DAX, Crude oil forecast: Rising energy prices, yields threaten risk assets

Following a weak handover from Asia, European markets and US indices were under pressure this morning, as rising oil prices and elevated bond yields once again weighed on risk appetite. Among the major European indices, the German DAX will be in firm focus this week, with the ECB’s rate decision coming up on Thursday. That decision is likely to be a hike, as rising oil prices threaten to re-accelerate inflation. Further gains in oil prices could threaten to unravel the rally in equity markets that began in March. For now, choppy price action continues to dominate.

 

Crude oil forecast remains tiled to upside amid US-Iran tensions

 

Crude oil prices rose again today, with WTI closing in on the $95 per barrel mark and climbing to its highest level since early June. The continuing conflict in the Middle East is keeping concerns over supply disruptions, and that in turn is worrying investors about the inflationary consequences of elevated oil prices.

 

The latest rise in oil comes after Saudi Arabia’s energy ministry said operations at some facilities had been suspended following strikes by Iran-backed Houthi militants based in Yemen, adding to concerns about disruption across the region.

 

 

Unless there is surprise de-escalation in the conflict, WTI could be heading to $95 next, with Brent now not far off the key $100 level.

 

For the Fed, the combination of resilient US employment and renewed pressure from energy prices are both hawkish signals. A sustained rise in oil prices would risk reversing the progress on inflation that policymakers have been relying on to justify lower interest rates, while simultaneously squeezing consumers and businesses.

 

That makes the next few weeks particularly important for markets: investors are having to weigh an overall still-positive risk environment against rising energy prices which could keep inflation higher for longer.

 

DAX forecast: ECB like to hike with the Fed to follow suit

 

Ahead of the FOMC meeting next week, we will first hear from the European Central Bank on Thursday. Thanks largely to surprisingly strong Eurozone data, and rising oil prices, traders have been increasingly price in a rate hike from the ECB and a couple more hikes are also expected during this cycle. The key question therefore is whether the ECB will validate the hawkish repricing of eurozone rates, or whether Christine Lagarde and co will turn out to be a little less dovish.

 

Validating the hawkish pricing of Eurozone rates will likely provide a bit of headwind for European equities and support for the euro, while if Lagarde suggests the central bank is happy to see through the latest spike in oil prices and imply that rates will not be tightened further, then that could hit the single currency. 

 

For what it is worth, I reckon the ECB will be keen to highlight stagflation risks amid continued Middle East uncertainty more than the mild improvement in the data. That may mean a more hawkish policy decision than expected. As such, the DAX and European markets in general could fall in response to the ECB’s choice of wording and economic projections.

 

DAX technical analysis and levels to watch

 

From a technical analysis point of view, the German DAX has been among the more resilient markets out there when you consider the all the macro headwinds. Still, the recent break down below the 21-day exponential has given the bulls the first warning sign that the rally may have come to a halt and that a period of consolidation or worse, a correction phase, could on the cards.

 

 

The first level of resistance to watch is around the 26,000 mark now, where the index was trading near at the time of writing. Above this, 26,166 is the next level of potential resistance followed by 26,355.

 

Initial support comes in around 25,900 area, below which the recent low of 25725 will be in focus followed by the old all-time high of 25,512. If the latter breaks, then the longer-term levels will be in play such as the 200-day average at around 24,700 area.

 

For now, the DAX forecast remains tilted lower, especially if crude oil prices continue to rise and/or the ECB turns out to be more on the hawkish side of things.