The DAX index crashed hard on Wednesday as concerns about the European banking sector continued. It dropped by over 3% on its worst day in months and settled at €14,734, the lowest point since January. This means that it has dropped by over 6% from its highest level this year. The focus will be on the upcoming European Central Bank (ECB) interest rate decision.
DAX index futures jumped by more than 1.8% on Thursday as investors focused on the latest bank rescue. In Switzerland, the Swiss National Bank (SNB) announced its rescue package for Credit Suisse, the second-biggest banking group in the country.
The bank, which is now implementing a turnaround strategy, will now have access to a near-blank check from the Swiss National Bank. It will access over $54 billion in cash when it needs it. While this is a positive thing, it shows that there are elevated risks in the American and European banking sectors.
The main catalyst for the DAX index, CAC 40, and FTSE MIB will be the upcoming interest rate decision by the ECB. In the past statements, the ECB has hinted that it will hike interest rates by 0.50% in a bid to fight the soaring inflation.
Now, with the bank staring at another banking crisis, there is a likelihood that it will take a moderate tone by hiking by 0.25%. These rate hikes are necessary considering that the bloc’s inflation remains significantly higher than the ECB’s target 0f 2%.
The key DAX index constituents to watch will be Deutsche Bank and Credit Suisse which fell by 9.25% and 8.71%, respectively. These banks are well capitalized, with a CET Tier 1 ratio of over 14%. The other DAX constituents to watch will be Siemens Energy, Continental, and Airbus Group.
In my last article on the German DAX 40 index, I warned that buyers should start taking profits because of the elevated risks. This view was accurate as the index has retreated from the year-to-date high of €15,700 to a low of €14,740. It has dropped below the key support at €15,167, the lowest point on March 2, The index has also fallen below the 25-day and 50-day moving averages.
Therefore, while the DAX futures are rising, I believe that the tide is changing, which will see the index continue falling in the near term. This decline will likely see it drop to the key support at €14,000, which is about 5% below the current level.
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