The DAX 40 index was hovering near its all-time high as the third quarter earnings season started, and as traders waited for the upcoming European Central Bank (ECB) decision. It was trading at €19,432, a few points below the record high of €19,630.
European Central Bank decision ahead
The DAX index remained on edge as the ECB prepared to deliver its November monetary policy meeting.
In it, the bank is expected to deliver the third 0.25% rate cut of the year, bringing the base interest rate to 3.25%.
Recent economic numbers show why the ECB is under increased pressure to cut interest rates. Data released on Wednesday showed that the headline Consumer Price Index (CPI) in key countries like France and Italy continued falling in October.
In Italy, the headline Consumer Price Index (CPI) dropped by 0.2% in September and to 0.7% on a year-on-year basis. The annual inflation report has moved much lower than the ECB’s target of 2.0%.
The preliminary report showed that the European inflation data also dropped to 1.7% in September, down from over 10.6% in 2022.
At the same time, the European economy was not doing well as the labor market started to show signs of weakening. For one, some big employers in Germany like Volkswagen and BASF are considering large layoffs as demand wanes.
Therefore, the ECB will likely decide to cut interest rates to stimulate the economy by making it cheap to access capital.
The odds of more easing by the ECB are reflected in the bond market. The German 10-year bund yields dropped to 2.20%, down from 2.30% on Friday and 2.7% in June. The five-year bund yield also retreated to 2.04%.
Central banks easing and China
Other global central banks have room to continue cutting interest rates. In the US, the Federal Reserve delivered a jumbo rate cut in its last meeting, and the odds of a 0.25% cut in November have risen.
Central banks like the Bank of England, Swiss National Bank (SNB), and Riksbank have also slashed rates in the past few months.
The DAX index and other Chinese firms do well when there are rising chances of more rate cuts in the future.
Meanwhile, the DAX index has risen to a record high because China has opened the floodgates of money in the past few weeks.
Officials have announced several stimulus packages worth billions of dollars to stimulate an economy that is weakening.
For example, the central bank has brought interest rates to near zero and become more flexible on bank rules.
The happenings in China are important for the DAX index because many companies in the index do a lot of business there. For example, automakers like Volkswagen and BMW count China as one of their biggest markets.
Corporate earnings ahead
The next important catalyst for the DAX index ist the ongoing earnings season in the US and Germany.
Most US companies like Goldman Sachs, JPMorgan, and Morgan Stanley published strong numbers. These banks have been helped by higher interest rates and the ongoing stock trading frenzy.
German companies are also expected to publish their numbers in the near term. Adidas stock price retreated by over 6% on Tuesday even after the company published strong financial results and forward guidance. It expects to make €1.2 billion in revenue this year, helped by its Gazelle and Samba brands.
SAP, the biggest company in Germany, will be the next top firm to publish its financial results next week. These numbers will come at a time when the stock has surged to a record high, helped by its momentum on cloud and artificial intelligence. SAP shares have rallied by over 170% from the lowest level in 2022.
After SAP, the next top company to watch will be Deutsche Bank, the biggest bank in the country, which will release on Wednesday. Beiersdorf and Mercedes Benz Group will also release their numbers next week.
Most DAX index constituents have done well this year. Siemens Energy moved from the worst performer in 2023 to the best this year as it soared by over 190%. Other firms like Rheinmetall, MTU Aero, Commerzbank, SAP, and Zalando are the other top performers.
DAX index forecast
The weekly chart shows that the DAX index has been in a strong bull run in the past few years. It has risen from the 2022 low of €11,905 to over €19,432. Along the way, it has formed an ascending channel pattern, and remained above the 50-week and 100-week Exponential Moving Averages (EMA).
The MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern. Therefore, while more gains are likely to happen, the index may show some volatility in the coming weeks. This means that it may retest the important psychological point at €19,000.
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