DAX: where ya off to?

This is probably one index that I rarely pay attention to, especially over the last few years where US equities has been where the real meat is...

But recently, things are changing - and not at the benefit of the index.

I want to make this quick and concise so that we don't get bogged down in a tonne of tangential ideas that don't really matter, and stick to the core reasoning for believing the index is weak and looking at a sharp downside move.

Reason #1: Take a bloody look at the state of it

Absolutely disgusting.

Not only has it ranged for a year, amidst the backdrop of increasing ECB liquidity provision, fiscal liquidity too and great German corporate profits...

Oh wait, that is the only real thing that marks the recent history of the index being absolutely crap from a price perspective.

Look, if you couldn't rally properly with all this support, when are you going to?

Reason #2: the ECB has a hawkish tilt

https://twitter.com/FerroTV/status/1490629417235845123

Nuff said.

ECB tightening the level SHOULD be a net negative to European equities.

However, it depends on the extent to which they commit to tapering too (but also what the market's fundamentals will allow them to do)...

And here is the pace of it in a chart...

Less liquidity = less reasoning for stocks to head higher since the ECB is not lowering the risk free rate of return as much...

And in today's video, we discussed the issue that the hawkish tilt from the ECB can bring...

We can currently see what European rates are thinking with regards to this relatively (to recent history) big pivot from the central bank...

Below is the BTP/Bund spread (Italian 10y vs German 10y yield spread).

This is stressful for the ECB, as it is a little bit of a tantrum...

And considering what Lagarde said roughly 2 years ago (identified on the chart), she might have to say something similar soon.

Reason #3: The chart looks similar to the Russell, which has already made a downside move off Fed hawkishness

Reason #4: German economic data is shocking right now

In the last quarter of 2021, Germany had negative GDP growth at -0.7%...

And the data this quarter is not supportive of positive growth for Q1 of 2022.

Let's take a quick look at it.

💩 -0.3% Industrial Production (caveat here that it was construction that brought the index down, whilst manufacturing increased MoM)

💩 -5.5% Retail Sales

💩 -6.7 Consumer Confidence

We need to build a bit of a bigger picture here rather than just off one month, but we can factor in rising energy costs to the picture here too.

The consumer is not going to benefit from higher costs (my bill has just gone to £300 per month for gas an electricity for example) and this will weigh absolutely on the economy, as it will everywhere.

In a hiking environment, I fail to see broad based ability for risk to rally - the same as anywhere - especially when timelines for hawkish tilts to complete are not completely certain.

My thinking is the DAX will provide initial weakness to the first level, and the break of the year's range will be absolutely key, but it is also reliant on credit spreads blowing out as well, something we have seen alongside the sovereign spreads rising.

See tweet from EMH here...

What's more, European credit spreads have risen at a faster pace than US and Asian recently, which should certainly be a signal to the ECB.

Tick tock.

Make sure you're watching the level on the DAX at 15000 - that is key.