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Stock markets managed to bounce back today, managing to hold onto the earlier gains at the time of writing late in the day in Europe. However, with sentiment remaining fragile, I wouldn’t bet against fresh falls in the days ahead. Today, bond yields retreated, and crude oil sold off nearly 5% following news of a large build in stockpiles of US gasoline, which raised serious concerns over demand, but lessened concerns over inflation. Despite the recovery, more losses could be on the way for European markets in the days ahead, and I am doubtful that the small recovery in US indices will last long.

What is driving markets?

Global equity markets have become strongly sensitive to economic data. Investors are trying to figure out when will the major central banks start cutting interest rates again. Recently, they pushed out those expectations well into the second half of 2024 insofar as the Fed is concerned, owing to signs of resilience in US economy and stickiness in inflation data. The ECB and BoE have also signalled willingness to hold onto a contractionary policy for longer. Central banks want to keep rates high for a sufficiently long time until they are confident inflation is heading back down to the target.

This is why every piece of data is causing so much volatility. Earlier, it was a weaker ADP print which triggered a rally in bond markets and thus equity indices. But as we have seen so many times in the past, the bullish momentum could fade again deep into the US session, so watch out for any bearish signs to emerge later. A stronger showing from the ISM services PMI and factory orders could weigh on the bond market recovery, which in turn could lift the dollar and undermine global indices again.

So, any lingering expectations of a final rate hike in 2023 have been more or less satisfied. But the key question remains as to how long interest rates will remain high. The ADP data showed companies hired the fewest number of people since the start of 2021, last month. This suggests that the labour market is finally cooling down, and this will help bring inflation down in the months ahead. However, ADP data has been rather poor of late and has been subject to wild revisions. In fact, even the official jobs data has also been continually revised. Investors appear reluctant to trust these numbers – and rightly so.

Later in the session, the focus turned to the ISM services PMI, which came in a touch better than expected at an impressive 53.6 reading. What’s more US factory orders rose more than expected, up 1.2% vs. +0.2% eyed.

All told, today’s US data will do little to ease concerns about interest rates remaining high for longer. This should keep bond yields supported on the dips.

So, it remains to be seen whether the stock market recovery has any legs. I, for one, am certainly doubtful. 10-year Treasury yields, although weaker today, had jumped some 30 basis points or so earlier this week. Such strong momentum usually does not reverse very quickly.

DAX technical analysis

Among the major indices to watch is the DAX, which is a favorite for our client base. The German benchmark index has bounced back from the support trend of its bearish channel. It is now testing key resistance around 15150ish, where it had previously bounced from. Once support, this zone could turn into resistance, leading to fresh selling pressure.

If the index does go lower from here, we think that today’s low at 14945 would be the first key target for the bears, below which there is little further support seen until 14700 area, where prior major resistance meets the 38.2% Fibonacci retracement level.

If, on the other hand, the bulls manage to push the index higher from here, then we will await fresh price action before deciding whether the bearish trend is over or not. It is not uncommon for the market to go against the prevailing trend for multiple days, before the underlying trend resumes.

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