DAX 30 Strongly Overbought as Bulls Regain Control Helped by the Fed
Key Talking Points:
- Federal Reserve sends a “keep calm and watch the economy recover” message
- DAX 30 buyers regain control but overbought conditions deepen again
So the Federal Reserve has decided to stick to its dovish stance regarding monetary policy and get behind the yield curve, avoiding addressing the concerns about rising inflation expectations given that Covid-19 continues as their main concern and inflation remains below 2%.
That said, the Fed’s updated economic forecasts are quite spectacular, with growth in real GDP forecasted to be 6.5% in 2021, with the unemployment rate falling to 4.5%. This optimistic horizon gets the Fed closer to its dual mandate of securing full employment whilst controlling inflation, which it expects to be above the 2% target by the end of the year. This, of course, means that the Fed may need to raise rates earlier than expected, although one would not think that by looking at the dot plot chart released in yesterday’s meeting, which suggests no rate hikes until 2024.
But investors were not deterred by this message from the Fed and the push higher in US bond yields is as good enough as proof as any. The benchmark US 10 year saw its yield jump from 1.618 pre-meeting to 1.736 during the Asian session this morning, continuing the volatile trend it had experienced since the beginning of the year.
US10Y Yield Chart (Intraday)
Overall, the message from the Fed was that they currently care more about employment than inflation but I expect investors to continue paying a close eye on how prices evolve, and their expectation that a rate hike will come sooner than 2024 is likely to continue.
DAX 30 Levels
Unsurprisingly, the stock market loved this “keep calm and watch the economy recover” message from the Fed, leading to a push higher in global stocks, led mostly by small-cap cyclical equities. In Europe, the DAX 30 posted a strong performance after a rather dull start to the week and the index is now above the 14,600 resistance level that was attracting sellers since last week.
And it seems that the Fed’s attempt to prove its credibility to stand up to market expectations has convinced the DAX 30 bulls for the time being, so I wouldn’t be surprised if the index continues to post new all-time highs as it heads towards the next round figure of 14,800, at which point fatigue might creep in again.
As expected, the Stochastic has ventured deep onto the overbought area again given that it had barely set foot below the 80 line before price shot up again. So we’re in this situation again where the DAX 30 is looking overpriced and the threat of rising bond yields is very much alive, but momentum seems to continue tilted to the upside. For me, this means that when things turn, they will be bad, especially as the index continues to overheat, so we may expect the Dax to continue pushing higher in the short-term, but a correction will come in due course, and I wouldn’t be surprised if the index falls below the 13,000 mark when it happens.
DAX 30 Daily chart
--- Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin
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