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Andreas Zanin
Analysis | July 27, 2021

Trading scenarios: DAX30 – The Impact of China and the Fed

The Dax has traded in a sideways range for the last few months but we think the chances of a significant correction to the downside have increased our view of the fundamentals, sentiment and technicals below…

“China and Hong Kong shares fell sharply to their lowest this year on Monday, as investor worries over government regulations battered stocks in the education, property and tech sectors.” (Reuters)

The big fall in stocks in mainland China on the Shanghai and Shenzhen indexes is being met by heavy foreign selling. Refinitiv data showed outflows of more than 9 billion yuan ($1.39 billion) from A-shares on Monday alone – why does this matter to the DAX?

Chinese shares falling actually matters globally and will create more risk-off if the sell-off continues. If we look at Germany it’s one of the most exposed countries to China in terms of trade and the most exposed country in Europe in terms of exports.

2 charts below the first shows German export shares and the second, shows the DAX’s correlation with the CSI 100 if the latter continues to fall then it will drag the DAX down with it in our view.

The DAX since June has traded in a range and has not been able to make much headway to the upside and a look at the chart below shows the DAX in Euro’s and in USD – In USD The trend is already down and we expect the EUR chart to turn south as well.

If the USD continues to firm this will be bearish for the DAX and we have the Fed this week which could put additional pressure on the DAX and other stock indices if the Fed are upbeat about the economy going forward which will bring the reduction of stimulus closer. If they don’t. This is discounted by the market anyway. In terms of China, it’s important to the global financial system and the sell-off in 2015 had a big impact globally on risk assets and today’s sell-off could see the same happen again.

Technical Analysis

On the weekly chart we can see we have failed to break free of resistance in the last two month and we are now moving down and if we break nearby support and the 20 week moving average we could see strong follow through selling to the downside.

On the daily chart, we see the DAX on rallies to resistance or on a break of support for a move to the the bottom of the recent range at 1500. If we were to break the range we would expect a more significant correction to unfold.

 

 

Research provided by LearnCurrencyTradingOnline.com

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