After reaching a record high of 16,282 in November 2021, the German benchmark index reversed its prior bull run and has been trading in a secondary down trend since. At this juncture sentiment is fragile and investors remain cautious following the recent August U.S. CPI data which sent global markets reeling.
The latest German PPI MoM data showed a rise of 7.9% in August and 45.8% over the year, much higher than market expectations. The main culprit behind this development are the rising energy prices. Energy prices are up 139% from a year ago and by 20.4% from July. Electricity prices in particular rose 175%. The Eurozone started preparations for mass blackouts which are likely to occur during the winter months. The German Regulator issued a warning that the likelihood of gas shortages this winter remains. Charles Michel, the President of the European Council recently said that the bloc must reduce energy consumption and increase supply and suggested that the EU needs to engage with Algeria, Qatar, UAE and Saudi Arabia to manage the current crises.
Germany is already making progress in replacing Russian gas imports, with Chancellor Olaf Scholz signing a deal for the supply of LNG and diesel with United Arab Emirates this weekend. Scholz signed a contract for delivering 137,000 cubic meters of LNG, which is likely to arrive in Germany in December. The LNG deal makes up only a small part of the 56.3 billion cubic meters of gas that Germany received from Russia in 2020.
Recession in Europe appears to be increasingly likely, and pressure remains on the stock markets as policymakers are battling soaring inflation, declining currency prices and a slowdown in economic activity. Although, the European Central Bank hiked its key interest rates by a historic 75-basis points in September, the risk to inflation outlook remains primarily to the upside – increasing the probabilities for frontloading and extending the tightening cycle.
The ECB is expected to raise interest rates by 75 basis points at its October and December meetings, adding to the previous 125 basis points hikes at its last two meetings. The Eurozone CPI data for August climbed 0.6% MoM, bringing the annual rate to 9.1% strengthening this view. Recently the World Bank and the International Monetary Fund warned of an impending global economic slowdown and concerns about possible stagflation, hitting sentiment even further.
The Frankfurt benchmark index has been trading deeply in the red since the release of the U.S. CPI data on September 13, 2022. The sharp selloff was exacerbated by renewed energy concerns as well as the deteriorating growth outlook in tandem with global markets.
The large descending triangle formation which was throwing a negative cast on the daily chart was confirmed by the breakout below the July 2022 low of 12,390, suggesting that much lower levels are likely to unfold in the coming months. The weekly RSI indicator remains below 50% showing that internal momentum conditions are incredibly weak. The RSI daily readings are dreadful too, with the indicator fluctuating below 65% throughout 2022, suggesting the index is in a bear market. Given the bearish price structure and the weak momentum conditions, our initial downside price target is 11,500 followed by 10,300 over the long-term. On Wednesday the momentum indicators have reached oversold levels, suggesting that a rebound to unwind the oversold momentum conditions could be seen soon. Such potential rebound is likely to be short-lived.
Nimble traders looking to gain exposure to German companies may use our 3x Germany 40 ETP to take advantage of the expected short-term rebound, and our -3x Germany 40 ETP to capture the expected subsequent decline.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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