect investors to respond to the latest efforts by the PBoC to boost growth. The PBoC cut the one-year loan prime rate (LPR) by 10 basis points while leaving the five-year LPR unchanged.

Economists expected the PBoC to reduce the one-year and five-year loan prime rates by 15 basis points each to 3.40% and 4.05%, respectively. Beijing made no further stimulus moves to shore up investor confidence.

Later this morning, German producer prices will draw interest. The weak demand environment has weighed on output prices in Germany and China, in particular. A more marked decline in producer prices would test buyer appetite.

Economists forecast German producer prices to fall by 0.2% in July after declining by 0.3% in June.

There are no US economic indicators to move the dial in the early part of the US session. The lack of US economic indicators will leave the DAX in the hands of central bank chatter as investors turn their attention to the looming Jackson Hole Symposium.

DAX Technical Indicators

After the bearish Friday session, the DAX sat below the upper level of the 15,600 – 15,525 support band. However, DAX remained below the 50-day and 200-day EMAs, with Thursday’s bearish cross weighing on buyer appetite. Significantly, the EMAs sent bearish near and longer-term price signals.

Looking at the 14-4H RSI, the RSI sits at 31.10, reflecting bearish sentiment, with selling pressure overweighing buying pressure. Significantly, the RSI aligns with the EMAs, supporting a fall through the 15,600 – 15,525 support band to bring sub-15,500 into play.

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