The DAX is on a tear, racing towards record highs. After posting impressive double-digit gains since October, Germany's leading index is now mere hundreds of points away from its previous peak in July. Fueling this surge is the growing belief among investors that central banks' interest rate hikes have reached their zenith and a potential cut could be on the horizon.
Since the ECB and the US Federal Reserve hiked interest rates significantly last year to combat inflation, they've hit the brakes, taking a pause in their rate-hiking spree. The implications have been substantial, as it appears inflation is receding on both sides of the Atlantic. In the eurozone, for instance, general inflation fell to 2.4% in November, edging closer to the ECB's 2% target. In the US, inflation also dropped to 3.2%, marking a sharp decline from last summer's record levels.
This descent in inflation has established a favorable environment for equities, as they generally fare well when interest rates fall. The projected drop in interest rates can stimulate economic activity, which in turn may lead to higher corporate profits. Moreover, shares become more appealing alternatives to income-producing investments at lower interest rates.
For tech stocks, specifically, a decrease in interest rates is particularly beneficial although this sector had to grapple with the impacts of high liabilities and expensive investments. The export-focused DAX and tech-heavy Nasdaq have showed striking gains as a result of these developments.
However, ECB officials maintain a firmer stance against cutting interest rates, citing recent favorable inflation data as a positive surprise. Yet, the financial markets continue to speculate about potential rate cuts in April 2023 for the ECB, and in June 2023 for the US Federal Reserve.
To gauge future US interest rate policy, investors eagerly anticipate economic data releases this week, including figures on labor market trends from ADP on Wednesday and the official US labor market report on Friday.
In summary, expectations for interest rate cuts by global central banks, including the ECB and US Federal Reserve, along with signs of decreasing global inflation, have contributed to the ongoing surge in stock markets, represented by the DAX and Nasdaq's impressive gains.
