DAX Index Sways As Recession Risks Higher Than Expected

Dax Index
Dax Index

The DAX index struggled for direction as investors reacted to the latest European earnings and the weak economic data from the region. They also focused on the upcoming meeting of European leaders.

European earnings disappoint

A number of top European companies released their earnings or removed their guidance. In France, Renault announced that its revenue declined by 19%. Its sales in Europe dropped by 36%, which was lower than the expected decline of 26%. At the same time, Volvo said that its sales will be hurt by the current pandemic. The company said that it had seen its orders cancelled as companies moved to preserve cash.

Meanwhile, in Germany, Daimler removed the forecast it had put forward in February this year. The company said that its earnings this year would decline following a 78% decline in first quarter earnings. Other European companies that released weak sales are Unilever, Pernod Ricard, Hermes, Swedbank, and Credit Suisse.

German PMIs drop

Another reason why DAX index was struggling to find direction was a wave of weak economic data from Germany and the European Union. According to Markit, the German manufacturing PMI declined to a record 34.4, which was the lowest it has been since 1998. The services PMI declined to 15.9 while the composite PMI fell to 17.1. A PMI reading of below 50 is usually a sign that an industry is contracting.

Germany was not the only country to slowdown. In France, the manufacturing PMI dropped to a low of 11.2 while the services PMI dropped to 10.4. In the eurozone, the manufacturing PMI dropped to a low of 33.6 while in the UK, it dropped to a low of 32.9.

These numbers raise chances of a steeper recession in the EU than most analysts are expecting.

EU leaders meeting eyed

Investors are also focusing on a meeting by European Union leaders to deliberate on a funding mechanism. The European Commission has proposed a $2.2 trillion fund to help the EU member countries deal with the crisis. Still, there are differences about the approach. France, Italy, and Spain are advocating for a common fund to deal with the crisis while Germany and other Northern countries have refused this.

Most companies in the DAX index were green today, with most gains coming from Wirecard, Daimler, Volkswagen, and Continental. Wirecard rose by more than 7% while the rest rose by about 1%. The worst performers were Allianz, MTU Aero, SAP, and Adidas, which declined by more than 1%.

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DAX Index technical outlook

On the daily chart, the DAX index appears to have found some resistance between the 38.2% and 50% Fibonacci retracement level.

This retracement was drawn by combining the highest and lowest levels this year.

The price has also resisted moving above the 50-day exponential moving average. Also, the index has formed an island reversal pattern. Therefore, I expect the index to move lower and possibly retest the support at €10,000 or the 23.6% retracement level at €9,555. This is its path of least resistance.

On the other hand, it is possible that the index will move remain near the current level or even move upwards and retest the 50% retracement level of €11,000.

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