Hawkish ECB Comments

The Dax is still sitting down from recent highs as we head towards the middle of the week. Hawkish comments from ECB’s Lagarde yesterday have given investors pause for thought. The index has ben on a solid run until the recent failure around the 16278.35 level where selling kicked in. The prospect of further rate increases from the ECB is weighing on investor sentiment while at the same time, the broader stock backdrop has turned more positive against the backdrop of the US debt ceiling deal being done this week. With the US now avoiding an historic debt default and the economic implications of such an event, investor sentiment globally should be more positive.

Recession Fears

However, recession fears remain a major headwind to European stocks, as well as warnings around the global banking system. The ECB recently reported on the liquidity risks facing major European lender sin the event of major customers such as funds or other institutions withdrawing funds. Looking ahead, European look vulnerable to further downside near-term given the hawkish ECB signalling we’re seeing. However, if inflation starts to fall at a quicker pace this should help underpin stocks medium-term, helping them rise again.

Technical Views

Dax

Following the correction lower from 16278.35, the Dax has subsequently held support at the 15642.76 level. The issue now is the index risks putting in a lower top against those highs, suggesting potential for a deeper correction if we break through 15642.76 and the channel lows. If we break below that area, focus turns to 15163.41 next.