DAX Turns Bearish on Hawkish Fed Minutes and US-China Tension

Highlights

• It was another bearish session for the DAX on Wednesday, falling 0.63% to end the day at 15,938.
• Service sector PMIs from China and the euro area weighed on market risk sentiment.
• Later today, German factory orders and a busy US economic calendar will move the dial.

It was a bearish Wednesday session for the DAX, which fell by 0.63%. Following a 0.26% loss on Tuesday, the DAX ended the day at 15,938. Significantly, the DAX gave up the 16,000 handle for the first time in three sessions.

Economic indicators from China set a bearish tone ahead of the European opening bell. In June, the China Caixin services PMI fell from 57.1 to 53.9. Economists forecast a fall to 56.2. As a result of the weaker Caixin Manufacturing PMI and Services PMI, the Chinese Composite PMI declined from 55.6 to 52.5.

However, euro area economic indicators added to the bearish mood.

US factory orders failed to provide support, with investors mindful of the FOMC meeting minutes out after the closing bell.

Economic Indicators Weighed on Investor Sentiment

It was a busy Wednesday session, with the US markets reopening after the Fourth of July holiday.

From the euro area, services sector PMIs drew interest early in the European session. The stats were bearish, raising fears of a Eurozone economic recession.

The Italian services PMI fell from 54.0 to 52.2, with the Spanish services PMI down from 56.7 to 53.4. While the German and French PMIs were unchanged from prelim figures, the Eurozone Services PMI fell from 55.1 to 52.0 (Prelim: 52.4).

However, with inflation as an ECB focal point, Eurozone Producer Price Index figures also tested buyer appetite. The Producer Price Index fell by 1.5% in May year-over-year reversing a 0.9% increase in April. Economists forecast a 1.3% decline. A pullback reflected a weak demand environment forcing manufacturers to reduce output prices.

From the US, factory orders increased by 0.3% in May versus 0.3% in April. Economists forecast a 0.8% rise.

The Market Movers

It was a mixed Wednesday session for the auto sector. Porsche bucked the trend, falling 0.30%. However, Continental AG rallied by 3.39%, with Mercedes-Benz Group up 1.13%. BMW and Volkswagen also found support, rising by 0.52% and 0.08%, respectively.

It was also a mixed session for the banks. Commerzbank ended the day with a 0.84% gain, while Deutsche Bank fell by 1.42%.

The Day Ahead for the DAX

It is a relatively busy day ahead on the European economic calendar. German factory orders and construction PMI numbers will draw interest ahead of Eurozone retail sales figures.

We expect factory orders to have more impact on the DAX. Economists forecast factory orders to increase by 1.5% versus a 0.4% decline in April.

With the German economy in the spotlight, investors should monitor ECB chatter throughout the day. However, no ECB Executive Board Members are on the calendar to speak today, leaving commentary with the media to move the dial.

It is a busy day on the US economic calendar. ADP nonfarm employment change and ISM Non-Manufacturing PMI numbers will influence sentiment toward Fed monetary policy. A pickup in service sector activity and better-than-expected ADP nonfarm numbers would support a more hawkish post-summer Fed monetary policy outlook.

However, we expect the DAX to also respond to the overnight FOMC meeting minutes, which were hawkish.

DAX Technical Indicators

Looking at the EMAs and the 4-hourly chart, the EMAs sent bearish signals. The DAX sat below the 50-day EMA (16,015). The 50-day EMA narrowed to the 200-day EMA, sending bearish signals.

A move through the 50-day EMA would support a return to 16,200 and give the bulls a run at the lower level of the 16,330 – 16,380 resistance range. However, failure to move through the 50-day EMA (16,015) would leave the 200-day EMA (15,845) and the upper level of the 15,820 – 15,780 support range in view.

The 14-4H RSI sits at 43.15, sending bearish signals and supporting a further pullback to target the upper level of the 15,820 – 15,780 support range.

For a look at the economic events, check out our economic calendar.