DAX holding firm, but winter is coming

Continental bourses have remained more resilient than their peers, but does that mean more pain is ahead or is there an opportunity here?
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The key elements of the situation

Since peaking late last year, stock markets pretty much everywhere slipped into a bear market throughout the year. But European indices stand out for not having dropped as much, in particular the DAX. This is remarkable, considering Europe is much closer and more affected by the war in Ukraine. The impending energy crisis would have been expected to drain investor interest.

The simple explanation for European bourse outperformance is the ECB. Unlike other central banks that are tightening policy to fight inflation, the ECB was the last of the major banks to raise rates. And that only took them back to 0%. Meanwhile, the bank continues to have a policy that would allow asset purchases even as its raising rates, to "balance" the effects on the interest rates of constituent countries.

Will it go on?

Now that the ECB is starting to raise rates, the presumption would be that stocks would follow a pattern more similar to other countries where rates are getting tighter. But, that might be a simple explanation. After all, one of the reasons that the ECB was delaying a rate hike was that inflation wasn't rising as fast. Additionally, the shared economy has continued to outperform, benefitting from cheaper borrowing costs.

The real test will, of course, be the winter. Despite trying to shore up its gas supply, Germany would have less than three months of reserves if Russia were to cut shipments in the winter. On the other hand, it was recently reported that Putin and Zelenskiy might meet soon to work out a potential ceasefire. However, despite ECB member Schnabel promising rate hikes even if there is a recession, Europe might get through the next months with lower rates than other economies. Lower rates are seen as supporting the economy, and potentially the DAX could maintain its resilience.

DAX stops at bearish trendline

The index has been under pressure recently following a rejection at the descending trendline at 14000. Above the 50-day average of 13250 bulls will be given more chances to recapture the round level. If successfully so, the 200-day average at 14200 will be the next resistance. Above 15500 becomes a significant supply area.

Sustained momentum under the average would open the door to the 12k-12500 zone where there was an inverse head and shoulders. In the interim, 13000 will act as minor support.

Key takeaways

DAX has outperformed key markets despite the ECB hiking as interest rates are at zero and the bank still engages in quantitative easing while others continue to lift rates.

The ECB is on its path to hiking though, and German stocks might not benefit from lower borrowing costs for much longer. But this assumes inflation continues to rise at no faster pace than now. Which makes Russia’s decision to supply Germany with gas all more important.