After the big falls we witnessed in the last couple of days, there were no dramatic moves to be seen today as markets were a lot calmer, at least in the first half of the session anyway. We saw markets in Europe and US rebound quite noticeably today as dip buyers stepped in following steep falls in Europe in the last couple of days. But with sentiment being driven almost entirely by energy prices right now, things could unravel again as we head deeper into the US session. Traders should remain nimble. At the time of writing in late afternoon trading in London, the German DAX index was at its session highs, testing a key technical level around 24,200. Other major indices were also near their session highs. Will the recovery hold, or will the sellers re-emerge here? My DAX forecast remains cautious following the breakdown earlier this week and won’t be surprised if we see the selling resume, especially as oil prices continue to hold up well on the dips amid supply disruption fears in the Middle East.
Sentiment improves – for now
For much of today’s session, we have been seeing a bit of a squeeze on those bearish positions accumulated since the start of the week, as a tentative “risk-on” mood crept back in. The tentative positivity seemed to have stemmed from a New York Times report suggesting Iran had indirectly sounded out the CIA over possible terms to bring the conflict to an end. It followed remarks from Donald Trump that the US Navy would safeguard shipping routes in the Middle East and that Washington stood ready to provide risk insurance to guarantee the “free flow of energy to the world”. On paper, it all sounds rather comforting. In practice, very little has changed. The conflict is ongoing and there’s no concrete evidence of de-escalation. This could keep pressure on risk assets for a while yet.
Goldman Sachs warns oil could hit $100
The key concern for equity markets remains high oil prices and their impact on inflation and growth, and, in turn, interest rates. Roughly a fifth of global oil and gas supplies pass through the Strait of Hormuz, and traffic has effectively ground to a halt after Iran’s threats towards commercial vessels. Quite understandably, markets are looking for something more tangible than warm words before stripping out the energy risk premium. Indeed, many analysts remain sceptical and are forecasting higher energy prices the longer the conflict goes on. For Goldman Sachs, global oil prices could surge to $100 if exports through the Strait of Hormuz stay low for several weeks. According to their estimates, if there is greater damage to oil infrastructure or we see a prolonged Hormuz disruption, of say about 5 extra weeks, then this could push oil prices even higher.
DAX forecast undermined by energy shock
Price action still revolves almost entirely around one simple dynamic: elevated energy prices benefit exporters and hurt importers. That’s left the euro and much of Europe on the back foot. While the DAX might be up today, unless there’s a genuine improvement in the energy backdrop — either via a sustained pullback in oil or credible steps to reopen Hormuz — it’s difficult to argue for rebuilding structural long equity positions just yet. With such a significant share of global energy flows at stake, the bar for confidence is understandably high. Against this backdrop, the risks to our short-term DAX forecast are tilted to the downside.
Technical analysis: DAX arrives at first resistance
Following the DAX’s nearly 4% drop yesterday, we have seen a nice bounce back today. But it was now approaching the first of the key broken support levels, namely the February low of 24,200. This is now the most important an important resistance level to watch. A closing break above it will be a short-term bullish development, which could then pave the way for a run to the next major resistance around 24,570/5 area next. On the downside, 23,480 is a potential support level, followed by the 38.2% Fibonacci retracement around 22,950.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
