Thursday June 9, 2022 - 16:24:46 GMT
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Indices, Inflation and Interest rates – where next?
ECB finally confirmed its rate hike plans during record euro area inflation of 8.1%. Joining other central banks such as the Fed and BoE, the main goal is to bring inflation under control. What does that mean for risk assets?
CNBC released results from a CFO survey which they conducted. Most of the officers believe that there is going to be a recession in the first half of 2023 and that the Dow is likely to fall to 30,000.
This follows recent concerns raised by major bank executives and investment managers that there could be further moves lower in risk assets and that the economy is poised for a recession.
The combination of high inflation and hawkish central banks means that we are headed for a very tough environment for the consumer – price increases outpace wage growth and credit costs will be higher. Of course, raising rates is the main tool to cool down the economy and to bring inflation back to normal levels, but it is likely to lead to a shock in the markets and the economy.
Let’s look at the Dow and DAX to see how are the two benchmarks behaving at the moment.
Dow Jones Technical Analysis
Dow Jones Daily Chart with 200 SMA.
Looking at the Dow, it has been locked in a range recently between 33250 and 32500. The moment the price breaks out of the range it’s likely that we will see a strong move in the direction where it exited. If it is as per the opinion of the CFOs from the CNBC survey and the move is lower, then the next obvious target is the low for the year which stands just above 30600. From then we have another 600 points to the 30,000 handle which they point as potential bottom.
If the price breaks out from the range to the upside, the 200-day simple moving average has acted as resistance this year and it is the first upside target.
DAX Technical Analysis
DAX Daily Chart with 200 day SMA
The DAX has reacted negatively today due to the hawkish ECB. Looking at where we have traded so far earlier this year, we can see a potential move towards 13400 which is the May low. Should support not hold there, the next potential move to the downside could be towards the lows for the year which stand at just above 12400.
If we follow the opinion of the US CFOs, then the round 12k handle for the DAX could be seen as a potential bottom.
All these views and situations can change very quickly – for example if the war between Russia and Ukraine ends, we can see a relief rally. Such a scenario could also potentially help the battle with inflation meaning that Central Banks might not need to be so hawkish.
There are a lot of ifs and buts, however as things currently stand most observers see more doom and red on the charts. If you need a broker to trade with, check this website.
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