Rates remain elevated, causing Fed concern over Dax's subpar performance
Hear the Tea: The Dax Might Take a Plunge amidst Global Rate Hikes
Get ready for a potential downturn in the German stock market, particularly the Dax, as it could be following the Dow Jones into negative territory this Thursday. Bank and brokerage calculations suggest a lower start for the Dax.
Yesterday, the Dax closed 0.6% lower at 13,256 points.
The anticipated 75-basis-point US interest rate hike, now ranging from 3.75 to 4.00 percent, was expected by the market players. Yet, Federal Reserve Chairman Jerome Powell cast a shadow over investors' hopes for a rate hike pause, asserting that given the persistently high inflation, it's still too early for a break.
Tomorrow, several German firms like BMW, Zalando, and Hannover Re will be unveiling their figures. US economic data, such as the trade balance and productivity, will also be under the spotlight.
Now, let's dive into why the Dax might be heading south:
The Inflationary Elephant in the Room:1. Sectoral Rollercoaster: Inflation could squeeze margins for consumer-facing industries but could benefit export-oriented sectors like automotive, given a potential currency depreciation. However, moderating euro-area inflation reduces immediate downside risks.2. Valuation Resilience: Although inflation concerns loom, the Dax trades at a relatively resilient P/E ratio of 13.6x compared to the S&P 500’s 19.2x.3. Debt Dilemma: Firms with high leverage could face heightened stock return volatility from inflation-driven debt servicing costs.
The US Rate Hike conundrum:- Capital Shuffle: Higher US rates might traditionally drive capital away from Europe, but recent trends show inflows into German equities due to attractive valuations and anticipation of EU fiscal stimulus.- Trade Relief Offset: The 90-day suspension of US auto tariffs has boosted shares of major automakers like Volkswagen and Mercedes-Benz, nearly erasing April’s losses.- Currency Tussles: A stronger dollar from Fed hikes could boost export competitiveness for German manufacturers, partially offsetting equity outflows.
Watch out for these risks:- Bear Market Scenario: Renewed trade tensions, ECB hawkishness, or sticky inflation could push the Dax toward 22,000 (around 3% below current levels).- Central Bank Spillovers: While euro-area inflation has eased [4], prolonged high US rates might indirectly affect the ECB’s policy flexibility, affecting sectoral performance.
Although the Dax's 13% YTD gain (vs. S&P 500’s -5.5% decline) shows some resilience thus far [1][5], global monetary tightening remains a significant headwind. Stay tuned as more data unfolds!
- The Dax's potential downturn, following the Dow Jones, could be due to early calculations suggesting a lower start for the Dax amidst global rate hikes.
- In the general-news, it's expected that several German firms like BMW, Zalando, and Hannover Re will be disclosing their figures tomorrow.
- The squeeze on margins for consumer-facing industries due to inflation could be offset for export-oriented sectors like automotive, given a potential currency depreciation, as noted in the inflationary elephant in the room.
- The stronger dollar from Fed hikes could boost export competitiveness for German manufacturers, partially offsetting equity outflows, as part of the US rate hike conundrum.
