Record run and no end: The prospect of falling key interest rates and strong company balance sheets pushed the Dax above the 18,000 point mark for the first time on Wednesday. The leading German index has been rising for months, recently reaching highs almost every day.
It wasn’t until mid-December that the Dax broke the threshold of 17,000 points. While the German economy is weakening, investors are in a cheerful mood. The price of gold is also close to its latest record, while the cryptocurrency Bitcoin has reached an all-time high. What are the reasons for the stock market euphoria and what are the prospects?
DAX companies globally positioned
Although there are great concerns about the economy in Germany, the 40 companies in the leading index operate globally and do large parts of their business abroad, where the economy is growing faster than in the home market – for example in the USA and China, but also in many Euro states. While the German economy is expected to grow at best minimally this year, according to the federal government, the International Monetary Fund has raised its 2024 forecast for the USA. US stocks are benefiting from the robust economy there, which is pulling the German stock market up.
And stock investors often focus not necessarily on the current situation, but on future profits. The business figures of large corporations provide impetus for rising prices in this country. On Wednesday, for example, Germany’s largest energy supplier Eon convinced investors. Despite all the swan songs on the German economy, things are going well for some DAX companies, with insurers like Allianz making record profits.
Artificial intelligence boom
In the USA in particular, there has been a hype surrounding artificial intelligence, for example around the chip manufacturer Nvidia, whose share price has literally exploded. Companies like Microsoft and Google parent Alphabet also benefit from this. Since American tech companies have a lot of weight on the world stock exchanges, this has an impact on the overall mood on the capital market. The USA is the undisputed leading stock exchange for investors. If things go well there, the Dax also benefits.
Prospect of falling key interest rates
Investors are primarily betting that the European Central Bank (ECB) and the US Federal Reserve will begin cutting interest rates in June. Recently, the prospect of faster falling inflation in the euro zone has boosted the German stock market. Key interest rate cuts from the Federal Reserve Bank are also expected in the USA. Inflation remains stubborn in both the Eurozone and the USA, which has dampened stock market traders’ anticipation of falling interest rates. Lower key interest rates are unlikely to come as quickly as expected weeks ago. But they will come, is the tenor of the market.
For stock investors, the prospect of falling interest rates is good news: stocks are becoming more attractive than fixed-interest securities. Loans are becoming cheaper, companies can therefore finance themselves more easily, and investments are becoming more affordable.
Bitcoin also on the rise
In addition to stocks, the cryptocurrency Bitcoin and gold are also in demand. Bitcoin only reached the record threshold of $72,000 on Monday; on Wednesday it was already well over $73,000. Since the beginning of the year alone, digital money has increased by around 66 percent against the US dollar. Asset managers such as Blackrock, who have launched Bitcoin funds in the USA, were primarily responsible for the price increase. They allow investors to invest in Bitcoin without having to directly purchase or hold the digital currency itself. With Bitcoin at an all-time high, it is not certain that the price will continue to rise. Bitcoin is notorious for enormous fluctuations.
Gold benefits from global crises
Gold is also in demand. The prospect of falling interest rates is also driving the price, which was recently just below the record of $2,195 per troy ounce. The lower the capital market interest rates are, the more attractive it becomes to buy gold, which pays neither interest nor dividends. Investors also value gold as a safe investment haven – and the geopolitical risks have increased with tensions in the Middle East.
Raw materials expert Thu Lan Nguyen from Commerzbank does not expect the price of gold to fall significantly in the long term. At the same time, she sees limited upside potential. “We are therefore only raising our gold price forecast for the end of this year and the end of next year from $2,100 per troy ounce to $2,200.”
Warning against too much euphoria
However, after the strong Dax rally, experts warn against carelessness. Portfolio manager Thomas Altmann from QC Partners referred to above-average trading volumes. At the moment it is enough if there are no negative surprises in big numbers such as the US inflation rate to drive the market up further. The Dax is “overbought”.
“The attitude of investors reflects less confidence and more carelessness and the fear of missing out,” wrote experts from Landesbank Baden-Württemberg. They expect increasing profit-taking in the summer. As the year progresses, a risk to security and global trade could also come into focus: the US presidential elections in the fall, from which Donald Trump could emerge as the winner.
