Banking Sector Merger Talks Push DAX30 Higher – Long Positions Favored

European stocks rose on Thursday morning, boosted by advances in the financial and mining sectors. In Frankfurt, the DAX 30 index opened the first trading day of the new month with a gap up, as Chinese manufacturing data released earlier pointed to an expansion in the world’s second largest economy, thus refueling investor confidence after it had been sapped by falling crude prices.

According to the China Federation of Logistics and Purchasing, the country’s official manufacturing purchasing managers index for August unexpectedly rose last month to the highest in almost two years, after dropping below the 50 threshold in July. The Manufacturing PMI rose to 50.4 last month while Non-manufacturing PMI stood at 53.5, remaining above 50 – which indicates improving conditions.

Bank shares are the best performers currently, with Deutsche Bank adding 3.75% and Commerzbank surging 4.92%. The two institutions – among Germany’s biggest lenders are still supported by speculation of a potential merger between the two, even though the plan has been postponed to allow both banks to focus on their own internal reorganization before proceeding with a merger.

The two top German banks coming together is expected to create a bigger European lender that would be able to cut costs and compete more effectively, against the backdrop of a fall in the revenues and profitability of banks. Banks worldwide have been affected  significantly due to low interest rates and high competition. According to the European Central Bank, Germany has the least consolidated banking sector in the Eurozone. The five biggest banks in Germany only make up one-third of market share in 2014. A consolidation within the banking sector could help improve efficiency and performance in the financial services sector as well as set the stage for further consolidation within the sector, which could help improve balance sheets as well as profitability within the sector.

Out of 30 stocks on the list of the index, only 10 companies’ shares were trading lower including German personal-care company Beiersdorf and Europe’s largest sportswear manufacturer Adidas.

DAX

Fig: DAX D1 Technical Chart

The DAX is trading comfortably above the 50.0% Fibonacci retracement level after breaking through the resistance created by the downward sloping trend line in early August. The index has been moving in an ascending trading range and is heading towards the upper boundary of the range. The market sentiment is strongly bullish, but the market has not yet entered into overbought territory. Further advances are expected. The  market could attempt a retest of the eight-month high at 10805.50 created on August 15.

Trade suggestion

Buy Stop at 10654.25, Stop loss at 10541.00, Take profit at 10805.50

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