DAX forecast dims amid fallout from EU elections

Sentiment remained downbeat in Europe for the second consecutive day. Concerns about Europe’s political future have been highlighted, for example, by the EUR/GBP falling to its lowest level since August 2022 and EUR/USD dropping near 1.07 handle amid plunging French bonds and stocks. The yield on the benchmark 10-year French bonds jumped another 10 basis points as bond prices fell for the fourth day. Other European peripheral bonds were also negatively impacted, sending yields on Italian and Spanish bonds also higher, while the perceived safe-haven German yields dropped, as the yield spread between German and French bonds surged to its highest level since March 2020, at the height of the Covid pandemic. European equities fell, with the French CAC index reaching its lower point since February and this weighed on the region’s other major indices. Among them, the German DAX was down for the third day. That said, the technical bullish DAX forecast has been dented only a little but more bearish price action is needed to confirm the tide has turned decisively. However, FX markets have decided to punish the euro more decisively.

Why are investors so concerned about EU’s political situation?

One reason why investors are not rushing to buy this latest dip is that the policies of a potential coalition government that could be led by President Macron and a far-right Prime Minister Jordan Bardella are unclear. The European Commission will likely place France in an Excessive Deficit Procedure next week anyway, as they question France’s fiscal sustainability and adherence to EU fiscal rules. This is an additional risk that is impacting the markets.

It is true that European politics and their economic impact evolve gradually. But the European elections suggest a future on border security and industrial policies, potentially shifting EU cooperation towards domestic agendas. Until now, sovereign debt tensions have been largely limited to France, but today we have seen the mini turmoil spreading to a few southern European countries.

A rightward shift across Europe could raise market uncertainty. Europe may become less predictable and attractive to investors, requiring European and national leaders to address these concerns promptly.

What does it all mean for France, EU and the markets?

We have seen further widening of the bond yield spreads between German and French debt today. Investors are clearly worried about a sustained period of political uncertainty and are therefore seeking haven assets and reducing their risk exposure. The unease has started to spread to other European markets, but so far, the moves outside of France are somewhat contained, but not unnoticeable. Gold investors found even more reason to buy the metal after its recent pullback, although keeping one foot on the brake with the release of US CPI and FOMC rate decision on tap on Wednesday.

DAX forecast: Markets continue to react negatively to EU political uncertainty

Source: TradingView.com

From a technical point of view, the DAX forecast is not significantly impacted yet, but we have seen the breakdown of a few short-term support levels. Still, more bearish price action is needed to tip the balance decisively in the bear’s favour. Meanwhile, the bulls will be hoping to see the index climb back above the broken support area between 18510 to 18635 in the days ahead, to remove the current short-term bearish bias.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R