Dax Index: From China to the Eurozone: Economic Headwinds Buffet DAX Market

Highlights

• DAX continued its descent, marking a three-day losing streak with Tuesday’s 0.34% fall.
• Euro indicators suggest a looming German recession; the service sector feels the strain of weak demand.
• US ISM Non-Manufacturing PMI numbers will be another test for the DAX today.

DAX Extends Losing Streak on Economic Woes

On Tuesday, the DAX fell by 0.34%. Following a 0.10% decline on Monday, the DAX ended the day at 15,772. Significantly, the DAX extended the losing streak to three sessions.

Service Sector Activity Contracts at a Faster Rate

Euro area service sector PMIs for August fueled recessionary fears on Tuesday. Unexpected contractions across the Italian and Spanish services sectors weighed on investor sentiment. Poor service sector PMI numbers for France, Germany, and the Eurozone added to the bearish mood.

China Economic Activity Slowed to Set the Tone

Service sector PMI numbers from China have raised questions about the ability of the Chinese government to reboot the economy. The all-important Caixin Services PMI fell from 54.1 to 51.8. Economists forecast a more modest decline to 53.6.

While avoiding sub-50, the first fall in new overseas business since December 2022 warned of a possible contraction.

US Factory Orders Deliver Little Comfort

US factory orders also signaled a gloomy macroeconomic backdrop. Factory orders slid by 2.1% in July (June: +2.3%). Economists forecast a 2.5% decline.

Despite the slide in orders, the figures had a limited impact on Fed interest rate bets. The US manufacturing sector accounts for less than 30% of the US economy, limiting the effect of sector numbers on Fed policy goals. The Fed will focus on service sector activity, employment, wage growth, and inflation.

The Tuesday Market Movers

Commerzbank was the worst performer on the DAX, tumbling by 6.10%. Investors respond to news of Barclays downgrading the stock to underweight. Concerns over non-performing loans have weighed on Commerzbank. The broader banking sector also struggled, with Deutsche Bank ending the day down 2.96%.

Today’s Session

The German economy is in the spotlight again this morning. Factory orders for July will draw interest. After the grim private sector PMIs, investors need some good news. However, economists forecast factory orders to slide by 4%. In June, factory orders unexpectedly surged by 7.0%.

Later in the session, euro area retail sales numbers will provide direction. Economists forecast retail sales across the Eurozone to fall by 0.1%. A continued downward trend in consumer spending would add to the bets on a Eurozone recession. Household spending accounts for about 50% of the euro area economy.

The numbers affect sentiment toward the economy and ECB monetary policy. A downward trend in retail sales would ease demand-driven inflationary pressures.

Away from the numbers, ECB Executive Board Member Elizabeth McCaul is on the calendar to speak. With the markets still betting on a September ECB rate hike, talk of hitting the brakes would provide support.

The DAX Futures was down 10 points this morning.

US ISM Non-Manufacturing PMI a Stern Test

The US ISM Non-Manufacturing PMI will garner more interest. A sharp decline in sector activity would fuel fears of a US hard landing. Notably, the US services sector accounts for more than 70% of the US economy, giving the numbers a significant weighting.

In contrast, hotter-than-expected PMI numbers would raise bets on a final Fed rate hike. Neither scenario is ideal for the DAX. However, better-than-expected numbers would be more supportive of riskier assets.

Short-Term Forecast

Euro area indicators are flashing red, signaling a German recession. The weak demand environment is also impacting service sector activity. Barring measures to boost demand, contradictory to ECB efforts to tame inflation, the DAX will likely remain under pressure.

DAX Technical Indicators

Daily Chart

The DAX pulled back further from the 50-day EMA, sending a bearish near-term price signal. However, the trend line and 15,663 support level limited the downside despite the service sector PMIs.

Another weak set of euro area numbers and steady numbers from the US could see the DAX break below the trend line and support level (15,663). A return to sub-15,600 would bring the 15,459-support level and the 200-day EMA into play. While the euro area numbers will influence, the US ISM Non-Manufacturing PMI will likely have more impact.

The 14-Daily RSI reading of 46.28 gives the DAX room to test sub-15,600 before entering oversold territory.

4-Hourly Chart

The DAX remains below the 50-day and 200-day EMAs, reaffirming bearish price signals. Another round of weak euro area economic indicators would support a break below the trend line. However, US economic indicators must signal more Fed rate hikes to force an extended sell-off.

Better-than-expected numbers from the euro area and steady US PMI numbers would give the bulls a run at the 50-day EMA. A move through the 50-day EMA would bring the 200-day EMA into play.

The 45.20 RSI reading shows the DAX can break below the trend line before entering oversold territory.

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