The DAX index made a slow recovery this week as sentiment in the market improved. The blue-chip German stock index rose by more than 300 points on Monday. It is also set to open much higher following the spectacular comeback of American indices like the Dow Jones and Nasdaq 100.
DAX and euro rebounds
The German DAX 40 index had a terrible performance in September as it crashed to €11,885. In total, the index slipped by more than 12% during the month. The same was true for the euro as the EUR/USD crashed to the lowest level in more than two decades.
October started well as the euro and the DAX index bounced back. This happened even as Credit Suisse risks rose. Instead, investors cheered the u-turn made by Kwasi Kwarteng in the UK as he scrapped a major tax cut for wealthy Britons.
Still, the DAX index is facing significant risks. First, the crisis in Ukraine is continuing, with Russia losing badly. This could see Putin use nuclear weapons, which could lead to more challenges for Europe’s economy.
Second, it is unclear how long German industrial companies will continue doing well in the coming years as energy costs rise. Analysts believe that elevated energy prices will cost companies like Volkswagen, BASF, and BMW substantially in terms of margins.
Third, the relief in the UK was actually unwarranted. For one, the tax cuts that Kwarteng excluded were worth about 2 billion pounds. Those he left intact, on the other hand, were worth more than 43 billion pounds.
Most importantly, the European Central Bank (ECB) will continue hiking interest rates this month. Analysts expect two more 75 basis point hikes in the coming months. Historically, the DAX index tends to do worse in times of a hawkish ECB. Some of the top DAX stocks to watch will be BASF, Covestro, RWE, and Zalando.
DAX index forecast
The daily chart shows that the DAX index has been in a slow recovery in the past few days. It has managed to rise from a low of €11,870 to a high of €12,209. The index remains slightly below the 25-day and 50-day moving averages while the RSI is pointing upwards.
Therefore, I suspect that the index will continue to rise following the strong performance of American stocks. If this happens, the next key level to watch will be at €12,387. It will then resume the bearish trend since this is a break and retest pattern.
