DAX analysis: How long will the rally continue?

DAX analysis: German index hits another record high
Risk of correction in tech sector is increasing
DAX technical analysis continues to point higher

The US markets will be closed on Monday in observance of Presidents’ Day, and the week ahead will not contain many important macro highlights to watch closely. But China will be back after a week-long holiday, and we will have earnings from Nvidia in mid-week to look forward to. Among the week’s data highlights, the global PMIs on Thursday could move the markets. In particular, watch those of Germany and the Eurozone, where the economic output has been below the pace of growth observed in the US. The weakness in Eurozone data did not stop the DAX from hitting repeated record highs, with nearly all mainland European indices doing rather well. But at some point, the market will have to assess the impact of weak data on earnings and consider whether they have pushed asset prices too high.

DAX analysis: German index hits another record high

On Friday, the DAX climbed to fresh unchartered territories, as investors insatiable risk appetite continued. Driving the DAX to record highs has been partly driven by speculation that the ECB is going to cut rates in the coming months. The German index has also found support from its technology constituents, with the sector surging on AI optimism in the US, lifting tech stocks across the globe.

Meanwhile, inflation within the Euro-zone has sharply fallen in recent months. From a peak of 10.6% in October 2022 to 2.8% last month. Analysts expect to see further moderation towards the 2% target this year. However, lingering risks persist: Wage growth remains high as incomes adjust to price spikes, while disruptions in Red Sea shipping pose renewed threats to supply chains. These factors have been ignored for now as the debate around when the ECB should begin lowering rates hots up.

Although nearly all ECB officials support a rate cut this year, there is disagreement on the timing. While a majority seem to prefer June or later, some are leaning towards April, and one official is not ruling out March. This divergence underscores the differing opinions on inflation trends and the outlook for Europe's sluggish economy. Against this backdrop of uncertainty with interest rates, and slow growth, the DAX may soon run out fuel.

Risk of correction in tech sector is getting higher

Wall Street was on track to close lower on Friday at the time of this writing, after indices there hit repeated record highs. But bond yields rose further, and this seemed to dampen the appetite for risk taking ahead of a long weekend. Following a hot CPI report, PPI was equally strong, printing 0.3% month over month against expectations of 0.1%, while core PPI rose 0.5% on the month, easily beating expectations of 0.1%. The PPI gains were fuelled by a sharp rise in costs of services, highlighting concerns about the sticky nature of inflation. We also saw an uptick in the UoM consumer sentiment and inflation expectations survey, with the latter rising to 3% from 2.9%. The market was therefore once again reminded that the Federal Reserve will be in no rush to cut interest rates.

Despite these signs, the US indices have hit repeated record highs. Investors have continually ignored the Fed’s consistent pushback against expectations of an early rate cut. Instead, they have chosen to concentrate on mostly stronger earnings and the AI optimism, taking advantage of the bullish momentum to drive stocks higher. But with some of the Magnificent 7 stocks reaching extremely expensive levels, there is always the danger of a correction soon. Nvidia will be the last from this group to report its results in the week ahead. With most of the optimism now in the price, a correction of some sort, should not come as major surprise in the tech sector.

DAX analysis: technical levels to watch

Source: TradingView.com

The DAX broke to a new record high on Friday, reaching a high so far of just under 17200. The index came off its earlier highs as US indices reacted negatively to stronger inflation data. But the DAX was still holding onto support in the range between 17000 to 17060ish. This area was previously resistance on multiple occasions, including in December. For the bullish trend to remain intact, the bulls must defend their ground here. As things stand, we will only consider bearish setups, should we see the series of higher highs and highs lows break. With that in mind, a potential move below 16780 support could be a warning sign that the bullish trend has come to an end. So far, the bears were nowhere to be seen. Let’s see if that changes in the week ahead, or we continue to power ahead. It is important to trade in the direction of the trend.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.