The German benchmark index enjoyed an impressive rally since late September advancing from a low of 11,860 to a high of 13,444 on Tuesday. This is its fifth consecutive week of gains and marks October as its best performing month since November 2020. After the Federal Reserve raised interest rates with another 75-basis-point on Wednesday the DAX 40 reversed its 5 weeks winning streak and has been trading deeply in the red on Thursday.
The European Central Bank (ECB) also raised interest rates by second jumbo 75-basis-point in late October bringing the official rate to 2%. The market reaction to the ECB meeting has been muted as the bank did not provide clarity on the future path of monetary policy and the DAX 40 has been moving in tandem with global markets.
The CPI for October surged to 10.7% – well above expectations, and five times above the central bank’s target of 2%. The ECB is likely to continue to raise interest rates to tame persistently rising inflation, despite the increasing probability of a eurozone recession. The focus is now on the final policy meeting of 2022, with the market expecting either a 50 or 75-basis-point hike. Despite lagging the Fed, this is the most aggressive monetary-tightening cycle in the ECB’s history.
Fears are mounting that the energy crisis driven by the war in Ukraine, will drag down output in the block, adding to the economic risks of rapidly rising interest rates, therefore a contraction in the coming months is probable. Despite the growing risks of a downturn in Europe, the central bank has little choice but to stick to its monetary tightening policy to supress growth; therefore, rate hikes are likely to continue into 2023, until inflation shows clear signs of a slowdown. Thus, the ECB faces the challenges of a record inflation and a likely economic downturn.
In the face of inflation and energy crisis, the ECB rate hikes will add pressure to the European economy and push it to the brink of recession. Despite Europe facing strong headwinds that are darkening its economic outlook, seasonally adjusted GDP for Q3 2022 increased by 0.2% in the eurozone, according to a preliminary flash estimate published by Eurostat, the statistical office of the EU.
After a rocky start from the beginning of the year the DAX 40 index declined 27% from its January high to its recent September low. The strong rally over the past five weeks rebounded to the medium-term down trend line crossing at 13,300, which could act as a dynamic resistance, therefore selling pressure around current price levels could emerge soon. While the rally does not appear overly extended the daily RSI indicator has reached overbought territory suggesting that in the short-term the index is due for a pull back to unwind its overbought momentum conditions. At this juncture in time, the medium-term down trend remains intact and further weakness in the coming months is on the cards.
Astute investors looking for magnified exposure to the index could check out our 3x Germany 40 and -3x Germany 40 ETPs to take advantage of upcoming short-term rallies and declines.
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 primary 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 Leverage Shares 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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