Dax underperforms as German business morale declines

German IFO business sentiment declined in August for the second straight. PMI data earlier in the week also surprised to the downside. The German economic recovery appears to be losing momentum. Can the Dax still break higher?

Germany

Dax underperforms on German business woes 

Recent data from Germany is pointing to rising concerns over the outlook and the economic rebound losing momentum.  

The latest German IFO index declined for a second straight month in August and by more than forecast to August to 99.4. This was below the 100.4 level forecast and down from 100.8 in July. Whilst the current assessment actually improved, IFO expectations saw the largest drop since the pandemic started. 

The data comes following softer than expected German manufacturing PMIs at the start of the week. Whilst both the German manufacturing and service sector expanded in August, the manufacturing PMI was the notable decline dropping to a 7 month low of 62.7 in August, down from 65.9 in July. Activity in the service sector slowed less ticking lower to 61.5, down from 61.8.  

So, what does this all mean? 

The figures suggests that the German economic recovery from the pandemic is starting to slow. Whilst the IFO numbers bode well for growth this quarter, the outlook for the coming quarter is weaker. The loss of momentum appears to be owing to rising concerns over the delta variant, and supply chain issues amid the ongoing global chip shortage. However recent floods in Germany and the uncertain political outlook could be adding to the deteriorating picture

Looking ahead any gains in the Dax could be capped by political uncertainty as attention shifts to the first German elections in 15 years without Chancellor Angela Merkel. The latest polls show that the SPD have overtaken Merkel’s CDU party for the first time in a decade and a half. 

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Where next for the Dax?  

The Dax’s rebound from the 50 sma has started to stall shy of 16000 for now. The index has been grinding higher across the year with the bullish trend intact, so it makes sense that we could see another test of 16000 soon. A break above this level would be a bullish signal and could boost the price to fresh all time highs. However, it is worth pointing out the bearish divergence on the RSI which suggests that momentum is slowing. 

On the downside side, the 50 sma has acted as a strong support across the year. A close below the 50 sma at 15675 would be significant and could open the door to 15000 the July low before sellers look towards the 200 sma at 14700. 



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