Could The DAX 30 Index Crash 30% On Trump’s Auto-Tariffs?
It was only a few weeks ago that US president Donald Trump received a classified 'Section 232' national security report submitted by Commerce Secretary Wilbur Ross. Having taken 270 days to create, the report - the contents of which have not yet been made public - has American allies and business entities extremely worried.
Even though Trump has 90 days to decide whether or not to act upon the recommendations, there are fears that the report contains tariffs of up to 25% on millions of imported cars and parts. These fears have been felt the strongest in Germany, and rightly so. Last year, the United States bought a whopping USD 31 billion worth of German vehicles and car parts.
Auto tariffs could wipe out much of Germany's economic growth and even though they are yet to be put in place, it has already affected the DAX 30 stock market index. In this article we explore the fundamental and technical picture of the DAX 30 and whether the index could crash 30% lower this year.
The Biggest Negative Influences On The Dax 30 This Year
As the German economy relies heavily on export manufacturing, its stock market is heavily influenced by global economics. And, with the world currently facing some of the most challenging economic events since the 2008 financial recession, there have been some major influences on the DAX 30 index already this year:
- Earlier this month, Germany's top economic experts slashed their growth forecast for 2019 from 1.5% to just 0.8%, confirming a significant slowdown in Europe's largest economy. The markets reacted accordingly, selling off from the day of this announcement.
- China is Germany's third largest customer, yet export orders have dropped for that market more than any other in the last six years. While the Asian powerhouse has enjoyed years of aggressive growth and expansion, there have been hints of problems in the last year. This is largely due to a slowdown in domestic spending as well as the current trade war with the United States.
- Brexit continues to weigh on Europe. While the UK has borne the brunt of its decision to leave the EU, investors have remained cautious with regards to Europe as a whole. The uncertainty surrounding the UK's departure from the EU and the impact this will have remains highly uncertain - especially with European elections later this year.
- Trump's war on trade. The United States is Germany's largest trading partner. However, Trump has indicated he could impose tariffs of 25% on German cars and parts imported into the US. This would be a huge blow to Germany's economy, and many investors have started to run for the exits. However, as Germany also place tariffs on US car imports there is a possibility of achieving 'middle ground' between them.
Analysing the price chart of the DAX 30 index is perhaps the most important type of analysis we can do, as it tells us what traders and investors think about the fundamental news, and most importantly, how they are acting on it. Let's take a look:
Could The Dax 30 Index Drop 30%?
Below is a weekly chart of the DAX 30 Index CFD, which tracks the underlying DAX 30 stock market index:
Source: Admiral Markets MT5 Supreme Edition, DAX 30, Weekly - Data range: from January 22, 2012, to March 26, 2019, accessed on March 26, 2019, at 12:40pm GMT. - Please note: Past performance is not a reliable indicator of future results.
It is clear to see the recent sell-off in the index in 2018 due to some of the fears already mentioned above. The DAX 30 has since recovered some of its fall, but now trades at an important level. The red horizontal line indicates a level of resistance which traders will typically use to initiate short positions, or come out of long positions.
The red horizontal line also intersects with the 50 weekly period moving average. Both of these have already acted as a resistance as sellers have stepped in and pushed the market lower. If the sellers remain in control and push the market down to the historical lows of 2013 it would represent a near 30% decline as highlighted by the yellow box in the monthly chart below:
Source: Admiral Markets MT5 Supreme Edition, DAX 30, Monthly - Data range: from June 1, 2005, to March 26, 2019, accessed on March 26, 2019, at 12:52 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
What is most beneficial when trading around support and resistance levels, is the fact they offer levels for buyers and sellers to lean against. In this instance, sellers have stepped in off the resistance level. If Trump does indeed slap tariffs on German automakers, or the global economy continues in its slow down, lower prices for the DAX 30 index are likely.
However, trading and investing is not just about buying or selling. It is also about understanding the possible obstacles that lie ahead. For example, if Trump does not decide to commit to the tariffs, or if global economic growth starts to gain momentum again, then higher prices could be likely for the DAX 30 index.
If buyers can break above the red horizontal resistance line in the chart above, then they have overcome the first obstacle and more buyers may decide to step into the market. This is why the current price level of the DAX 30 is being widely watched by traders all over the world.
Conclusion
The DAX 30 index is at an interesting juncture in which buyers or sellers could retain control for an extended period of time. Typically, when the fundamental picture and price action analysis both result in the same outlook, big trends are likely to develop. Are you prepared for it?
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