DAX lower on concerns over China and Greece; index testing key technical level

European stocks are lower as the new trading week and month gets underway. At midday in London, the UK’s FTSE and Germany’s DAX indices are both lower by around half a per cent. Sentiment has taken a knock from the weaker PMI figures out of China and the Eurozone. On top of this, investors are once again growing worried about the political situation in Greece and what it might mean to its future membership in the single currency bloc. This is clearly highlighted by the fact that the yield on the benchmark 10-year government debt has risen back above the 8% mark. There are worries that Greece will be forced to hold elections in February and that this will result in a victory for the anti-austerity Syriza party. Investors are also probably playing it safe after last week’s sharp rally and ahead of key fundamental events this week, not least the ECB rate decision on Thursday and of course Friday’s US jobs report. But with the major central banks such as the BoJ still intervening in the markets, traders are finding it difficult to express their bearish views as profoundly as they would have otherwise liked. Hence, the losses have so far been limited.

PMI data

At the weekend, the official Chinese manufacturing PMI showed a reading of 50.8 in October. This was down from 51.1 in September and also weaker than median estimates of 51.2. On top of this, the key new orders sub index dropped, although at 51.6 it still remains above the expansion threshold of 50. Meanwhile, the non-manufacturing Chinese PMI was released overnight. This showed that activity in the sector dropped to its lowest level in nine months in October, coming in at 53.8 from 54.0 in September. The European PMIs were mixed but overall a touch weaker than expected. The Eurozone final PMI was 50.6, down from an initial estimate of 50.7 as French PMI was revised higher and Germany lower. Separately, Spain’s manufacturing PMI came in at 52.6 vs. 52.4 expected , while in Italy the PMI was 49.0 compared to expectations and previous reading of 50.7. But in the UK, the manufacturing sector expanded more sharply than anticipated, with the PMI climbing to 53.2 from 51.1 in September. Even this however failed to have a positive impact on the FTSE.

Technical outlook

As well as the abovementioned fundamental concerns, some of the indices – such as Germany’s DAX – are also coming under technical pressure. As can be seen from the daily chart, below, the DAX has run into an area of resistance around 9300/40. As well as the 50-day moving average this is where we also have the 61.8% Fibonacci extension level of the last downswing. So, there is a possibility that the index could head sharply lower from this key technical area with the next level of support coming all the way down at 9160. If the index also breaks the 9160 support then things could get a little messy towards the second half of the week. Alternatively, a potential break above today’s high (9345) would be a bullish outcome which could pave the way for a move towards the 200-day average at 9510 or the 78.6% Fibonacci level at 9560.