The DAX in Frankfurt soared past the 17,000-point mark for the first time on Christmas eve, thanks to the promising prospect of reduced interest rates soon. The leading index spiked 1.4% to hit 17,002 points, continuing its impressive record-breaking climb that began with its year-end rally.
This upward trajectory saw the DAX surpass its four-month peak from last week and set new record highs daily. The Fed, the US central bank, decided to keep its interest rates unchanged during their Wednesday night meeting. However, some market analysts foresee potential rate cuts in 2024, aligning with the Fed's new economic forecast, which anticipates approximately three rate cuts in total, amounting to 0.75 percentage points.
Jerome Powell, the Federal Reserve Chair, had played a part in boosting stock market investor confidence the previous night. The projection of around three rate cuts in 2024 from the Fed's new economic forecast surpasses the market's previous interest rate expectations.
Portfolio manager Thomas Altmann from QC Partners commented on the situation, stating that investors are now expecting Christine Lagarde, ECB President, to follow in Jerome Powell's footsteps by implementing interest rate cuts. The Q&A session is a focus for investors, with April's first cut currently being priced on the stock market. Altmann added that a significant part of the market's optimism depends on whether Lagarde warms the market against premature exuberance.
The surge in stock market expectations for the Fed has ramped up significantly since the onset of the rally, which initially aimed for only one interest rate cut in 2023. Currently, investors anticipate further adjustments to the Fed's interest rate hikes in 2024.
Lower interest rates are a boon for equity investors, making shares more appealing compared to fixed-income securities. As loans become cheaper, firms can finance themselves more easily and investments become more affordable.
The DAX sliced through the 15,000 and 16,000 marks in March and August 2021, as stock markets worldwide left their post-coronavirus 2020 lows behind. The index plummeted to 8255.65 points at the commencement of the pandemic, but has more than doubled since then, despite the Russian war in Ukraine and record inflation causing severe economic damage.
Germany's stagnant economy contrasts with the positive sentiment among share investors, who are often primarily interested in future profits rather than current economic conditions. Moreover, the majority of the 40 companies listed on the DAX have a prominent international presence, making Germany just one market among many.
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The recent rise in the DAX is influenced by a myriad of factors, where ECB interest rate cuts have a more direct impact on the German stock market compared to US Federal Reserve rate cuts.
- ECB Interest Rate Cuts
- Expected Rate Cuts: The ECB is anticipated to push forward with further rate cuts, targeting a first cut in January 2025 to reduce the key interest rate to 2.75%.
- Impact on German Economy: By making borrowing cheaper, ECB rate cuts can support demand growth over time and be particularly beneficial for Germany, which has been battling recession for the past two years.
- Comparison with US Federal Reserve
- Rate Cut Expectations: While the market is expecting 100 basis points of rate cuts for the ECB in 2025, US Federal Reserve and the Bank of England rate cut expectations are at half that level.
- Widening Spread: The expanding gap between interest rates in the eurozone and the US can help fuel a tailwind for European equities, as European assets become relatively more attractive compared to US assets.
- German Stock Market Performance
- DAX Performance: The DAX has seen a remarkable 50% surge in two years, displaying a significant disconnect from domestic economic conditions. This is partly due to major German companies generating most of their revenue abroad.
- Corporate Earnings and Global Demand : Companies like SAP, Siemens, and Deutsche Telekom have performed well, driven by robust corporate earnings and global demand for their products and services. This has contributed considerably to the DAX's top-notch performances.
