Why the DAX is racing to an all-time high
Prices are rising sharply on the stock markets. At the forefront: the leading German index. The DAX has posted double-digit gains since October and is now approaching its previous record high. What's going on?
The leading German index is on its way to topping the record high it reached in the summer. The DAX is only around 300 points, or just under one percent, short of the record high of 16,529 points set in July. Since its October low, the index has gained a whopping twelve percent, including around nine and a half percent in November. The US stock markets are also rising strongly, with the Nasdaq technology index in particular soaring.
There is a bet behind the price gains: more and more investors are betting that the interest rate hikes by the central banks have come to an end - and that interest rates will even be cut again in a few months. In order to get a grip on high inflation, both the European Central Bank (ECB) and the US Federal Reserve ended their years-long zero interest rate policy last year and raised key interest rates sharply.
The mechanism behind this: Higher interest rates make loans more expensive and slow down both consumption and investment, which tends to dampen prices. However, it takes time for the interest rate hikes to take full effect. The rule of thumb is between 12 and 18 months.
The central banks have taken a break since October and have not raised interest rates any further. In the meantime, it looks as if inflation is back under control on both sides of the Atlantic and will fall even without further interest rate hikes.
Inflation is losing its terror
In the eurozone, general inflation fell to 2.4 percent in November, bringing it even closer to the target of 2 percent at which the central bank considers price stability to have been achieved. In the USA, the inflation rate is 3.2%, which is also a sharp fall from the record levels of last summer. Tendency: falling further.
At the same time, the European economy is weakening and economic activity in the USA is also declining according to the Fed's economic report. This suggests that the central banks will soon cut interest rates.
Equities generally benefit from the prospect of falling interest rates. For one thing, they tend to boost the economy and thus enable companies to make higher profits. In addition, lower interest rates make shares more attractive than investments that pay interest. There is another reason for this, particularly in the case of tech stocks: Due to sometimes very high liabilities and expensive investments, falling interest rates are a considerable relief for the industry. Against this backdrop, the export-heavy DAX and the technology-heavy Nasdaq are among the indices that have made particularly strong gains recently.
The ECB is sticking firmly to its communication line that interest rate cuts are not on the cards. The latest inflation data is "good news" and a "positive surprise", said ECB Vice President Luis de Guindos recently. However, despite the sharp decline in inflationary pressure, there is still no reason to sound the all-clear. Bundesbank head Joachim Nagel, who likes to use the image of the "greedy beast inflation", repeatedly warned against prematurely proclaiming victory over inflation. It would be premature to lower interest rates soon or even to speculate about such steps.
"Good arguments for easing"
Nevertheless, the financial markets are increasingly expecting the ECB to initiate a turnaround in interest rates in April next year. A later date is currently being assumed for the USA. Deutsche Bank, for example, assumes that the Fed will cut interest rates in June.
Central bankers in the USA are already cautiously preparing the markets for this possibility. Fed Director Christopher Waller said last week that there are good arguments for considering easing if inflation continues to fall for a number of months. "If a senior central banker like Waller sounds like this after such a strong rise in share and bond prices as in November, then this must now be considered the official line within the US Federal Reserve," says Jochen Stanzl, chief market analyst at CMC Markets.
"Whether the prevailing interest rate optimism continues, however, would also have to be confirmed by the economy," says Commerzbank. Economic data to be published this week could therefore provide an indication of future US interest rate policy. The main focus will be on figures on the labor market from private service provider ADP on Wednesday and the official US labor market report on Friday.
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The expectation of interest rate cuts by central banks, such as the ECB and the Fed, is fueling the surge in share prices, including the DAX and Nasdaq. This is because lower interest rates make shares more attractive and can boost economic activity, allowing companies to increase their profits. The interest rate decisions by central banks are closely tied to inflation rates, with higher interest rates aimed at controlling inflation. However, recent data suggests that inflation is decreasing in both the eurozone and the USA, potentially easing pressure for further interest rate hikes.
Source: www.ntv.de
