DAX: Stock market sell-off overdone?
Fawad Razaqzada April 5, 2016 8:30 AM
<p>European equity markets fell sharply this morning and are only modestly off their earlier lows at the time of this writing. Traders responded to yesterday’s big drop in oil prices and a retreat on Wall Street to dump European equities, which saw miners dominate the bottom of half of the FTSE 100. Banks were also lower with Deutsche off by 3.5 per cent in Frankfurt. The sell-off in banks appears to be in response to the falling yields. Today, for example, the German 10-year Bund yields hit a new 12-month low as they hover near the all-time extreme.</p>
European equity markets fell sharply this morning and are only modestly off their earlier lows at the time of this writing. Traders responded to yesterday’s big drop in oil prices and a retreat on Wall Street to dump European equities, which saw miners dominate the bottom of half of the FTSE 100. Banks were also lower with Deutsche off by 3.5 per cent in Frankfurt. The sell-off in banks appears to be in response to the falling yields. Today, for example, the German 10-year Bund yields hit a new 12-month low as they hover near the all-time extreme.
Yields are falling (and bond prices are rising) because of the ECB’s on-going QE stimulus programme. Previously, falling yields would have seen the stock markets rise in tandem with bond prices, and weigh on the euro. But this is no longer the case as the market is now more focused on the direction of oil prices and concerns that the record low interest rates would hurt banks’ earnings. The surprisingly positive reaction of the euro in recent months to the growing divergence of monetary policies between the EU and US suggests that the single currency may have bottomed out against the dollar. Thus some of the export names that had previously found support from a weaker euro can no longer rely on this source.
That being said, I still think oil prices are due a bounce of some sort because nothing has changed fundamentally over the recent days to justify the recent sharp sell-off. Indeed, some would argue that oil prices have already bottomed out and that the latest pullback is an opportunity to go long once the impact of profit-taking and short-term selling pressure wanes. If this view turns out to be correct, stocks should also rebound I would imagine. What’s more, the impact of falling yields may not be supporting the markets right now, but further falls to fresh record lows could see more yield-seeking investors park their funds into risker assets such as equities and away from safe haven government bonds.
Technical outlook: DAX
The recent sell-off has left a couple of big gaps in some of the major indices, such as today’s featured chart: the German DAX, below. Usually, but not always, gaps get "filled" before the markets make their next move. This implies that the DAX could bounce back. Indeed, the technical outlook is still slightly positive on the DAX after it climbed back above the pivotal 9300/9340 area in February, which basically violated the trend of lower lows and lower highs. Although the 200-day moving average is still significantly above price and pointing lower, the faster moving 50-day average has turned flat recently and is being tested as support today. Significantly, the 50-day SMA is also roughly where the 38.2% Fibonacci retracement level, at 9570, comes into play. This makes it a potentially strong support area. So, I wouldn’t be surprised if the DAX bounces back from here as early as later this afternoon.
Of course, the more significant reference point is the broken 9300/9340 area, but ideally the bulls would like to see the index turn around and rally without testing this region; if seen, this would strongly suggest the selling pressure is weak. But if the selling pressure continues relentlessly then the next stop could well be at around the 9300/9340 support area before the index makes it next move.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.