Chart Advisor: Evaluating DAX Momentum

By Manuel Tellechea, CMT

1/ DAX Extends its Momentum 

2/   $IBEX Recovers 13,000 Points

3/ Strong Relative Strength3

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1/

DAX Extends its Momentum Amid Political Shifts and Economic Optimism

The German DAX index showed a positive performance in today’s session, registering an increase of 0.6%. This upward movement is attributed to the victory of the conservative CDU/CSU bloc in the federal elections, led by Friedrich Merz, which generated expectations of political stability and continuity in economic policies. Additionally, the far-right Alternative for Germany (AfD) achieved its best result ever, which could influence future parliamentary decisions. 

Courtesy of StockCharts.com

Past performance is not indicative of future results

Since the end of 2024, the DAX has maintained favorable momentum compared to the U.S. market, and it seems that this trend could extend a bit further.  

Courtesy of StockCharts.com

Past performance is not indicative of future results

The new government is expected to implement measures such as tax cuts and increased investment in infrastructure and defense, which could further strengthen the DAX’s performance. Moreover, the continuation of accommodative monetary policies by the European Central Bank could provide a favorable environment for corporate growth.   

2/

$IBEX Recovers 13,000 Points

The IBEX 35 closed the session with a 0.47% increase, consolidating its recovery of the 13,000-point level, a key threshold that had been reached in previous days but still showed some volatility. The index had not reached this level since 2008. 

Courtesy of StockCharts.com

Past performance is not indicative of future results

The key drivers behind this movement in the IBEX were a strong boost from the energy and banking sectors. Banks, in particular, had a positive session, fueled by expectations of a possible monetary policy easing by the European Central Bank (ECB). 

Since late 2024, the IBEX 35 has maintained a sustained bullish trend, registering a 28.2% increase over the past five years, solidifying its position as one of the best-performing European indices during this period. 

The index continues to show favorable momentum compared to the U.S. market, with the potential to extend its upward trend in the short term if key sectors continue to drive growth. However, market performance will depend on external factors, such as inflation trends in the Eurozone and the ECB’s interest rate decisions

3/

Still Risk Appetite  

The HYG/LQD ratio (High Yield vs. Investment Grade) provides insight into whether investors are favoring risk or credit quality. 

If the ratio rises, the spread between High Yield and Investment Grade bonds narrows, meaning that High Yield bonds are outperforming Investment Grade bonds. Investors are increasing their exposure to High Yield bonds, which suggests a greater risk appetite in the market. This could be driven by expectations that the Central Bank will lower interest rates in the coming months, making it easier for lower-credit-quality companies to refinance their debt. It may also reflect market confidence that less solvent companies will be able to meet their debt obligations. Additionally, this trend could be influenced by low inflation expectations and anticipated rate cuts by the Federal Reserve or the ECB. 

Conversely, if the HYG/LQD ratio declines, the spread between High Yield and Investment Grade widens. This signals risk aversion and a potential rotation toward safer assets. Such movements typically occur during periods of economic uncertainty, recession expectations, or heightened market volatility. Investors seek protection in bonds issued by financially stronger companies, which have a lower default risk. It can also reflect concerns over higher interest rates, which have a stronger impact on heavily indebted companies (common in the High Yield sector). 

Courtesy of StockCharts.com

Past performance is not indicative of future results

The current ratio indicates that, despite a recent pullback, investors continue to favor exposure to High Yield bonds, suggesting that risk appetite remains strong in the market. This could be due to expectations that the Central Bank will lower rates in the coming months, easing debt refinancing conditions for lower-credit-quality companies. 

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Originally posted 25 February 2025