Dax Resilience for now but watch PMIs

Today’s release of the April IFO business sentiment survey showed the sixth consecutive monthly increase in the Business Sentiment survey, albeit at a smaller pace of improvement than in previous months. The Expectations component was flat (no rise for the first time in seven-months). Interestingly, Germany’s Purchasing Managers’ Index for manufacturing and services have both started to turn back down after the brief rebound earlier this year resulting from improved liquidity conditions, courtesy of the ECB’s December & February LTROs. In fact, manufacturing PMI dropped back below 50 in March, while the services PMI slipped for back-to-back months, reaching 52.1.

If the tapering off in the IFO begins to move in line with the retreat in the PMI, then this could clash with the ECB’s attempts to leave the LTRO behind and return to worrying about inflation –as was hinted by Mr. Draghi last week. Meanwhile, the Bundesbank has explicitly stated monetary policy is no solution to the eurozone problems and that “We shouldn’t always proclaim the end of the world if a country’s long-term interest rates temporarily go above 6%”. Such commentary suggests escalating obstacles to the ECB the next time it mulls a fresh round of asset purchases and/or long term refinancing operations.

Since their peak in mid March, Spain’s IBEX is off 17%, Italy’s FTSEMIB is off 16%, Germany’s Dax is off 6%, while the S&P500 is down 1.5%. At this point, the peripherals’ decline may be more likely to extend the pullback in the Dax than is the latter likely to support the peripherals. Looking at the Dax weekly chart, the next rebound will have to break above the 6900 figure to shake-off the last four weekly declines. On the downside, the confluence of supporting dynamics stands at 6540, which combines the 100 WMA and the seven-month trendline support (from Sep low). A weekly close below 6500 risks triggering the return to 6000. The question then becomes, at what equivalent of the peripherals would such levels be?