DAX Set for Correction After Impressive Recovery

 | Dec 07, 2022 13:10

  • Global indices are starting retreat as recession fears replace the peak inflation narrative
  • DAX ends recent consolidation with a break of short-term trend
  • This combination of factors may encourage the bears to come out of hibernation

    • European and U.S. stocks have fallen back in recent days, giving back some of their impressive gains made in the last couple of months. Investors are starting to re-focus more on recessionary signals than the peak inflation narrative. They worry that weaker demand in 2023 might hurt company earnings, and the current market valuations might be too high.

    Furthermore, the fact that inflation remains around 10% in Europe and very high in other parts of the world means central banks will have to continue to tighten their belts, which should hurt demand further.

    In the U.S., the stronger wages and employment data we saw last week may yet encourage the Fed to continue tightening interest rates so that it climbs above 5% before the cycle is paused. This is an additional risk facing equity markets, especially those that pay low or no dividends.

    But equally, we haven’t had many new bearish catalysts in recent days, which is why the downside has been limited thus far. If anything, data out of Europe was stronger today.

    Eurozone GDP was revised slightly higher, and German industrial production fell less than feared. A day before, we saw German factory orders advance 0.8% in October, well above an anticipated rise of 0.1%. German Economy Minister Robert Habeck noted that:

    “In addition to the slightly improved sentiment indicators, this is a further indication that the recession could be weaker than feared, even if the outlook for the industrial economy remains subdued.”

    Still, I would err on the side of caution, given the breakdown of some key support levels in recent trade.

    On the DAX Futures, for example, we have seen the breakdown of a short-term bullish trend and support around 14400. While still inside the recent consolidation, this may encourage the bears to come out of hibernation now.

    If the range is low around 14142 breaks and we hold below it, then that will provide a stronger bearish signal. In that case, we may see the onset of fresh technical selling, leading to a potential drop all the way back down to the base of the breakout around the 13710 area.