DAX expected lower as strong economic data become a rate problem

The DAX is expected to extend yesterday’s losses initially and start trading at around 25,300 points. The lead from the US and Asia is providing little support. High bond yields, renewed increases in oil prices and resilient US economic data are keeping investors cautious. Following an extended market holiday, the Tokyo Stock Exchange caught up with developments of recent days and managed to post modest gains.

In the Middle East, a swift diplomatic solution remains out of sight. At the same time, the latest resilient US economic data are putting additional pressure on bond markets by keeping speculation about further Federal Reserve rate hikes alive. Strong economic data are therefore not necessarily good news for equity markets at the moment. The stronger the US economy proves to be, the longer investors may have to contend with elevated interest rates and bond yields.

This leaves markets facing three headwinds at once: high energy prices, rising yields and geopolitical uncertainty. As long as there is no sustained easing on any of these fronts, the DAX is likely to struggle to regain stronger upward momentum. What the equity market needs most at present is not necessarily more growth, but less pressure from oil and bond markets.

Today, attention will initially turn to Germany’s Ifo Business Climate Index. Investors will be watching closely to see whether recent hopes of an economic recovery can gain further support. At the same time, interest-rate decisions from the Swiss National Bank and Norges Bank will provide further indications of how central banks are navigating the trade-off between inflation and economic growth.

The stronger catalysts, however, are likely to come from the US-China meeting and the upcoming US labour market data. From a technical perspective, the DAX is expected to trade within a range of 25,200 to 25,550 points today.