DAX forecast: Rising oil prices and bond yields undermine stocks

European equity indices traded mostly lower by mid-morning London trade, with some indices like the DAX recovering from their earlier lows. Sentiment remained bearish, though, after a weak session on Wall Street yesterday, where the major US indices came under pressure as higher oil prices revived concerns over inflation, while rising government bond yields also unnerved investors. Uncertainty remains elevated following the expiry of the US-Iran memorandum of understanding. If oil prices continue to rise, this could weigh on European markets which have been quite resilient of late. That could weigh on the German DAX forecast given the nation’s reliance on energy imports.

 

US-Iran stalemate underpins oil, bond yields

 

With Donald Trump rejecting an extension of the truce and escalating his rhetoric towards Oman, the situation is not improving. Iranian parliamentary speaker Mohammad Bagher Ghalibaf said the Strait of Hormuz would remain closed until the blockade and oil embargo are lifted, adding that Iran was prepared to respond more forcefully to further actions against it. The comments underline the risk that the disruption to energy markets could persist for longer than investors had hoped.

 

The bond market is also becoming an increasingly important source of pressure for equities. The sell-off in US Treasuries accelerated on Tuesday, pushing the 30-year yield to its highest level in almost two decades as fears of a wider Middle East conflict fuelled concerns over inflation and the path of interest rates.

 

The 30-year Treasury yield rose to 5.3264%, its highest level in nearly 20 years. The pressure was not confined to the US. Japan’s 10-year government bond yield moved close to 3%, a level not seen since the mid-1990s, while eurozone yields remained around multi-year highs.

 

For equities, the combination of rising energy costs and higher long-term borrowing costs is becoming increasingly uncomfortable.

 

How will the ECB respond?

 

Higher energy prices are also reshaping expectations for European monetary policy. Markets are increasingly leaning towards a 25 basis-point rate increase from the European Central Bank in September, while the possibility of another quarter-point move by early next year remains on the table.

 

That said, the eurozone’s improving economic data needs to be viewed against a less favourable energy backdrop. Natural gas prices are close to their highs for the year, leaving the region vulnerable to another inflationary shock should the geopolitical situation deteriorate further.

 

Technical DAX forecast and levels to watch

 

 

The German DAX index has been consolidating near all-time highs in recent sessions, but yesterday it fell back quite noticeably to move below a couple of short-term support levels. So far, this pullback can be viewed as a normal retracement inside a larger bull trend. We could see some further downside if broken support levels such as 26,283 and 26,440 now turn into resistance. In that case, a dup down to the next support at 25,895 could be on the cards. Below that, the January high of 25,512 is the next key level to watch in the event of a slightly deeper pullback.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R