EU stalemate leaves DAX vulnerable to a pullback

The month of July has so far played out as anticipated. Key global equity markets were led higher by a rally in U.S. equities post the 4th July long weekend. While the improvement in risk sentiment sent the U.S. dollar index, the DXY tumbling almost 1.50% lower.

Charts (2)

From here things don’t appear to be so clear cut. One near term catalyst, the European Union summit held in Brussels this past weekend ended in a stalemate as the “frugal five” (Austria, Sweden, Denmark, Finland, and the Netherlands) dug their heels in over the size and shape of the coronavirus recovery fund.  

Specifically, the “frugal five” want to reduce the proportion of the EUR 750bn fund that will be grants rather than loans. They also want tighter conditions and controls in place to govern how the money is spent. Not an unreasonable request from this writer's point of view.

While no agreement was expected from the summit, the extent of the divide, creates some modest pullback risks in the EURUSD, EURCHF as well as the DAX, the German stock index we wrote a bullish article on in early July here.

“A break/daily close above the downtrend resistance at 12400 would be a positive development and the trigger to consider opening longs in the DAX. The positive bias would then be magnified on a break above the 12591 high which would then open up a retest and break of the 12867 high.”

This call worked out well as the DAX made fresh cycle highs last week. However, in light of the macro reasons outlined above and because of the Elliott Wave count below that indicates that the DAX is in the terminal stages of a 5-wave advance, we now move to a more cautious stance.

While we don’t want to pre-empt the end of what has been a robust recovery, we would suggest using a break and daily close below uptrend support at 12700ish as an initial sign the DAX has commenced a pullback towards the mid-June 11589 low.

EU stalemate leaves DAX vulnerable to a pullback

Source Tradingview. The figures stated areas of the 20th of July 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.

Important Notice:

Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.