German government and Fed deliver stimulus, DAX30 bulls still in trouble

March 16, 2020 12:00

 Economic Events Calendar

Source: Economic Events Calendar March 16 – 20, 2020 - Admiral Markets' Forex Calendar

DAX30 CFD

The last week of trading started with a "Black Monday." In addition to fears and panic around the Coronavirus, global financial markets were hit by another risk-off wave after oil prices collapsed due to Russia resisting Saudi Arabia's push for deeper production cuts at the OPEC meeting in Vienna.

With oil prices dropping more than 25%, further losses to be expected, and many US oil companies from the fracking industry threatened by a potential bankruptcy (which could then mean a significant negative impact on the banking sector), global equity markets dropped massively with the DAX30 CFD seeing temporary losses of more than 10%.

That said, the monetary stimulus from the ECB last Thursday didn't come as a big surprise, even though the bullish impact was clearly limited, as the DAX30 CFD and market participants were more concerned about US president Trump's (surprising) travel ban from Europe, and the DAX dropped significantly below 10,000 as a result.

On Friday, the German government made a first step towards fiscal stimulus by announcing billions of Euro in support to cushion the economy, and plans to set up a safety net for companies and no limit on credit programs for companies.

As a result, the DAX stabilised, but failed to regain 10,000 points into the weekly close, in fact, gave back all of its gain in the hours later – a clear sign of further weakness to come in our opinion. The DAX30 CFD likewise rallied sharply, gaining as much as 9% on the day, but gave back all of its gains in the hours later that day - a very weak sign.

On Sunday evening, the Fed took a massive step, too, cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.

Unfortunately, these extreme measures failed to lift the market, too, the DAX opened on Monday morning below 9,000 points.

As it seems, similar measures from other governments, especially European ones, are probably needed and also expected and thus Short positions should be taken very cautiously, even though the overall advantage stays on the Short-side.

That said, the mode in the DAX30 CFD stays Short, with the drop below 10,000 points in the days to come being a serious option and the region around 8,700/800 points being a first potential target.

A short-term bounce and recapturing 10,300 points would short-term loosen the bearish grip a little, activating 11,450/500 points as a potential target.

MT5-SE Add-on DAX30 CFD Daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between November 28, 2018, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.

Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!

US Dollar

After the latest wave of risk-off, induced by the collapse in oil prices last week, US Treasury yields saw a massive drop and astounding volatility over the last days, too.

After 10-year US yields dropped temporarily below 0.3%, yields bounced back over the next days, nearly tripled by then closing the week around 0.9%. As a result, the USD Index Future dropped significantly below 96.00 points after seeing a sharp reversal, still interrupting the bullish mode to neutral now.

This seems especially true after, on Sunday evening, the Fed took another massive step by cutting rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.

The impact on Equity markets was short-lived since the emergency cut was kind of a drop in the bucket and didn't calm down financial markets at all. So, we expect further monetary stimulus from the Fed, additional fiscal stimulus from the US government being announced shortly.

With that in mind, we expect the US dollar to stay under pressure and if the situation around the Coronavirus not only gets worse in Europe with Germany potentially being hit similar hard as Italy, but the virus to spread in the US with a very negative impact not just on the daily life of US citizens, but also the US economy, US yields should stay under pressure and thus the selling of the US dollar should continue.

Technically that means that we see room on the downside in the USD Index Future down to minimum 93.00 points:

Weekly Nearest OHLC Chart

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to March 2020). Accessed: 13 March 2020 at 10:00 PM GMT

Don't forget to register for the weekly "Trading Spotlight" webinar with presenters including Jens Klatt, every Monday, Wednesday and Friday at 2pm London time! It's your opportunity to follow Jens and others as they explore the weekly market outlook in detail, so don't miss out!

Euro

Last Thursday, the ECB disappointed: the ECB did not follow the Fed, BoC, and BoE by cutting rates, keeping rates unchanged at 0%.

Still, the European Central Bank increased their current QE with a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.

After this, the Euro performed bearish, potentially driven by an overall uncertain outlook for the European economy in general, also triggered by the announced travel ban from President Trump last week on Wednesday evening.

