European stocks took significant losses last week, with the German DAX falling about 3%, due to the European Central Bank’s decision to slow the pace of its interest rate rises while reiterating that further monetary tightening would be necessary to combat rising inflation.
On Monday, the German DAX index tried to erase some of those losses, rising nearly 0.5% during the Frankfurt session, but it looks like the positive sentiment won’t last for long.
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Klaas Knot, a member of the ECB’s governing council, stated on Friday that the central bank has a longer distance to raise interest rates than the Federal Reserve but will not reach the same level (circa 5% for the Fed).
This promise of future interest rate rises and the likelihood of sluggish economic growth has dampened market optimism.
German IFO surveys surprise
The leading German IFO Business Climate Index increased to 88.6 in December from 86.4 in November and 88.0 predicted.
Meanwhile, the Current Economic Assessment rose to 94.4 points in the reporting month, up from 93.2 in November and 93.5 anticipated.
The IFO Expectations Index – a measure of companies’ expectations for the next six months – increased to 83.2 in December, up from 80.2 the previous month and against expectations of 82.0.
Following the publication of the German IFO Business Survey, institute economist Klaus Wohlrabe stated, “the German economy sees a silver lining on the horizon. The likelihood of a recession has reduced with today’s IFO data.”
The survey follows PMI data from the previous week, which indicated that the decline in German economic activity eased for a second consecutive month, suggesting that a potential recession in the union could be less severe than initially anticipated.
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Elsewhere, China reported its first Covid fatality after the government loosened restrictions nationwide during a viral epidemic. China’s grave concerns exacerbate the deteriorating market sentiment. Meanwhile, Chinese official media published several economic development objectives outlined during China’s annual Central Economic Work Conference.
Short-term seems bullish
It looks like a rounding bottom pattern in the 30-minute chart, reinforced by the notable bullish divergence between the RSI indicator and the price. As a result, we might see further gains today.
The next target should be at 14,100 € or near 14,280 €. On the downside, if bearish sentiment persists, the support seen at last week’s lows near 13,900 €.
DAX 4H chart, author’s analysis, source: tradingview.com
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