Is the DAX index a safe buy after the ECB jumbo rate hike?
- The DAX index has embarked on a strong sell-off in the past two week.
- The European Central Bank decided to deliver a jumbo rate hike.
- It warned that more rate hikes are highly likely in the coming months.
The DAX index pulled back on Thursday after the latest interest rate decision by the European Central Bank (ECB). It retreated to a low of €12,825, which was about 8.15% below the highest point in August. Other European benchmark indices like CAC 40 and Stoxx 40 also retreated.
More challenges for German companies
The DAX 40 index retreated after the ECB concluded its two-day monetary policy meeting. The bank decided to hike interest rates by 75 basis points, the biggest increase since 1999. Its deposit facility rate rose from 0.00% to 0.75% while the marginal lending facility increased from 0.755 to 1.50%. The benchmark rate rose from 0.50% to 1.25%. These rate hikes were in line with expectations as we wrote here.
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In a statement, Christine Lagarde said that the extremely tough position was necessary to contain the runaway inflation in the bloc. Data published last week revealed that the bloc’s inflation soared to a record high in August. In its estimate, the bank now expects that the headline consumer price index will average 6.8% in 2022 and then retreat slightly to 3.4% in 2023. The ECB statement said:
“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target.”
The DAX index declined because historically, stocks underperform in periods of aggressive monetary policy.
In addition, the index has fallen because of the elevated risk of a recession in the region. Russia has already stopped gas flows to Europe as it fights to have sanctions lifed. As a result, gas prices have soared to historic levels, leading to thinning corporate margins. Some manufacturing companies have also decided to close or reduce operations.
The DAX 40 index has also been hit by the sliding euro. While a weaker euro is positive for exporters, it has made it significantly expensive for them to import raw materials.
DAX index forecast
The DAX index has been in a strong bearish trend since mid-August. This sell-off has been supported by the 25-day and 50-day moving averages. Additionally, the Awesome Oscillator has formed a bullish divergence pattern.
The index has also moved slightly above the important support level at €12,417, which was the lowest level in July. Therefore, the path of the least resistance for the blue-chip German index is downwards, with the next key support being at €12,417.