Swiss Emergency Operation Sends DAX On a Downward Slide – But the Fed Remains on Course

Jürgen Molnar, Capital Market Strategist RoboMarkets

24 March 2023

It was open-heart surgery. The end result was a forced marriage between former rivals UBS and Credit Suisse that left investors around the globe first speechless and then perplexed. The fact that such a drastic measure had to be carried out in just 48 hours, 15 years after the financial crisis, shows how fragile the current banking system is. But then central banks and governments immediately rushed to the rescue, the initial shock was digested and the stock market sell-off was over for the time being.

Although the DAX also had to reorganise itself after this weekend of crisis, the downward slide currently only looks like a healthy correction, at least from a chart perspective. In the course of the week, the index failed in a first attempt at the resistance level of 15,250 points. Only above this level would the way be clear to the high for the year and the correction could be considered complete. However, Wall Street will have to help once again, as it went on a real up-and-down run after the Federal Reserve’s interest rate decision.

End of the Interest Rate Hike Cycle in the USA Still Open

Not too much and not too little was the Fed’s motto. As expected, the key interest rate went up 25 basis points. Without the recent turbulence in the financial sector, it could have been a big rate hike. What did not come, however, was a clear commitment to an end to the cycle of interest rate hikes. On the contrary, there should still be at least one interest rate step, because inflation, which is still high, clearly remains the declared goal of monetary policy, according to Powell. And inflation is still very far from the two percent mark.

Real Estate Sector as a Banking Risk

The share of the real estate company Vonovia fell to a ten-year low last week. In the last 12 months alone, the stock has lost almost 60 percent. The recent interest rate hikes are hitting the real estate sector particularly hard and are also becoming a clear threat to the banking world via this route. If loans run out and have to be refinanced at much higher interest rates, the pressure on real estate groups such as Vonovia increases further, which in turn could lead to liquidity problems on both sides. The commercial real estate sector in particular could cause many a bank great concern in the future.

Those Presumed Dead Live Longer

In contrast, the US video game retailer Gamestop, which only became known to many investors through wild speculation on the stock markets, made positive headlines. A company whose business model had become obsolete due to the internet and for which only few believed in an economic turnaround may now have actually achieved it. In the past quarter, Gamestop achieved a profit of a good 48 million US dollars; a year earlier, the company had lost 147 million dollars. In response to the figures, the share price jumped more than 40 per cent at its peak, just like in the good old days. However, only the next quarterly figures will provide information on whether this is really a sustainable turnaround.

German Economy Could Avoid Recession

According to the German government’s Council of Economic Experts, the short-term outlook has brightened slightly due to a more stable energy supply and lower wholesale prices. The problem, however, remains the continuing high inflation, which is causing a loss of purchasing power and thus dampening consumer demand. According to economists’ expectations for the figures to be published next Thursday, inflation is expected to have picked up slightly in March. This will be followed on Friday by data for the Eurozone. While the US economy remains rather quiet on the numbers front, Germany’s Ifo business climate index will open the week on Monday.

DAX – Current Supports and Resistances

Supports: 15,050/15,000 + 14,850/14,800 + 14,650/14,600

Resistances: 15.150/15.200 + 15.300/15.350 + 15.400/15.450

This article is from RoboMarkets.