German DAX index continued to decline today and was 2% weaker heading into the US session, trading at around 15,000 EUR, the level last seen in early October.
Panic returned to the markets Tuesday as Moderna chief Stephane Bancel suggested in a Financial Times article that existing Covid-19 vaccines would struggle to cope with the omicron variant, predicting a ‘material drop’ in their effectiveness. He also warned it would take months before pharmaceutical companies can manufacture new variant-specific jabs at scale.
From other news, the German unemployment rate improved a notch to 5.3% in November , while the unemployment change ticked higher to -34,000 (from -39,000 previously).
Additionally, the European CPI inflation rate came out way above expectations of 3.7%, printing 4.9% year-on-year . At the same time, the core inflation rate jumped to 2.6% from 2.0% in October. Nevertheless, the ECB has said several times it is doubtful that it would raise rates in 2022 , so inflation can continue to rise toward double digits.
The European Central Bank (ECB) Vice President Luis de Guindos said in an interview with Les Echos on Tuesday that he is confident that those net asset purchases will continue throughout next year. Beyond that, he doesn’t know. The dovish messaging is pretty apparent.
The euro also suffers on the FX market, being crushed by the USD to the lowest level since July 2020. The divergence in monetary policies remains in favor of the dollar. However, weaker euro is usually bullish for German stocks.
Later in the session, Federal Reserve Chair Jerome Powell will testify on the CARES Act before the Senate Banking Committee in Washington DC. His words usually bring volatility to the financial markets.
DAX testing significant support but looks bearish
The index retested the 200-day moving average today and yesterday (currently at 15,400 EUR), but it failed to breach above it, and bears sold the index. As long as it trades below that moving average, the medium-term outlook seems negative.
DAX is currently testing another major support at the psychological barrier of 15,000 EUR. If it drops below that level, the next target could be at October lows of 14,800 EUR.
Short-term time frames are now really oversold, implying a possible bounce from the mentioned significant support. The resistance is at the 200-day average at 15,400 EUR. DAX needs to close above it to ease the bearish pressure. Until then, the outlook appears bearish.