DAX Index Plunges 555 Points as US Tariffs Shake Global Markets

DAX Hits Record High Before Sharp Reversal

On Friday, January 31, the DAX extended its winning streak to four consecutive sessions, edging up by 0.02% to close at 21,732. This followed Thursday’s 0.41% gain, with the index reaching an all-time intraday high of 21,801.

Soft German inflation data and weak retail sales fueled expectations of multiple European Central Bank (ECB) rate cuts. Lower borrowing costs could enhance corporate earnings and stock valuations.

Sector Performance: Tech and Banking Lead, Automakers Struggle

Infineon Technologies saw a 1.97% increase, benefiting from ASML’s positive earnings report on January 29. Siemens Energy AG continued its recovery, climbing 1.97%, while Commerzbank advanced 1.72% due to strong profit growth.

However, the automotive sector faced headwinds, weighed down by uncertainty surrounding tariffs. BMW declined 1.60%, while Daimler Truck Holding, Mercedes-Benz Group, and Porsche also recorded losses.

Economic Data Bolsters ECB Rate Cut Expectations

German economic indicators reflected a struggling economy. Retail sales dropped 1.6% month-over-month in December, and the unemployment rate ticked up from 6.1% to 6.2%. Additionally, annual inflation cooled from 2.6% in December to 2.3% in January, signaling weakening consumer demand.

These factors support a more accommodative stance from the ECB. Looking ahead, Eurozone inflation data, set for release on February 3, could reinforce the case for aggressive monetary policy easing. A sharper-than-expected decline toward the ECB’s 2% inflation target would likely strengthen expectations for multiple rate cuts.

US Economic Data Dampens Fed Rate Cut Hopes

Meanwhile, in the US, the January 31 Personal Income and Outlays Report cast doubt on the likelihood of a near-term Federal Reserve rate cut. The Core PCE Price Index, a key inflation gauge, rose 2.8% year-over-year in December, maintaining its November pace. Additionally, personal spending surged 0.7% month-over-month, with income also climbing, suggesting sustained inflationary pressures.

Trump’s Tariffs Send Markets Tumbling

US equity markets ended the week in the red, rattled by economic data and trade policy developments. The Nasdaq Composite fell 0.28%, while the Dow and S&P 500 declined 0.75% and 0.50%, respectively.

The White House confirmed that President Trump will implement new import tariffs on goods from Canada, China, and Mexico starting February 1. These tariffs are expected to raise import costs, potentially driving inflation higher and influencing future Fed policy decisions.

Corporate earnings also played a role in market sentiment. Energy giant Chevron (CVX) tumbled 4.56% after missing analyst expectations.

Upcoming US Economic Events: Focus on Manufacturing

Traders will shift their attention to the US manufacturing sector on February 3. Forecasts indicate a slight improvement in the ISM Manufacturing PMI, expected to rise from 49.3 in December to 49.5 in January. Employment and pricing components are also projected to climb, which could reinforce expectations of a prolonged period of higher interest rates.

Market participants will closely monitor Federal Open Market Committee (FOMC) officials' commentary on tariffs and their potential economic implications.

Near-Term Outlook for the DAX

The DAX’s trajectory will largely depend on upcoming inflation data from the Eurozone and economic reports from the US.

• If Eurozone inflation slows significantly, the index could push toward 22,000.
• Conversely, a higher inflation reading may pressure German stocks, pulling the index back toward 21,500.
• External influences, including potential stimulus measures from Beijing and US trade policies, could further sway market trends.

As of Monday morning, market sentiment reflected concerns over Trump’s tariffs. DAX futures plummeted 555 points, while the Nasdaq 100 mini dropped 567 points. Additional pressure stemmed from China’s Caixin Manufacturing PMI, contributing to a challenging start to the European trading session.

Technical Analysis: DAX Remains in Overbought Territory

Following its recent rally, the DAX remains well above its 50-day and 200-day Exponential Moving Averages (EMAs), signaling a continued bullish trend.

• A break above the record high of 21,801 could set the stage for a run toward 22,000 and beyond to 22,500.
• However, if the index dips below 21,500, it may test key support at 21,000.
• The 14-day Relative Strength Index (RSI) stands at 79.59, indicating overbought conditions. This suggests that selling pressure could intensify around Friday’s record high.

Key Drivers to Watch

Traders should keep an eye on Eurozone inflation and US economic indicators for further market direction. Additionally, developments in China’s economic policies and the evolving US trade landscape will play a critical role in shaping the DAX’s performance in the coming weeks.

Source: fxempire.com