DAX
The DAX index was little changed today as the market reacted to the developing story about Wirecard and Lufthansa.
Shares of Wirecard dropped by more than 25% yesterday after a scathing report by KPMG. The shares of the company, which replaced Commerzbank, in the DAX index dropped by more than 4% today.
The Wirecard crisis started after the Financial Times started focusing on the company. In its original report, the paper said that Wirecard was using foreign companies with questionable records. The company was also accused of inflating sales and profits. By so doing, the company became one of the best-performing companies in the DAX index.
In reaction to the allegations, the board of management requested for a special audit of the company by KPMG. In its report, the audit firm said that the company could not authenticate some of its revenue from its partners. The firm said:
“KPMG was not sufficiently able to forensically trace the existence of the transaction volumes in the 2016 to 2018 investigation period,”
Following the report, Chris Horn, the founder of Children’s fund asked the board to replace the company’s CEO, Markus Braun. Horn is one of the best-known investors in Europe and is also one of the investors in the company.
This announcement means that the company could face significant challenges in the near term. It also suggests that German regulators could start their own investigations.
In another big news, Lufthansa Airlines is said to consider filing for bankruptcy as the problems in the airline industry continues. This decision, which risks more than 10,000 jobs, is intended to allow the firm to renegotiate its large debt.
Media reports have said that Germany is considering offering a large bailout on the company. Still, the government is divided about how this bailout would happen.
Some members have said that any bailout would lead to job guarantees while others have suggested that the bailout would lead to the government sitting on the board. Other government officials have argued that the company should be barred from paying bonuses and dividends if it receives bailout money.
Lufthansa is not the only airline in trouble. In the United States, big airlines have received more than $60 billion in bailout funds while in South Africa, the government has let the national carrier go out of business. As I reported earlier, Japan’s ANA airline is also in trouble after making its biggest loss ever.
Wirecard and Lufthansa shares dropped by 6% and 0.75% respectively. Other big laggards were Bayer, Deutsche Post, Adidas, and SAP. The biggest gainers in the DAX index were MTU Aero, Continental, and Daimler.
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On the daily chart, we see that the DAX index is finding some strong resistance at the 50-day EMA and slightly below the 50% Fibonacci retracement level. We also see that the index is nearing the tip of the ascending triangle pattern.
Therefore, I expect the upward trend to continue as bulls attempt to move above the 50-day EMA and 50% retracement at around 10,900. If this happens, bulls will start to target the 61.8% retracement level at 11,580.
On the flipside, this thesis will be invalidated if the price reaches 10,197. This is a strong support level that is at the intersection of the 23.6% retracement level, the ascending trendline, and the lower swings showed below.