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Trends & Analysis
News

Gold price tests a multi-month low on a stronger USD

News

Micron shares slide despite upbeat results

News

Will gold hold or fold?

News

Costco shares slide despite earnings beat

News

Crude oil becomes volatile as Russia relaxes ban

News

Where could the bulls save the S&P 500?


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Asset Watch

Does the DAX index offer a poor risk-reward?

 

Thursday, July 6, 2023

It was only a few weeks ago that the German DAX index hit a new all-time high. And although the Ukraine war was considered a precursor to a deep recession, the worst never materialised, and European growth remained resilient.
But, with the ZEW’s German Economic Sentiment Index (ESI) signalling weakness beneath the surface, could the DAX index confront challenges in the months ahead? ZEW President Professor Achim Wambach said on Jun. 13:
“The ZEW Indicator of Economic Sentiment shows a slight improvement, but it remains in negative territory. This means that experts do not anticipate an improvement in the economic situation during the second half of the year. Particularly, sectors focused on exports are likely to perform poorly due to a weak global economy. However, the current recession is generally not considered particularly alarming.”

More importantly, since the ZEW ESI is often a good indicator of the DAX index’s future direction, the recent divergence remains problematic. The black line tracks the DAX index’s daily movement, while the orange line tracks the ZEW’s monthly ESI. As you can see, the former has largely followed the latter over long time horizons.

 

While the DAX index attempts to reclaim its record high, the ZEW ESI is back below zero. As a result, the surge that helped spur the DAX index’s October 2022 rally is no longer supporting the bulls.

 

So, will the DAX index catch down to the ZEW ESI, or will economic sentiment turn sunny again in Germany?


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