DAX 40: Does War Mean a Bear Market?

German traders are running to the hills owing to Germany’s economic exposure to Russia and its gas supplies. But after a 14% drop from its highs, is it time to buy the dip?

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DAX crashes, is it over?

Along with most European indices, Germany's DAX cratered following the announcement that Russia would launch a major invasion of Ukraine. The index fluctuated throughout the first day of military action on Thursday, depending on reports of actions on the ground. For the week through Thursday, the index plunged nearly 8%.

BUT dip-buyers have been tempted in, sending the index up on Friday and recouping some of the weekly losses.

Perhaps one of the critical elements missing from the equation was how Europe would respond.
Several potential sanctions options were rumoured but despite the rhetoric of "massive" sanctions, it became clear that specific options weren't very likely. Perhaps the most concerning was the possibility that the EU would suspend payments through the SWIFT program. Such an action would mean that European companies couldn't pay for Russian goods & services, particularly for gas.

Germany’s Russia ties

Germany is perhaps in the most precarious situation across the EU, given its reliance on Russian natural gas. Russia has committed to selling gas, and there has been no talk of suspending buying. But half of that gas goes through Ukraine, and the fighting could interrupt it, particularly around significant hubs such as Sumy, Poltava, and Ivano-Frankivsk.

Additionally, Germany relies on Russia to import palladium, neon, and titanium to manufacture a wide range of high-tech machinery. That could weigh down the DAX more than other indices because the stock index is heavily weighted towards industrial companies.

Sanctions, sanctions

The bottom line is still whether the EU responds with sanctions targeting individuals, such as oligarchs or government members, or whether they are broader sweeping sanctions that could target the entire Russian economy. In the case of the former, the DAX could stage a recovery relatively quickly. But broader sanctions could take some time to adjust to.

Germany 40: correction territory

The Germany 40 index CFD fell to a yearly low on Thursday, plunging deeper into correction territory – down 14% from its record high. A 'death cross' of the 50/200-day averages a week ago pre-dated the latest weakness.

The index has taken out the critical 15,000 support level that has held several tests over the past 11 months. That same 15K level is now major resistance to any further rebound.

The index stabilised by closing above the 14K handle but another break lower could target 13,300 – a big S/R level from 2020.

Source: Spreadex trading platform

Key takeaways

Investors will pivot around the EU's response. In particular, how significant sanctions on Russia might be and where they will be targeted. If the EU announces sanctions devoid of major short-term impact, the relief rally could continue.

If the situation in Ukraine worsens with the Ukrainian military counter-attacking Russian forces and putting civilians at risk and making business diffictult, the index could resume its sell-off.