Europe's largest economy is officially on the brink of a recession. Business confidence in Germany plunged to its lowest level in seven years. Manufacturing output has suffered its biggest annual decline in nine years. And now the slowdown has now infected Germany's service sector as companies report a rapid deterioration in business conditions. Even the country's central bank, the Bundesbank, has warned the country is likely heading for a recession, making this a very interesting time to trade the DAX 30 stock index.
In this article, we discuss the economic data signalling a recession for Germany, how investors have started to react to it and the possible trading opportunities around - what could be - a historic point for the country. Let's get started!
Is Germany heading into a recession? The signs…
A warning from the Bundesbank that the country is heading into a recession is a good sign as any for investors. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months". The decline in economic activity is measured by the following five indicators: real gross domestic product (GDP), real income, employment, industrial production and retail sales.
The German central bank has already confirmed the country's huge downturn in orders for cars and industrial equipment in the second quarter and is predicting this is likely to continue in the third quarter. The significant drop in exports has been blamed on Brexit and the trade war between the US and China.
Many economists and analysts take the definition of a recession one step further, by defining it as an economy having two negative quarters, consecutively, in GDP growth. The head of the Munich-based IFO Institute for Economic Research confirms this is happening in Germany by forecasting that Germany's GDP will shrink this quarter, after having contracted by 0.1% in the previous three months. This could mean the first recession for Germany since 2013.
Learn how to prepare for an economic recession in this article.
So, how have investors reacted to the news so far? Let's take a look at Germany's DAX 30 stock market index.
How to Trade the DAX 30 Index (DAX 30)
The DAX 30 stock market index tracks the price performance of the 30 largest German companies in terms of order book volume and market capitalisation from the Xetra trading venue in the Frankfurt Stock Exchange. These companies include the likes of Adidas, BMW, Volkswagen and others.
The long-term price chart of the DAX 30 index is shown below:
Source: Admiral Markets MetaTrader 5, DAX 30, Monthly - Data range: from June 1, 2005, to Aug 27, 2019, accessed on Aug 27, 2019, at 9:15 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the price chart above of the DAX 30 index, it is clear to see the long-term ascending trend line which has acted as a support level since 2008. The most recent bounce off the trendline was in January 2019. However, the move higher has been contained by the smaller descending resistance line from the high of 2017.
Many traders will be looking for a possible breakout of these support and resistance lines before initiating any longer-term positions. While the recessionary fears have limited the amount of buying of German assets, there is still the possibility the central bank could embark upon a stimulus programme to revive the economy. This could lead to investors buying German assets once again to position themselves as early as possible in an economic growth story.
Therefore, traders are left to look at the lower timeframes for more clues on identifying a directional bias. Let's take a look at the weekly chart:
Source: Admiral Markets MetaTrader 5, DAX 30, Weekly - Data range: from Jan 17, 2016, to Aug 27, 2019, accessed on Aug 27, 2019, at 9:21 pm BST. - Please note: Past performance is not a reliable indicator of future results.
The weekly chart above shows the failed break to the upside, as the market briefly broke through the descending resistance line but not enough buyers followed through, causing the market to drop back down below it. This now opens the doorway for the DAX 30 index to fall back to the next major support line which is the blue horizontal line.
A move back down to this area would result in a more than 10% drop from where the index opened at the beginning of August. It's certainly a very interesting time to be involved in the DAX 30 index and with Admiral Markets you can trade 24 hours a day with zero commissions on it, so how will you be trading it?
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