DAX forecast: Risk appetite improves

Risk appetite has ticked up due to the absence of fresh bearish stimulus and a light economic calendar. Investors are reassessing last week’s events and recognising that the reaction to the Bank of Japan’s unexpected policy tightening might have been a little overblown. While we’re not entirely in the clear, some markets such as commodity dollars are slowly realigning with fundamentals. This DAX forecast reflects the current sentiment shift.

Markets more stable after recent wobble

Risk appetite has improved a little further today, thanks largely to the lack of any major bearish news. With the economic calendar also being light, investors are making a more sober assessment of the events over the past week or so and are realising that there may have been a bit of an overreaction to the Bank of Japan’s larger than expected policy tightening last week that triggered all the volatility as investors were forced to unwind carrying trades. That’s not to say we are completely out of the woods just yet. But there’s at least some stabilisation in the markets, which should allow some markets to re-align with the fundamentals.

For example, the pro-cyclical commodity dollars are finally finding some support against the US dollar. The dovish repricing of Fed interest rates last week was overshadowed by the carry trade unwind, thus preventing pairs like the AUD/USD and NZD/USD from rising despite softer US macro data. Now, they are finally catching a bit of a bid. Major indices also finding some love as the bears ease the pressure. From its weakest point on Monday, Nikkei futures have rebounded a good 15%. US index futures were up solidly across the board. The German DAX was up 1.5% at the time of writing, helped further by surprisingly stronger German industrial data for a change.

German industrial data shows surprise improvement

This morning’s release of German data for June delivered a mixed message. Exports fell by 3.4% following a 3.1% decline in May to point to ongoing structural weaknesses. However, industrial production rebounded by a stronger-than-expected 1.4% in June, raising hopes that the strong production growth in the automotive industry could lift the eurozone’s largest economy from its slumber. The drop in exports is a reflection of a weaker Chinese and US demand. But with Chinese imports recovering to a three-month high of 7.2% y/y in July, there is hope that an export-driven recovery may still be on the cards. With China’s government setting an ambitious growth target for the world’s second largest economy, we could see more stimulus measures in the months ahead. Still, for Germany, we will need to see more evidence of a recovery as domestic industrial production is still around 10% below its pre-pandemic levels.

DAX forecast: Technical analysis

Source: TradingView.com

The DAX has stabilised around its 200-day moving average after a sharp drop from last Thursday.  It initially fell below the 200 MA but bounced right where it needed to: between 17000 to 17050. This area marks the high of 2023 and the base of the breakout from February. The bulls will now need to see some further stabilisation around current levels, ideally above the 200-day to help bring back confidence that the market has hit a low. Short-term resistance is seen between 17570 to 17620 area, where the index was residing at the time of writing. A potential closing break above this area could pave the way for a run towards a more significant resistance zone between 17950 to 18050 (shaded red area on the chart). This area was a key support zone that gave way following Thursday’s breakdown.

So, our DAX forecast point to a stabilising market sentiment as investors reassess recent events and recognise potential overreactions to recent events. The absence of new bearish news and a light economic calendar have helped improve risk appetite somewhat. While not completely out of the woods, the market's realignment with fundamentals offers a more optimistic outlook. Stay tuned for further updates as the DAX tries to establish a base around its 200-day average.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R