Bund Sell-off Continues, Germany 40 Feels the Pinch

DAX ANALYSIS

• Bund yields rally.
• Energies and financials help buoy DAX index.
• EMA bearish crossover.

DAX FUNDAMENTAL BACKDROP

GERMAN BOND MARKET EXPECTING ECB HIKE

Bund yields on the 10-year government bond are testing yearly highs (May, 2021), this comes after the “stagflationary” environment gripping much of the developed world – rising inflation along with stagnant economic growth. Pressure is mounting on central banks to hike interest rates, reflective in the recent European bond sell-off. According to Reuters, money markets are pricing in a 10bps rate hike before from the European Central Bank (ECB) by the end of 2022.

10-YEAR BUND YIELDS:

Source: Refinitiv

German equity share prices are dwindling in the current economic environment however financials are benefitting from the expected higher interest rate forecast. Energies are another sector helping to keep the DAX from falling further as the European energy crisis endures. Today, these two sectors are outperforming the rest as outlined in the graphic below.

DAX SECTOR PERFORMANCE:

Source: Refinitiv

THE WEEK AHEAD: DAX INDEX

The week ahead is short but impactful for the Germany 40 and key sentiment and inflation data will surely add to the mix of influences currently under consideration by the ECB – lower than expected sentiment data or higher inflation could add to the already hawkish argument.

DAX ECONOMIC CALENDAR:

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

DAX DAILY CHART

Chart prepared by Warren Venketas, IG

There is a lot going on with the daily Germany 40 chart above, starting with the test of key medium term support (black). This trendline support has come under pressure after a strong YTD performance by German stocks in an extremely accommodative environment. Support has held firm throughout the latter half of 2021 but with the latest fundamental pressures, I am not too sure how long this can hold.

The Exponential Moving Average (EMA) suggests a bearish crossover as the 50-day crosses below the 100-day EMA (blue). This could bring recent swing lows into consideration should a second daily candle close below the support threshold.

The Relative Strength Index (RSI)interestingly indicates bullish divergence (green) whereby price action moves in the opposite direction the RSI. The RSI currently reflects an increase in upside momentum as it exits oversold territory. For now, trading against the recent downtrend is risky so DAX bulls should be wary looking for potential long entries.

Resistance levels:

• 15500
• 15300
• Trendline support (black)

Support levels:

• 15000
• 14813 – recent swing low

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas