Buying the DAX during brief downturns worked well in early August, as over half of the losses were often recovered the following day. However, yesterday saw the market unable to enjoy a quick recovery, with the DAX only managing to stabilise.
A notable apprehension surrounds the crucial U.S. employment data set to be released on Friday, along with the associated hopes for interest rate cuts. The August low of approximately 23,400 points has now become a significant reference point; if the market falls below this level, it risks completing a double top, potentially leading to further declines toward the 22,000-point region.
The increasing global debt levels have become a dominant concern for the stock market. Fortunately, as long as new government bond auctions do not fail, there is some reassurance for investors. Japan’s recent bond auction was successful, which has calmed fears somewhat and temporarily halted the rapid rise in yields.
Investors are looking to the Federal Reserve for support in light of recent turmoil in the bond market, with expectations of five interest rate cuts over the coming twelve months. However, this scenario carries risks. If the employment data is stronger than anticipated and inflation figures next week come in hotter than expected, the Fed may find it challenging to toggle into a faster rate cut mode.
The exit of Porsche AG from the DAX reflects a structural change within the German industry, something that even an index provider like Deutsche Börse cannot ignore. The DAX is evolving, which has its positives: the removal of underperforming stocks like Sartorius and Porsche, combined with the inclusion of stronger companies such as Gea and Scout24, enhances the overall index. This shift helps strengthen the DAX as weaker stocks make way for more robust ones.
By Jochen Stanzl, Chief Market Analyst at CMC Markets
