The DAX index, comprising Germany's top 40 companies by market capitalisation, has reached unprecedented heights this week, surging past the 16,500-point mark, a level last witnessed in early August 2023.
ADVERTISEMENTIn the past 13 trading sessions, the DAX has closed positively out of 11 of them, resulting in a robust 20% gain since the start of the year. This performance ranks as the second best annual showing in the past decade, with three weeks remaining in the year.
What's behind the German stock market gains?
Prominent contributors to this recent surge include Infineon Technologies AG, Siemens Energy AG, and Sartorius, all recording gains ranging from 25% to 30% over the past month. Notably, positive gains have been widespread across the DAX components, with only three companies reporting a negative monthly performance.
This remarkable rally in the DAX index is occurring despite less favorable economic data for Germany, which may already be on the verge of, if not already in, a contraction phase.
In November, the nation's unemployment rate unexpectedly surged to 5.9%, reaching its highest level since March 2021, indicating a deteriorating labour market trend and reflecting prolonged contractions across key sectors of Europe's largest economy.
Germany's industrial production witnessed a 0.4% decline in October, which fell short of economists' projections of a 0.2% increase, marking the fifth consecutive month of decline. In a similar vein, factory orders experienced a substantial drop, plummeting by 3.7% month-over-month in October, significantly below the expected 0.2% rise.
The sentiment in the nation's construction sector, as measured by the HCOB Construction PMI, reached its lowest point since April 2020, coinciding with the period when the country was under Covid-related lockdowns.
Although the services sector displayed some improvement in November, the predominantly manufacturing-centric German economy has witnessed an overall contraction in private sector activity, as indicated by the composite PMI, for four consecutive months.
With these economic indicators in mind, it's natural to question the factors behind the outstanding performance of German stocks.
ECB rate cuts in 2024 and lower energy prices
Rising expectations of European Central Bank (ECB) rate cuts, as Euronews recently highlighted, and a substantial decline in oil and gas prices have been the two primary factors propelling German equities lately.
The recent disinflation within the eurozone has fueled hopes that the ECB will initiate rate cuts in the coming year. Money markets indicate that investors are pricing in 137 basis points of cuts through December 2024, implying five interest-rate reductions of 25 basis points, with the first expected in either March or April 2024.
This significant shift in ECB rate expectations has driven bond yields lower across the eurozone. Just last week, German bond yields hit a six-month low of 2.17% on December 7, before slightly recovering to the current 2.26%. This rate is notably lower than the 3% level observed in October, offering German corporations much-needed relief in terms of more manageable refinancing plans for their maturing debts.
Another major catalyst behind the record-breaking performance of German stocks has been the substantial drop in energy prices. Despite Germany's strong commitment to the "Energiewende" – the nation’s transition plan towards renewable energy sources by 2030 – fossil fuel purchases continue to represent a significant cost burden for German corporations.
Encouragingly, German automakers and energy-intensive sectors have recently found relief as both oil and natural gas prices have declined significantly over the past few months. Brent crude oil prices have fallen by 20% since the end of September, while European gas prices, tracked by the Dutch TTF benchmark, have plummeted by 35% since the end of October, and by over 70% compared to a year ago.
