A heated week on the financial markets is gradually gaining momentum, similar to the declines in the main German index DAX40. Despite yesterday's rebound, the index has experienced nearly a 5% sell-off over recent sessions. Analysts predict that the DAX will soon return to April's lows, falling below the critical threshold of 17,650 points. This prediction is causing a stir among investors and traders, as they seek to understand the underlying reasons for this downward trend and to anticipate future movements in the market. The primary factors influencing these market dynamics include a combination of technical analysis signals, macroeconomic indicators, and geopolitical developments that are shaping investor sentiment.
The sellers are holding onto several key arguments that justify their bearish outlook on the DAX40. One significant factor is the technical breakdown of the index's support levels, which has been accompanied by negative divergences in various technical indicators. These divergences suggest that the recent price actions are not supported by underlying market strength, which is often a precursor to further declines.
Additionally, there is a growing concern about the macroeconomic environment in Europe, particularly regarding the slow pace of economic recovery and persistent inflationary pressures. These economic challenges are exacerbated by uncertainties in the global supply chain, which have been disrupted by a series of events, including the ongoing effects of the COVID-19 pandemic and geopolitical tensions.
Monday's session in Europe demonstrated a clear attempt to recover from the weak end of last week. The German DAX strengthened by nearly 0.5% yesterday, signaling a temporary respite for investors. However, this recovery is still minimal when viewed against the backdrop of the recent sharp decline of -3.34% over two days and the ongoing corrective movement that has resulted in almost a -5% decrease since May 16. This modest rebound did little to alleviate the broader concerns that have been plaguing the market.
Investors remain cautious, closely monitoring economic data releases and corporate earnings reports for signs of sustained recovery. The recent rebound, while encouraging, has not been sufficient to offset the broader downward trend, leading to continued skepticism among market participants.
Not only did SAP, the most important company in the DAX index, struggle to rebound, but Siemens, the second-largest company in the DAX, also performed poorly, losing over 6%. SAP, which accounts for 10% of the DAX's weight, plays a crucial role in the overall performance of the index. Its difficulties reflect broader challenges faced by the technology sector, including supply chain disruptions and changing consumer demand patterns. Similarly, Siemens' significant losses indicate underlying issues within the industrial sector, which has been hit hard by rising raw material costs and supply chain bottlenecks. The poor performance of these leading companies has a ripple effect, contributing to the overall bearish sentiment in the market and raising questions about the resilience of major European corporations in the face of ongoing economic challenges.
As a result, buyers only managed to defend the 18,000-point support level, but they clearly lack the strength to regain the upward momentum. The defense of this key support level indicates that there is still some buying interest in the market, but the lack of follow-through suggests that this interest is not strong enough to sustain a meaningful rally. Market participants are likely waiting for more concrete signs of stabilization before committing significant capital to long positions. This cautious approach is reflected in the subdued trading volumes and the hesitant price movements observed in recent sessions. The inability to regain upward momentum underscores the challenges faced by the market in overcoming the prevailing bearish sentiment and restoring investor confidence.
DAX is moving in a negative technical structure, so as long as the market does not return above the 18,400 range, there is no chance for a rational long position. The current technical setup indicates a bearish trend, characterized by lower highs and lower lows. This pattern suggests that selling pressure is dominant, and any attempts at rallies are likely to be met with resistance. Traders who are looking to establish long positions need to see a decisive break above the 18,400 range to confirm a reversal of the current trend. Without this confirmation, long positions remain risky and prone to potential losses. The market's technical structure, therefore, serves as a crucial guide for traders in assessing the feasibility of long positions in the current environment.
Selling signals are becoming stronger on all European exchanges. DAX has recently broken the 50-day moving average, which are critical indicators for traders and investors. The breachof these support levels is a clear sign of weakening market sentiment and increasing selling pressure. When an index breaks through such significant support levels, it typically signals that the bearish momentum is gaining strength and that further declines are likely. This technical deterioration is compounded by negative divergences in momentum indicators, such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), which are showing signs of continued weakness.
The political situation also remains a significant burden for the index, complicated by the results of the European Parliament elections. The surprising outcomes of these elections have introduced a new layer of uncertainty into the market. Investors are particularly concerned about the significant rise in the position of the AFD (Alternative for Germany) party, which has been gaining popularity month by month. The AFD's increasing influence is seen as a destabilizing factor for the German political landscape, which could lead to policy shifts that might impact economic stability and growth. Political instability often results in market volatility as investors react to the potential for changes in economic policies and regulatory environments.
Moreover, the upcoming snap elections in France, scheduled for June 30 and July 7, are adding to the uncertainty. These elections are expected to provide a clearer picture of the political landscape in one of Europe's largest economies. The outcome will indicate how much the views of European Union citizens have shifted, especially in the context of recent economic challenges and social unrest. A significant shift towards more radical or populist parties could lead to changes in government policies that might affect economic growth and market stability. Investors are watching these elections closely, as the results could have far-reaching implications for the European Union's economic and political future.
In addition to political uncertainties, the European economy is grappling with persistent inflationary pressures. Rising prices for goods and services are eroding consumer purchasing power and increasing costs for businesses. Central banks are under pressure to balance the need for monetary tightening to control inflation with the risk of stifling economic growth. The European Central Bank (ECB) has been cautious in its approach, but any signs of accelerating inflation could force it to adopt more aggressive measures, which might further unsettle the markets.
Supply chain disruptions remain another critical factor impacting the market. The COVID-19 pandemic has left a lasting legacy on global supply chains, causing delays and shortages in various industries. These disruptions have been exacerbated by geopolitical tensions, such as the conflict in Ukraine and trade disputes between major economies. Companies are struggling to manage these challenges, leading to increased costs and reduced profitability, which in turn affect their stock prices and overall market performance.
The market's current state reflects a complex interplay of these various factors. While there are pockets of resilience, the overall sentiment remains cautious, if not outright bearish. Traders and investors are looking for signs of stability and recovery, but the prevailing conditions suggest that the market is still in a corrective phase. The focus is on key economic indicators, corporate earnings reports, and political developments, which will provide more clarity on the market's future direction.
For those considering long positions, the technical structure of the DAX must show significant improvement. This means not only breaking above the 18,400/430 points range but also maintaining those levels to confirm a sustainable upward trend. Until then, the market is likely to remain volatile, with potential for further declines if negative factors continue to dominate.
In conclusion, the current environment on the European stock markets, particularly the DAX, is marked by significant challenges. Technical breakdowns, political uncertainties, inflationary pressures, and supply chain disruptions are all contributing to a bearish outlook. Investors need to navigate this complex landscape carefully, keeping an eye on key support and resistance levels, and staying informed about macroeconomic and geopolitical developments. Only a combination of technical confirmation and positive fundamental changes will provide a more favorable environment for long positions and a potential market recovery.
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18.06.2024
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