Here’s Why DAX Index is Ripe for a Bullish Breakout to €13,600
The DAX index is up by 0.80% today after the strong Germany Q3 GDP data and hopes of a better trans-Atlantic relationship. The relatively weaker euro and the latest news on vaccines has helped boost the blue-chip German index. Further, Deutsche Boerse has announced plans to add ten more companies to form DAX 40.
Strong Germany Q3 GDP data
In a report earlier today, the German Bureau of Statistics, also known as Destatis, said that the country’s economy increased by 8.5% in the third quarter. That was a better reading than the median estimate of 8.2% and the previous quarter’s contraction of 9.7%.
On a year-on-year basis, the economy contracted by 3.9%, which was also a better performance than in the expected decline of 4.1% and the previous quarter’s decline of 11.3%.
All sectors of the economy did well in the quarter. For example, private consumption rose by 10.8% while government spending rose by 0.8% after rising by 2.8% in the previous quarter. Similarly, gross capital formation in machinery rose by 16% while investments in construction fell by 2%.
These numbers came a day after we received the preliminary manufacturing and services PMI numbers from Germany. The data showed that the services PMI fell to 46.2 in November mostly because of the lockdowns measures announced by the government. In the same month, the manufacturing PMI was 53.8, lower than the previous 54.8. The latter number matters for the DAX index because its biggest constituents like Siemens, Volkswagen, and BMW are in the sector.
DAX reacts to better US relation hopes
The DAX index is also rising because investors are hopeful that the incoming administration in the United States will be friendlier than the current one. This was evidenced yesterday by Joe Biden who announced his first part of his cabinet. Most of the members, including John Kerry and Tony Blinken are internationalists who don’t prefer using tariffs amongst friends.
This is in contrast to Donald Trump, who had threatened to focus on the European Union in his second term. He had also threatened to add more tariffs on the bloc in his attempt to balance the trade.
These tariffs would have been negative for DAX companies like BMW, Volkswagen, Continental, and Daimler because of the vast amount of goods they sell to the United States.
Further, globally, investors hope that the Biden administration, coupled with deadlock in congress will not lead to higher taxes. In his campaign, Biden had pledged to increase taxes, which would have been negative for DAX index companies.
Covid vaccine boosts German stocks
The DAX index is also in high spirits because of the likelihood of a Covid-19 vaccine. Recent results by Pfizer and BioNTech, Moderna, and AstraZeneca have been strong. The three vaccines are more than 90% efficient, which means that they will possibly be certified soon.
In the US, the Food and Drugs Administration (FDA) will vote for Pfizer’s jab in early December. Subsequently, Moderna’s vaccine will receive a vote on December 17.
As a wealthy country, Germany will be among the first country to start the vaccinations. That will be a positive news for companies in the DAX.
DAX 30 to become DAX 40
In a report today, Deutsche Boerse said that it would add more companies to the DAX 30 index, forming DAX 40. That is in part because of the bourse’s response to the Wirecard scandal.
As part of the new changes, the bourse will also set more rules for its membership. For one, member companies will need to have positive earnings before interest, taxes, and amortisation. The bourse will also have an independent auditor to certify books before a company becomes a member.
In recent years, several high-profile companies have left the index. The most notable ones were Wirecard, Thyssenkrupp, Lufthansa, and Commerzbank. They were replaced by Deutsche Wohnen and Delivery Hero.
DAX index technical outlook
On the daily chart, we see that the German DAX gapped up on November 9 and reached a high of €13,325. That was an important price considering it was also the highest level in July and September. Since the jump, the price has remained within that level, forming a bullish flag pattern.
Therefore, in the next few days, I suspect that the index will break out higher with bulls aiming for the next resistance at €13,600, which is a 2.70% increase from the current level. However, a move below the support at €12,730 will invalidate this trend.