The RoboMarkets Weekly Review and Outlook – US Debt Dispute Ends, Interest Rate Question Open – DAX Hovers Around the 16,000 Mark

Jürgen Molnar, Capital Market Strategist RoboMarkets

02 June 2023

The cow is off the ice and the issue of the US financial insolvency is off the table, at least for the next two years, after both chambers of the US Congress approved the compromise negotiated by President Biden and Republican McCarthy to suspend the debt ceiling. However, only the next few days and weeks will show whether the entire issue of budget and debt policy in the world’s largest economy has disappeared from the radar of rating agencies and investors. In 2011, too, the rude awakening came only after the dispute over fiscal policy in the United States had been settled. On Wall Street, share prices fell by a good 12 percent within the following three weeks.

DAX Slightly Battered

In the short term, however, there was plenty of relief on the stock market at the end of this trading week, even though not many investors had really expected the process to fail. As a result, the DAX continues to hover around the 16,000 mark and thus also around the upper end of the week-long sideways range from which the index had only broken out for a brief excursion to a new high for the year, but had returned just as quickly.

In the course of the week, the DAX had fallen below the important support at 15,700 points. Thus, at least from a technical point of view, the foundation of the rally since last autumn is crumbling somewhat and the resistance of German equities to a potential correction on Wall Street is becoming correspondingly weaker.

Euro Under Pressure

The German stock market is also facing headwinds from the currency market these days. Although a weak euro is good for export-oriented companies, a resumption of the downward trend of the common currency towards parity would also entail capital flows back into the dollar area. Precisely because the DAX has performed much better than the indices in New York in recent months, profit-taking is currently quite attractive for foreign investors.

China’s Economic Engine Sputters

And in China, the world’s second largest economy, the economic outlook is becoming increasingly gloomy. The Purchasing Managers’ Index for industry unexpectedly fell further in May and remains below 50 points, pointing to an economic downturn. The country is currently struggling with many problems, the weak real estate sector with some desolate large corporations, the aftermath of the pandemic and a general decline in exports. So after decades of growth, there are clear skid marks in the Middle Kingdom these days, which are likely to trigger recessionary tendencies in other parts as well.

US Labour Market Knows No Weakness

However, the labour market in the USA is not showing any recessionary tendencies. On the contrary, 339,000 new non-farm jobs were created in May, significantly more than in April. If the tense situation on the labour market were the only factor, the Fed would have a hard time pausing interest rates.

On 14 June, the question will be no less than whether the tightly implemented cycle of interest rate hikes that started at the beginning of 2022 will be paused for the time being. That, at least, could be the most likely scenario after the latest statements by important Fed council members. And most of the time the Fed prepares the market relatively credibly for its next decision.

Purchasing Managers’ Indices and China Data Ahead

The coming week will start with various purchasing managers’ indices from Europe, but also from the USA. On Wednesday, further figures on imports and exports from China could show what impact the sputtering engine of the economic locomotive has on foreign trade with the rest of the world. Meanwhile, the mood on the stock market remains cautious, to put it positively. The optimism, which is at least superficially perceptible, does not match the current sentiment surveys at all. Only 12 percent of institutional investors expect prices to rise further. 80 percent want to wait for better entry prices. However, if they are wrong, this is where the next upside potential for the stock market lurks.

DAX – Current Supports and Resistances

Supports: 15,950/15,900 + 15,750/15,700 + 15,600/15,550

Resistances: 16,000/16,050 + 16,100/16,150 + 16,250/16,300

This article is from RoboMarkets.