Dax Index fighting to stay above 10,000 as German economy likely contracted 9.8% in Q2

Dax Index fighting to stay above 10,000 as German economy likely contracted 9.8% in Q2

  • Germany’s leading institute projects that the economy probably shrank 9.8% in the Q2
  • Earlier, analysts said the national economy could contract 4.2% this year
  • Despite gains in the last two days, DAX Index is fighting to stay above 10,000 today

DAX 30, a German blue-chip stock market index, is struggling to keep its head above the 10,000 mark as Europe’s largest economy likely contracted as much as 9.8% in the second quarter, according to national Ifo institute.

Fundamental analysis: Record decline

Analysts from Ifo institute, one of Germany’s largest economic think-tanks, believe that the national economy probably declined 9.8% in the second quarter amid the COVID-19 outbreak. If true, this would mark the largest decline since the records began in 1970.

“It is not unlikely that the crisis will drag on longer than expected and lead to production being frozen,” said Timo Wollmershaeuser, economist at the Ifo institute.

“In this scenario the recession will be deeper and the recovery will be slower. It will also be more difficult for the government to prevent businesses from going bankrupt,” he added.

Ifo institute believes that the economy probably shrank by 1.9% between January and March. Earlier reports from Germany suggested that the economy could contract 4.2% this year and then recover 5.8% next year. 

“The coronavirus pandemic is triggering a deep recession in Germany,” said the institutes, before adding that there is a “significant downside risk to their predictions”.

These predictions are the latest evidence that the coronavirus-related economic hit will be much stronger compared to the global financial crisis in 2009. For instance, around 1.4 million employees were on short-time work in 2009, while expectations are that this number will rise to 2.4 million this year. 

Germany reported an unemployment rate of 3.2% for February, which could soon rise to 5.9%, according to the institute’s projections. 

Technical analysis: DAX Index struggling to stay above 10,000

DAX Index is trading barely in a positive territory today, despite significant gains made in the last two days. The blue-chip index opened the week by surging 5.77% higher, before adding a further 2.79% yesterday.

These moves have helped the price action to return above the key resistance around the 10,300 mark, a level that is being tested currently in the context of a support. 

DAX Index daily chart (TradingView)

Despite the rally, the bulls are struggling to keep the bullish momentum going as the sellers look more confident at the moment. A failure to stay above 10,300 is likely to trigger another wave of selling that could push the price action towards the absolutely crucial support block above the 8,000 handle.

Summary

DAX Index is trying to stay above the key 10,300 support as the buyers struggle to keep the positive momentum intact. The bulls are facing more pressure now as Germany’s leading economic institute said that the economy likely contracted 9.8% in the second quarter, the biggest quarterly decline since records began in 1970.

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.

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