Favourable market conditions, relief on the back of a reduced threat of Catalonian secession from Spain and record low-interest rates and QE combined have all helped to lift the German DAX to a new record level of 13,000 today. Although the ECB has talked up the prospects of tapering its huge bond-buying programme, interest rates are likely to remain at record low levels for some time yet. Indeed, if the U.S. is anything to go by, reducing QE alone would probably not be a good enough reason for the rally to stall. Improving economic conditions and low-interest rates across the globe should help to support company earnings, which should keep European stock markets underpinned in the long-term.
In the short-term outlook, the DAX’s rally could accelerate in the event the euro eases back from current levels, as this would further boost the appeal of German exporters. So far, though, the euro/U.S. dollar (EUR/USD) currency pair has managed to cling onto 1.18s but if tomorrow’s release of U.S. inflation and retail sales data help to underpin the dollar then the EUR/USD could fall back and lift the DAX to new highs.
First thing is first though, the DAX needs to hold above the prior record high level of 12950. If it manages to do that then the path of least resistance would remain to the upside, with the next long-term objective being at 13245, which corresponds to the 127.2% Fibonacci extension level of the prior downswing that took place in June. Shorter-term Fibonacci-based targets are also shown on the chart. However, if the DAX breaks down and goes below 12900 first then we may see a deep pullback, possibly towards 12700, before the next up leg potentially starts.