The DAX 40 index has been under pressure throughout March as investors
remained focussed on the banking crisis. Deutsche Bank, which is the
biggest bank in Germany lost almost 30% of their value in March as its
credit defaults swaps soared to their highest level in years.
Deutsche Bank has been under severe selling pressure recently, as the cost
of protecting against a default on its bonds soared on fears that the
German banking giant will be caught up in the ongoing banking crisis.
After the forced takeover of Credit Suisse by rival UBS and the write-down
of some of its contingent convertible bonds, concerns about Deutsche Bank
mounted as the company is implementing a turnaround strategy, a few years
after it was on the verge of a collapse.
Market sentiment improved this week following news on the weekend that
First Citizens Bank has agreed to acquire Silicon Valley Bank’s deposits
and loans. As banking jitters eased bank shares recovered some ground and
the DAX 40 index staged a good rebound.
Meanwhile, last week the European Central Bank reassured that the euro area
banking sector remains healthy and resilient because of the strong
regulatory regime and tight supervision of the banks implemented after the
severe banking crisis in 2008.
This week some sort of stability returned to markets roiled by bank
failures and the forced UBS-Credit Suisse deal. However, investors remain
weary of further surprises in the financial sector as the aggressive
monetary tightening by central banks over the past year started to ripple
through the global economy.
Confidence is building that the turmoil surrounding the global banking
sector may be coming to an end, with officials on both sides of the
Atlantic keen to reassure the markets of the underlying strength of the
industry.
The DAX 40 index started 2023 on a strong foot as the threat of inflation
looked less severe and the German economy appeared robust. Throughout March
the banking turmoil brought the market rally to a halt and investors are
trying to figure out what the second quarter might bring.
Inflation data for Germany is due on Thursday and the preliminary March
reading for the euro zone is due on Friday. While euro zone headline
inflation is expected to slow, core inflation, which strips out the
volatile food and fuel prices, is expected to accelerate further to 5.7%
from 5.6%.
The European Central Bank raised interest rates by 50-basis point in March
to 3% with investors’ attention now turning to what the next move of the
central bank might be. Some policymakers are calling for more cautious
steps ahead as the past interest rate hikes are starting to take hold and
the economy is starting to respond.
While the German index has bounced, the banking crisis has prompted fears
that lending would slow and could act as a drag on the economy. The recent
banking turmoil has increased the risk of a recession in the U.S., which
could have global repercussions. Given the current fundamental backdrop the
15,700 level of resistance might be difficult to be cleared.
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