DAX Things are going from bad to worse for European stocks

September is here. The already high volatility is about to kick up a notch or two as traders and investors return from summer vacation. Unfortunately, investors are more likely to suffer as Europe’s energy crisis deepens. We could see a new lows for the year for the likes of the German DAX ahead of next week’s ECB meeting after August turned out to be another bad month for risk assets.

The main global indices fell sharply last month. In Europe, the Europe Stoxx 50 index fell around 6% over the month, while the DAX lost 5.4% and the FTSE deteriorated 2.4%. In the United States, the S&P 500 and the Dow Jones lost more than 4% while the Russell slipped 2.4% over the month. Bond prices fell further and yields rose sharply as central banks became more hawkish as more evidence emerged of a slowing global economy. The US dollar gained a further 2.7%, leading gold down 3% in August as the metal extended its losing streak to 5 months. A break below $1700 seems very likely.

Investor bets on more aggressive rate hikes and hawkish comments from the central bank should keep the US dollar and bond yields underpinned, and zero-yielding and low-yielding assets undermined for some time to come. In August, we saw the Fed become even more aggressive in its hawkish tone as it attempted to rein in inflation with big rate hikes. Bets that the Fed would carry out a three-fold rate hike in September rose sharply after Fed Chairman Jerome Powell spoke at the Jackson Hole Symposium. Belligerent rhetoric from the ECB has also increased as Europe grapples with an energy crisis and record inflation. In August, Eurozone inflation hit a record high of 9.1% and Germany saw inflation hit its highest level in over 40 years. Several ECB policymakers have called on the central bank to accelerate the pace of its rate hikes from an initial 50 basis point hike in July to a three-quarter point increase at next week’s meeting.

Adding additional fuel to the fire was concerns about the health of the Chinese economy. The latest sign of weakness in the world’s second-largest economy was highlighted by manufacturing PMI data showing an unexpected contraction in August as the country’s zero-COVID policy and energy issues hit the sector.

As China is one of the main export destinations for many German manufacturers, the The DAX index will struggle to find much love in the current market environment. The German index has broken several support levels and now looks set to clear this year’s lows at 12431 (March) and 12385 (July). There will likely be a cluster of sell stops resting below these levels from trapped long positions. Thus, I expect to see a sharp decline, perhaps as early as later in the day.