- Soaring inflation to weaken Eurozone economy
- ECB set to up the rate hikes
- DAX in renewed bearish motion
European equities are likely to remain under pressure as concerns about the economy and inflation continue to mount. Keep a close eye on the German DAX index as it could be heading for a new low for the year.
The German inflation rate climbed to an almost 50-year high and a new record inflation print of above 9% is likely for the Eurozone as a whole as the fallout from the Russian war in Ukraine continues to take its toll on households and businesses.
Rising prices are putting increased pressure on the ECB to raise rates at a faster rate from September. ECB policymakers Klaas Knot and Madis Müller have both said that 75 basis points (bp) should at least be discussed, while several other members such as Isabel Schnabel and François Villeroy de Galhau called for “significant” action by the ECB at the Jackson Hole Economic Symposium last week.
There are also additional risks in terms of blackouts and rationing, should Russia decide to further cut its gas deliveries to Europe, as a three-day halt of the Nord Stream pipeline starts today. There are fears that Russia will find another excuse to reduce gas deliveries.
Against this backdrop, I would be surprised if the DAX would be able to build on the slight recovery it made on Monday and the first half of yesterday’s session.
By late afternoon on Tuesday, the DAX had given up most of its earlier gains as it fell along with global stocks due to ongoing macro concerns which encouraged the bulls to take profit. The selling started around the previous support area of 13085, which is now the key level to watch on the upside. Tuesday’s bearish reversal helped to create an inverted hammer-like candle on the daily chart, which suggests that the downward momentum may have resumed following the rebound on Monday when dip buyers stepped in to take advantage of oversold prices in the aftermath of Friday’s bloodbath for global equities.
Given the above technical indications, I wouldn’t be surprised if we were to see further weakness during today’s session, despite a somewhat positive start to the day. A couple of short-term support levels that need to be monitored are around 12892 (Tuesday’s low) and 12780ish. If on an intraday basis we see the index struggle to stay around these levels, then watch out below. A quick drop to this year’s earlier lows of around 12400 could then become highly likely given that there are no further obvious support levels to watch in between.
Disclaimer: The author currently does not own any of the instruments mentioned in this article.