DAX extends uptrend as hopes grow for diplomatic solution in the Middle East

Investors in Frankfurt continue to bet on a diplomatic solution to the conflict in the Middle East, even though sentiment deteriorated again yesterday. New US threats of sanctions against countries and organisations that continue to do business with Iran underline just how fragile the situation remains.

Investor attention is therefore increasingly focused on tomorrow’s meeting between the US and China. Alongside trade relations, geopolitical issues are also expected to feature prominently in the talks. Disruptions to international supply chains mean the conflict in the Middle East is increasingly affecting China’s economic interests as well. Investors have already placed considerable faith in diplomacy. Now they need to see tangible progress.

Today’s purchasing managers’ indices from Europe and the US will provide important early indicators of economic momentum. Investors will be watching closely for further signs of recovery. Following last week’s monetary policy decisions, the latest economic data now need to show whether hopes of a recovery are also justified by the fundamentals.

The DAX is likely to continue its attempt to establish itself above 25,600 points. However, a significant acceleration in momentum appears unlikely for now. Investors remain highly selective in their buying, leaving Germany’s benchmark index without the necessary market breadth for a stronger upward move. A handful of strong stocks can lift an index in the short term, but a sustainable uptrend requires support from the broader market.

Energy prices remain the key risk factor. Any prospect of diplomatic de-escalation could push oil prices lower and ease inflation concerns. Conversely, renewed geopolitical tensions could reverse the equation within a very short period of time. From a technical perspective, the DAX is expected to trade within a range of 25,550 to 25,850 points today.