Here’s why German stocks are plummeting

The DAX index declined for the second straight day as market fear shifted from interest rates to impacts of inflation on corporate earnings. The index declined by more than 2% following the Wall Street carnage that saw the Dow Jones crash by more than 1,200 points. It is trading at €13,725, which was the lowest level since last week. 

Margin pressures

The DAX index has been in a strong bearish trend this year. This trend has been driven by the rising risks in Europe. First, the crisis in Ukraine and the sanctions of Russia have a direct impact on the German economy. For example, constituent companies like BASF have strong ties to the Russian market.

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Second, there are lingering fears that the European Central Bank (ECB) will start hiking interest rates. Last week, the head of the German Central Bank recommended that the bank should start hiking interest rates in July. And this week, the Dutch central bank governor made the case of a 0.50% rate hike.

In most cases, German stocks tend to underperform when the ECB is hawkish. Further, since many DAX index constituents are global in nature, meaning that they are affected by other hawkish central banks like the Fed and Bank of England.

In a statement on Tuesday, Fed’s Jerome Powell warned that the bank would continue hiking interest rates in the coming months. He also warned that there would be some pain when this happens. 

Third, and most importantly, there are concerns about inflation’s impacts on corporate profits. These fears exarcibated this week after the weak guidance by Walmart and Target, two of the biggest retailers in the US. With these firms warning of inflation, analysts believe that other companies are suffering as well.

The worst-performers in the DAX  index were Deutsche Boerse, SAP, Deutsche Post, BASF, and Adidas. These stocks declined by more than 3%. The only firms in the green were Zalando, RWE, and Delivery Hero. 

DAX index forecast

Turning to the daily chart, we see that the DAX index has declined sharply in the past few days. It has managed to move below the upper side of the descending channel pattern. 

Also, the index crossed the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved slightly below the neutral point at 50. Therefore, the outlook of the German DAX is lower, with the next key support level being at €13,378.

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