In recent weeks, the DAX has been buoyed by the promise of €1.1 trillion worth of QE engaged by the ECB. This news has put a floor under the DAX and kept sentiment upbeat. There have been a couple of fundamental events that boosted the DAX last week that had threatened to derail the index today as the positivity has looked to unwind. However the announcement that the German ZEW Economic Sentiment indicator continues to recover has jogged the bulls again this morning. Will it be enough to drive the DAX to a sustainable move above 11,000?
On Thursday last week, the news that there was a ceasefire in eastern Ukraine boosted sentiment on the DAX and pushed equities strongly higher. In 2014 the DAX was strongly correlated to newsflow regarding events in Ukraine, but this seems to have died down in 2015 as the announcement of QE suggested that there would be a significant guiding hand to underpin the markets.
The news that this ceasefire is not being adhered to was one of the reasons behind why the DAX sold off at the open today. The other was the continued deadlock in negotiations between Greece and the Eurogroup of EU finance ministers. The breakdown in talks last night now means that we move now to Friday as the next opportunity for an agreement to be thrashed out. Greece is running out of time as the bailout expires on 28th February.
The usual expectation is that a fudge will be reached. The politicians will somehow come to a position where the can is kicked down the road. Even though Greek finance minister Varoufakis is unwilling to accept a deal that simply delays or extends payment and seems to be confident that an agreement will be reached, Europeans politics is littered with fudges and this remains the most likely course of events.
However, the DAX is now just 10 points lower on the day having been 160 points down at its nadir. The reason was the announcement of a 4th month in a row of the German ZEW Economic Sentiment showing growth. This is an indicator that is positively correlated to German GDP and the recent months suggest that there is a consistent improvement in growth. The recent flash GDP reading for Q4 jumped to +0.7% which was well ahead of the +0.3% expected and a significant improvement on the +0.1% in Q3. The ZEW suggests that this improvement in growth rate is continuing and is not just a one off.
The 5 minute chart of the DAX suggests a projection target of 10, 930 from the recovery today. A retest of the 11,014 all time high is increasingly possible too.
All in all though, the DAX will remain underpinned by QE, whilst the improving trends on German economic indicators will also be supportive. The risks to this will be the potential for a “Grexit” (which I believe is unlikely, the Eurozone is a POLITICAL project, not an economic one), and a deterioration in eastern Ukraine once more (likely, but this is an on-going threat). Although the daily technical analysis on the DAX may look a little tired, I still see the DAX making further gains in the coming weeks.
The DAX has not been the only instrument to improve on the back of the ZEW. The euro, which had threatened to show another drab day has picked up strongly and is now testing around the resistance at $1.1440. With the euro recovering strongly today, the dollar is struggling today.