DAX outlook: Stocks not out of the woods yet

• DAX outlook: German index hits resistance
• Rising oil prices could weigh on stocks
• DAX index testing key resistance

At the time of writing, the stock markets were starting to come off their best levels. With this being the month- and quarter-end, there will be lots of repositioning today, which may mean lower stock prices later, given that we have been in a risk off market environment for much of September. In any event, volatility is here to stay.

Before discussing the macro factors further, let’s take a quick look at the DAX’s chart…

DAX outlook: German index hits resistance

Source: TradingView.com

The German index has now pushed into what could be a strong resistance zone in the shaded region. This area was previously support until it broke down earlier this week. Once support, it could turn into resistance moving forward. For that reason, there is a risk we could see renewed weakness come into the German stock market – at least from a technical standpoint anyway.

So, why are stocks higher and can the recovery last?

After heavy selling pressure comes a big bounce. That’s precisely what happened yesterday with global markets recovering sharply off their lows, before extending those gains into the first half of today’s session. Ironically, Thursday’s bounce in stocks appears to have been triggered by softer-than-expected US data. The rationale is that weaker data will discourage the Fed from tightening its belt further, and simultaneously increases the chances of a sooner-than-expected rate cuts. But let’s not jump into any conclusions as the monthly data can be quite volatile. The Fed looks at the trend of data than month-over-month volatility. More evidence is needed to reverse the sharp bullish repricing of US monetary policy that has helped to propel the dollar to new highs on the year and bond yields to their highest levels since 2007.

For this exact reason, the DAX was able to rise despite more data weakness from the Eurozone, as it cemented expectations that the ECB won’t hike again. However, while the market recovery makes some sense in that regard, weak data is not good news for stocks in the long term. So, I reckon the DAX and European markets have further room to the downside.

Anyway, German retail sales fell 1.2% month-over-month versus 0.5% expected, while Eurozone annual CPI eased to 4.3% on the headline and 4.5% on the core front, both lower than expected (4.5% and 4.8%) and below the previous month’s prints (of 5.2 and 5.3 percent, respectively).

DAX outlook: Rising oil prices could weigh on stocks

Another reason why I am not so bullish on European stocks is because of crude oil. Though crude oil prices fell for a second day, they remain in a strong bullish trend. The OPEC is highly unlikely to change its policy next week and this will likely keep prices supported towards $100. This is concerning for investors and central banks. Rising oil prices should make stagflation even worse for oil-importing countries in the Eurozone, Japan and China, among others. This comes as borrowing costs have skyrocketed across the developed economies. In the US mortgage rates surged to a 23-year high this week, providing yet another blow to the housing market. According to Freddie Mac, the rate on the average 30-year fixed mortgage increased to 7.31% from 7.19% the week prior, reaching levels last seen in the year 2000.

If crude oil were to rise further, this could fuel inflation worries and thus drive bond yields higher again. So, taking everything into consideration, I think that the risks remain skewed to the downside for stock markets.

Look forward to next week

Investors will be looking forward to some more important data releases from the US next when we will have the likes of the ISM Services PMI and the monthly jobs report to look forward to, among the key data highlights. Today saw the core PCE index came in a bit weaker than anticipated, as too did personal spending, while the Chicago PMI was much weaker at 44.1 versus 4.7.5 eyed.

US ISM Services PMI

Wednesday, October 4

The Fed has indicated that its tightening cycle may not be over just yet. But macro indicators in the US have weakened more than expected off late, which is why the market feels like the Fed’s job is done for now in terms of hiking. The dollar bulls will be looking for further evidence in incoming data, such as Wednesday’s ISM Services PMI, to support the Fed’s view. But if we now start to see a trend of weaker data emerge, then this will call into question the Fed’s strong inclination towards rate cuts being pushed further out in 2024, with the possibility of one more hike before the end of this year.

US nonfarm payrolls report

Friday, October 6

Concerns over interest rates remaining high for longer in the US has caused lots of volatility in recent weeks. Until Thursday’s reversal, we had seen a sharp sell-off in stocks while bond yields climbed to levels last seen before the global financial crisis. The market is worried about inflation and oil prices remaining high, which could call for one more rate increase before the end of 2023, or keep rate cuts off the table until at least H2 of 2024. So, as well as the headline jobs number, this month’s wages data should be monitored closely. A bigger rise in wages should support the dollar.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R