Germany’s economic sentiment improves, DAX index hits record highs

Germany’s economic sentiment unexpectedly improved in October, marking a significant rebound from September’s levels, driven by rising optimism around potential interest rate cuts and a better export outlook.

This uptick in sentiment, alongside a record-setting performance by the DAX index, signals a momentary halt in the downward trend that had been plaguing German economic morale.

The ZEW Economic Sentiment Index, which tracks the expectations of financial market experts, climbed to 13.1 points in October from 3.6 points in September, surpassing analysts’ projections of 10 points.

However, the assessment of Germany’s current economic conditions continued to decline, with the relevant indicator dropping by 2.4 points to a stark minus 86.9 points. This suggests that, while there is optimism for the future, the present economic situation remains dire, with nearly 90% of survey respondents holding a negative view.

Despite starting from a low base, the uptick in sentiment reflects a hopeful outlook, driven by expectations of stable inflation rates and potential further interest rate cuts by the European Central Bank (ECB).

Professor Achim Wambach, President of the ZEW, also highlighted that positive signals from key export markets such as the United States, China, and the eurozone have also contributed to this renewed optimism.

“The increased optimism for China is likely linked to the Chinese government’s economic stimulus measures. These developments have probably also contributed to the rise in economic expectations for Germany,” he said.

The broader outlook for the eurozone followed a similar trajectory. The ZEW’s indicator for the eurozone’s economic sentiment rose by 10.8 points to reach 20.1 in October, underscoring a growing belief in the region’s resilience.

Nonetheless, much like in Germany, the current situation in the eurozone continues to appear bleak, with the assessment of current conditions dipping slightly by 0.4 points to minus 40.8.

DAX hits fresh record highs as euro weakens, oil tumbles

The improvements in economic sentiment were mirrored in Germany’s stock markets, with the DAX index hitting new record highs on Tuesday, buoyed by falling oil prices and a weakened euro.

These factors have given Germany’s energy-dependent, export-led economy a much-needed boost. The DAX rose by 0.3% to close at 19,600 points, surpassing its previous peak set in September.

Leading the DAX’s gains was MTU Aero Engines AG, which saw its shares jump by more than 4% after the company raised its earnings guidance for 2024, following strong preliminary quarterly results.

Sportswear manufacturer Puma, utility company E.ON, and sports giant Adidas also posted solid gains, rising 3.3%, 2%, and 1.3% respectively.

The DAX’s performance stood in stark contrast to other European indices: the Euro STOXX 50 dropped 0.4%, Milan’s FTSE MIB fell 0.5%, and the CAC 40 in Paris declined by 0.9%, dragged down by weakness in the luxury sector.

French luxury brands LVMH, Kering, and Hermes suffered losses amid concerns over lack of news regarding Chinese fiscal stimulus.

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Oil prices provided further fuel for German equities. Brent crude plunged by over 4% to $74 a barrel following reports that Israel may opt for a limited military response, avoiding attacks on Iranian energy infrastructure, according to the Washington Post.

Meanwhile, the euro continued its downward trend, weakening to $1.09 on Tuesday, marking its 11th negative session in the past 13 trading days.

Investors are now keenly awaiting the ECB’s meeting on Thursday, where a second consecutive interest rate cut is expected, a move that could further depress the currency. German Bund yields held steady at 2.25%.