DAX index analysis: Should you buy the German index now?

The DAX index is hovering near its all-time high even as concerns about monetary policy remain. The index, which tracks the biggest publicly-traded companies in Germany, is trading at €15,787, which is a few points below its all-time high of €16,300. It has jumped by over 85% from its lowest level in 2020.

Germany bond sell-off

The DAX index is made up of the 40 biggest companies in Germany. Some of the prominent firms in the index are Daimler, BMW, Volkswagen, Deutsche Bank, and SAP. 

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The index has held relatively steady even as a bond market sell-off goes on in Germany. On Wednesday, the yield of the 10-year government bonds managed to cross the 0% for the first time in years. Rising bond yields usually happen when there is a bond sell-off since the two are usually inversely correlated.

While the yield of the 10-year bund has retreated, its trend is still bullish. This is a signal that investors believe that the European Central Bank (ECB) will start hiking rates. Most analysts expect that the bank will hike interest rates in September this year. Previously, they were expecting that the bank will start its hiking cycle in October.

This view is suggested by the latest economic data from Europe. For example, on Thursday, data by Eurostat revealed that the bloc’s inflation rose to 5% in December. That was the highest level it has been in years.

In theory, the DAX index tends to underperform in a period of higher interest rates by the Federal Reserve and the ECB. That’s because most constituent companies are in the non-financial sector.

Still, there are two main catalysts for the DAX 40 index. First, at a time when rates are rising, investors will find the value provided by the index to be significant. Second, the index is relatively cheaper than its American counterparts. For example, while the S&P 500 has a PE ratio of more than 25, it has a multiple of 15. Most importantly, analysts expect that many companies in the index will return to growth this year.

DAX index forecast

The daily chart shows that the DAX has moved slightly below its all-time high of €16,300. The index has formed what looks like a double-top pattern and is along the 25-day moving average. The MACD has also formed a small bearish crossover. 

Therefore, while the overall outlook of the index is bullish, this chart shows that it will retreat first and then resume the bullish trend.

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