The tide in the Euro could turn again if the fear that the coronavirus outbreak and pandemic among European countries will spark an economic downturn in Europe similar to the 2008 financial crash would be countered by massive fiscal stimulus.

In fact, last Friday the German government made a first step towards fiscal stimulus, delivered billions of Euro in support to cushion the economy, plans to set up a safety net for companies and no limit on credit programs for companies.

The Euro didn't respond bullish at all, at least not against the US dollar which saw heavier demand by stabilising and rising yields into the weekly close.

Still, longer-term and with us expecting the yield differential between US and European bonds to continue to converge, a push above 1.1500 and EURUSD probably taking on bullish momentum up to 1.2000, seems a serious option:

MT5-SE Add-on EUR/USD Daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between January 14, 2019, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.

JPY

Given the massive volatility in US yields and knowing about the high positive correlation between US yields and the USD/JPY, the high volatility in the currency pair does not come as a big surprise.

In fact, we expect volatility to stay very high, seeing US yields under further pressure and thus favour the Short-side in USD/JPY.

This seems especially true after the Fed on Sunday evening took another massive step, cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.

The impact on Equity markets was short-lived since the emergency cut was kind of a drop in the bucket and didn't calm down financial markets at all. So, we expect to the further delivered monetary stimulus from the Fed, additional fiscal stimulus from the US government being announced shortly.

In combination, this seems to be a solid "cocktail" for a serious push as low as 100.00 and probably even lower.

Still, we get more and more cautious in regards to overly optimistic USDJPY Short engagements, reason: the Bank of Japan will probably very aggressive in regards to a strengthening JPY given recent very bad economic data in regards to the Japanese GDP growth in Q4 and given the damaging impact on exports a too strong JPY might have.

Probably we already saw a massive BoJ intervention over the last week, given the massive bounce against 101.00. That said, traders should be cautious and expect nearly any time verbal intervention from the BoJ, openly expressing concerns over instability in Japanese financial sector and economy, warning between the lines that an intervention from the BoJ might be on its way and keeping USDJPY solidly above 100.00.

MT5-SE Add-on USD/JPY Daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between January 4, 2019, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT

In 2015, the value of the USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.

Gold

While the picture in Gold, given the recent developments around the Coronavirus, collapse in oil prices and the massive monetary stimulus from the Fed already on Sunday, stays mid- to long-term clearly bullish and a run above 2,000 USD seems only a question of time, short-term the picture stays way more complex.

In fact, last week of trading Gold bulls failed, again, to sustainably push the precious metal above 1,700 USD and gain further bullish momentum despite volatility staying high and equities staying pressure.

While we could certainly argue that this is a result out of the sharper bounce in US yields after its short-term drop below 0.3%, this seems only half the truth.

In fact, recent data from the Commitment of Traders Report underlines the point that the drop in Equities resulted in margin calls which led larger market participants to reduce their Gold Long exposure to meet these.

In addition to that, traders should also recall the drop in Gold during the financial crisis in 2008 where a deflationary shock resulting out of the credit crunch back then, had a negative impact on the yellow metal with dropping and taking on momentum from 2010 onwards.

This time, this could be similar, meaning that despite elevated volatility, dropping US yields driven by risk-off tendencies, Gold fails to profit and sees a drop, going hand in hand with a dropping USD and dropping Equity prices.

Still, mid- to long-term and also technically short-term, the mode in Gold stays bullish as long as we trade above the daily trend support which can still be found around 1,535/545 USD:

MT5-SE Add-on Gold Daily chart

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between December 12, 2018, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.

Discover the world's #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!

Download MetaTrader 5 and begin trading today!

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

  1. This is a marketing communication. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
  2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
  3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
  4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
  5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
  6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
  7. Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
  8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
  9. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.
Avatar-Admirals
Admirals
An all-in-one solution for spending, investing, and managing your money

More than a broker, Admirals is a financial hub, offering a wide range of financial products and services. We make it possible to approach personal finance through an all-in-one solution for investing, spending, and managing money.