Positive Momentum to Start the Year

European equities start the year on a strong positive note following gains in Asia overnight. During the Christmas and New Year’s holiday period it was cryptocurrencies that were leading the way higher, with Bitcoin up more than 48% since the 24th of December, peaking at an all-time high of 34,793 in yesterday’s session.

A suave resolution to Brexit is also a positive factor in equity markets as we start the new year given that it avoids further uncertainty. Sticking to the political theme, last week we saw Donald Trump sign off on a $900 billion stimulus package which he had previously suggested he would veto, pushing US stock indices to finish the week at new all-time highs.

Germany to Extend National Lockdown

The coronavirus pandemic continues to be a threat worldwide as new strains of the virus were discovered just before the Christmas holiday. Despite vaccine rollout picking up pace in most developed countries, the rate of infections is still very worrying, causing many governments to take tougher actions until a sizeable drop in daily infections and deaths can be seen.

Germany is one of the worst-hit countries in Europe, with more than 1,000 daily deaths in the last few days of the year. The seven-day infection rate stands at 140 per 100,000 people, which is well over the target of 50 that politicians had established for softer restrictions. It is expected for tougher restrictions currently in place – including the closure of all bars and restaurants – to be extended until the end of the month, or until the 7-day infection rate falls below 25.

DAX 30 Daily chart

(Click on image to enlarge)

The all-time high seen last Tuesday just above 13,900 was momentarily broken this morning as the DAX shot up more than 1.2% at the European open, peaking at 13,916, before retreating back to 13,770 as the session gets underway. The path of least resistance continues to be higher as buyer momentum builds aiming for the 14,000 mark, but significant risks remain, both fundamentally and technically, which means a pullback may be likely.

If so, 13,600 will be the first line of defense for buyers, before sellers aim to break the 13,400 support area, from which point a further pullback is likely to see a fall towards 13,000 where strong buyer support remains. The Euro’s continued strength also undermines the DAX’s bullish potential, as investors will be worried about German exports being too expensive, so we can expect the German index to be defensive if the euro continues rising.