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As the coronavirus is squeezing its grip on the world, the DAX 30 dropped sharply, and from its 2020-high, the index was down by 36% last week as panicking investors, effectively erased six years of gains in the index.
The WHO issued a pandemic alert, the US declared a national emergency, and on Saturday, March 14, Spain is telling all of its citizens to stay at home from Monday, March 16, at 8 am. People are allowed to travel to work if needed, but the government is urging people to work from home. Investors see this as a risk to the economy and their stock market holdings, as countries like France and Germany will follow soon, given the significant gain in coronavirus cases in their countries. President Macron has already mentioned the idea to close France’s borders.
I don’t disagree that a shutdown will slow the economy, and that is why the markets have come down crashing. However, the markets started to trade lower before the general public understood what was happening, and they are ahead of the WHO and governments.
As an example, when the China February PMI was released a few weeks ago, it showed that the Chinese economy came to an almost complete halt. Yet, the Shanghai composite remained stable, and western indices ignore the news, as the markets had already priced in the slowdown in China.
I think the same is happening now with the DAX index. Investors have been betting on the spread of the virus, and a shutdown of the world economy. Italy and Spain are currently closed for business. Germany, France, and the UK may follow soon, with the US a few weeks later. The general public sees this as something bad, while I see it as the start to the end of the crisis. I am, therefore, keeping a close eye on the daily growth rate cases across the world, and signs that governments are about to shut down their countries.
In China, it took about two weeks of lockdown for the virus cases daily growth rate to slow, and when the peak in the growth rate was reached, we saw a low in the markets. I am anticipating the same in the rest of the world.
DAX 30 Technical outlook
From a technical point of view, the DAX 30 found support from the February 2016 low of 8680. The sharp decline from the 2020 high suggests to me that the markets have probably priced in the worst scenario for the world economy, however, it is important to keep an eye on the coronavirus cases as explained above.
Just below the February low we find the October 2014 low, which is the level I am watching. If the DAX remains above the October 2014 low, I suspect that we could see the longer-term upward trend remain in play. If the October low does not hold, then the DAX 30 could reach the April 2013 low at 7383.
Article written by Alejandro Zambrano, Chief Market Strategist at ATFX UK.
